Draft Trust Consultation Sub-group minutes, September 2012

^[H1]Meeting details

Venue:	Meeting Room 16-708 ATO, Docklands, 747 Collins Street, Melbourne
Date:	18 September 2012
Start:	10.00am	Finish:	3.15pm
Chair:	Fiona Dillon
Contact and Secretariat:	Lyn Freshwater	Contact phone:	(07) 3213 5554

Attendees

Louise Andolfatto	ATO (attended for items 4.4 and 4.5)
Simon Clark	Property Council of Australia
Andrew Clements	Law Council of Australia
Adam Craig	Treasury
Lance Cunningham	Institute of Public Accountants
Fiona Dillon	ATO
Peter Dwyer	ATO (attended by phone for item 3)
Lyn Freshwater	ATO
Liz Gamin	ATO
Tony Greco	Institute of Public Accountants
Trevor Jones	ATO (attended for item 5)
Ian Kearney	CPA Australia
Alexis Kokkinos	Institute of Chartered Accountants Australia
Brian Lane	Institute of Chartered Accountants Australia
Bernie Marks	Law Institute of Victoria
Andrew Mills	The Tax Institute
Gavin O'Shea	ATO
Karen Payne	Law Council of Australia
Kate Preston	Treasury
Tony Poulakis	ATO
Ken Schurgott	The Tax Institute

Apologies

Nick Connell	National Tax and Accountants' Association
Carla Hoorweg	Financial Services Council
Mark Morris	CPA Australia
Karen Rooke	Academic

^[H2]Agenda items

Disclaimer

NTLG Trust Consultation Sub-group agendas, minutes and related papers are not binding on the Australian Taxation Office (ATO) or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

1.1 Welcome and administrative matters

1.1 Welcome and introduction

The chair welcomed members to the meeting, the first at the new ATO premises in Melbourne and noted apologies.

1.2 Confirmation of draft minutes of previous meetings

Following consultation with members:

¦ draft minutes of the meeting of 24 April 2012 were published to www.ato.gov.au on 7 June 2012

¦ draft minutes of the meeting held by telephone hook-up on 24 July 2012 were published to www.ato.gov.au on 5 September 2012.

Members accepted the draft minutes of the meetings without amendment. Those minutes will now be treated as finalised and the change of status published to www.ato.gov.au

Action item	1.2 April 2012
Description	Change of status of minutes to be published
Responsibility	Secretariat
Update	Status changed

1.3 Review action items from previous meetings

The secretariat summarised the progress of each of the action items from the meeting on 24 April 2012, namely:

¦ [Action item 1.2 April 2012] Status of Minutes of 21 February 2012 meeting changed to 'final'.

¦ [Action item 1.3 April 2012] Novation issue. No material has been received. Members agreed that those with a particular interest in this issue may pursue it out of session (possibly by way of a TIES notification).

¦ [Action item 2.1 and 2.2 April 2012] Trustee resolution compliance program. Draft fact sheet distributed to members. Members comments incorporated in fact sheet published on 4 May 2012.

¦ [Action item 6.1 April 2012] Directly relevant expenses. Fact sheet about interim streaming amendments amended to address issue raised at 24 April meeting.

¦ [Action item 7.1 April 2012] Effect of the Clark decision. Clark Decision Impact Statement amended to indicate that the reasoning of the court has the effect that a valid amendment to a trust, not resulting in a termination of the trust, will not of itself result in the happening of CGT event E1. Draft Taxation Determination TD 2012/D4 has subsequently been published in respect of this issue.

¦ [Action item 8.1 April 2012] Possible ruling topics. ICAA will shortly submit to NTLG Public Rulings Steering Committee as a possible ruling topic the application of Family Trust Distribution Tax where the recipient of a benefit is not a beneficiary of the trust.

¦ [Action item 9.2 April 2012] Interim streaming amendments. ATO provided advice provided to Treasury about unintended consequences.

The Assistant Treasurer announced on 30 July 2012 that the law will be amended to ensure MITs can continue to choose whether to apply the streaming changes for a further two years (until 1 July 2014, being the proposed start date of the new MIT regime). Treasury indicated that this amendment would be introduced for passage in Autumn 2013. Treasury also indicated that amendments to deal with other issues will be progressed as part of the broader trust reforms and will be incorporated in the exposure draft legislation scheduled to be released in early 2013.

¦ [Action item 12.3 April 2012] Top 3 issues reported to NTLG Secretariat for July 2012 NTLG meeting.

Members agreed that all of the action items from the meeting be treated as finalised.

The action items from the meeting on 24 July 2012 were considered in the context of agenda item 3.

1.4 Issues register - unresolved issues

The secretariat noted that, since the April 2012 meeting, the status of issue 22 (Clarke Decision Impact statement) has been changed to resolved.

As agreed at the February 2012 meeting, no action will be taken to progress issues 1, 3, 4, 6, 9, 10 and 11 pending the ongoing review of trust taxation.

The secretariat noted that there are currently two other unresolved issues on the register: issue 23 (trustee resolution compliance project) and issue 24 (closely-held trust TFN withholding project).

1.2 Trust reform

Treasury updated members on the progress of the review of the trust taxation provisions.

Since the last meeting the government released in July 2011 a discussion paper A more workable approach for fixed trusts. The period for comment on that paper closed on 14 September. Treasury is currently reviewing the submissions with a view to getting advice to government in the next few months. It is proposed that any changes to the fixed trust definition resulting from this review will be made in conjunction with those coming out of the review of the general trust taxation provisions in Division 6.

Treasury indicated that it is proposed to issue a policy design paper in the near future which develops two of the models for the reform of Division 6 canvassed in the original discussion paper (Modernising the taxation of trust income). Treasury indicated that there would be a six week consultation period in respect of that paper and that they hoped to conduct workshops with interested taxpayers and practitioners during the first four weeks of that period (with the intent of leaving a clear two week period for interested persons to compile their submissions).

Members felt that it would be beneficial if Treasury held a consultation workshop with this Trust Sub-group in addition to the other proposed workshops.

Treasury indicated that the government also proposes to issue a separate consultation paper in the coming weeks about the new tax system for Managed Investment Trusts (MITs). It is also proposed to hold a workshop specifically for MIT stakeholders as part of the consultation process on that paper.

1.3 Compliance issues

3.1 Trustee resolution project

The ATO provided members with an update in relation to this project and thanked them (and the associations which they represent) for the assistance that has been provided in educating practitioners and their clients about the need for resolutions to be made by 30 June.

The ATO advised that an initial education letter reminding trustees of the importance of appointing income by 30 June 2012 (or earlier if required by the trust deed) was sent to approximately 1,200 trustees in May 2012.

This was followed by a small review of 120 trustees from the original data set. Those trustees were asked to provide a copy of any resolution they made to appoint income. As at the date of the meeting, 116 responses have been received.

The ATO indicated that it is satisfied that all of the resolutions they have seen were made by 30 June. Given the limited nature of the compliance activity, the ATO had not asked for trust deeds to be provided with the resolutions and so could not give any view or assurance as to the effectiveness of those resolutions. However, the resolutions will be examined with a view to identifying issues that may suggest further education or follow-up is warranted.

One minor issue (unrelated to whether a resolution has been made by 30 June) coming out of the review of those resolutions is the continued use of particular resolutions intended to apply if the Commissioner determines that the trust's section 95 net income is greater than that returned. The ATO noted that Examples 6 and 7 in Draft Taxation Determination TD 2012/D5 take the view that these resolutions are ineffective to create any present entitlement to income at 30 June. At best, the resolution may give the beneficiary a contingent entitlement at that time.

Members indicated that the project has resulted in an increased awareness that beneficiaries must be presently entitled to income by 30 June (and, where need be, appropriate trustee resolutions must be made by that date). However, members said the message has not been heard by all practitioners and that some still think they have until 31 August as per the withdrawn administrative practice. In this context members suggested that the link to 31 August in the timing rules that apply in relation to streaming of capital gains (in respect of which specific entitlement may be created up until 31 August) is one reason for the confusion.

On the capital gains streaming rules more generally, it was noted that some practitioners may not be aware, for example, that in the context of a discount capital gain the entire capital gain must be dealt with in order to effectively stream the entire gain for tax purposes. Some practitioners may also not understand the consequences for tax purposes of streaming of other types of income following the Greenhatch decision.

Another matter about which there is debate amongst practitioners is whether a trustee of a so-called 'fixed trust' would need to make a resolution if the relevant trust deed permitted, but did not require, a resolution to be made. The ATO indicated that if the income entitlements arise automatically by operation of the relevant trust deed, and such entitlements are clear, no trustee resolution is required. This is consistent with the outcome for beneficiaries of so-called 'discretionary trusts' that are taken by operation of a trust deed to be entitled to income of the trust in default of the trustee making a resolution to appoint income to particular beneficiaries.

Members noted that the professional bodies had written to the Assistant Treasurer about the practical difficulties in ensuring beneficiaries are presently entitled to all of the trust income by 30 June. They have urged government to provide some interim relief (in the nature of an extended period for creating such entitlements) pending implementation of the broad review of Division 6.

3.2 Closely held trust TFN withholding tax

3.2.1 Administrative arrangements in respect of trust TFN withholding tax obligations for 2012 income year

If a beneficiary does not quote their TFN to the trustee before the receipt of a distribution or the creation of a present entitlement, the trustee is required to withhold tax. An action item from the 24 July 2012 meeting (action item 5.1 July 2012) required the ATO to consider what concessions it might make in terms of penalties for failure to withhold where a beneficiary has not quoted a TFN to the trustee by the required date.

The ATO proposed that, in respect of the 2012 income year, failure to withhold penalties might be remitted if the beneficiary was in the process of obtaining a TFN by 30th June, a valid TFN was quoted to the trustee by 30 September 2012 (and no part of the beneficiary's entitlement was paid prior to it being quoted) and included in the TFN report due on (and submitted by) 31 October 2012.

Members suggested (and the ATO agreed) that instead of the beneficiary having to be in the process of obtaining the TFN by 30th June for this concession to apply, the trustee should just be required to have requested it by then. Moreover, they noted that the requirement not to pay (including by say crediting a loan account) until the TFN is provided would provide significant practical limitations. The ATO advised of its concerns that the trustee may otherwise be personally liable for a penalty for failure to withhold (for example, should the TFN not be forthcoming in time) without access to the funds to which the withholding liability related. The ATO agreed to remove this requirement, but advise trustees of this risk should they pay a beneficiary's entitlement ahead of obtaining their TFN.

Members suggested that the concession should be extended to the 2013 year and the ATO agreed to consider this suggestion.

The ATO will amend the Trust TFN withholding tax guide in this regard. A proposed form of words will be distributed to members for comment.

Action item	3.2.1 April 2012
Description	ATO to provide members with a proposed form of words for comment (with a quick turnaround required).
Responsibility	Tony Poulakis to provide proposed form of words to secretariat for distribution to members as a matter of urgency.
Update	Material provided to Subgroup members on Friday 21 September 2012

3.2.2 Implementation and proposed compliance activity

The ATO advised that preliminary analysis indicates that compliance with the rules has been high but noted that there is still a need for some compliance activity.

The starting point for checking compliance with the measure will be to examine 2011 trust tax return distribution statements to identify those beneficiaries subject to the measure in respect of whom no TFN is reported and no withholding has taken place. It is proposed to send a letter to a selection of trustees from this population. The particular trustees will be selected based on considerations such as size of distribution and the need for a stratified sample.

From this starting pool of cases, compliance with the TFN withholding obligations will be checked and in some instances, trustees may receive a letter asking for further information.

The overall ATO approach to compliance is to help and educate and will be informed by the fact that the measure is designed to enable the easy and accurate tracing of trust distributions via validated beneficiary TFNs lodged in a TFN report.

Members expressed an interest in reviewing the proposed letter prior to it being sent. Members also suggested that an e-link article about the compliance project might be useful.

Action item	3.2.2 April 2012
Description	ATO to distribute draft letter to members for comment.
Responsibility	Tony Poulakis to provide letter to secretariat for distribution to members.

3.2.3 Action items from 24 July meeting

The secretariat then raised for discussion the other action items from the meeting on 24 July 2012, namely:

¦ [Action item 2.1 July 2012] Sub-group members to suggest further action the ATO might take to increase practitioner awareness of the closely held trust TFN withholding measure. Members suggested that some education activities take place in relation to the matters discussed at 3.2.1 and 3.2.2.

¦ [Action item 3.1 July 2012] Secretariat to discuss relative priorities of portal enhancements with Sub-group members out of session and provide their feedback to ATO officers responsible for making portal enhancements.
The Secretariat thanked members for consulting with practitioners about the relative priority of a facility to enable practitioners to easily and quickly identify those beneficiaries in respect of whom a TFN has already been quoted. The practitioners sampled felt that the issue was now within the top 5 of the 15 that had previously been identified. This feedback has been provided to ATO IT staff. While they understand that the issue is becoming important they have advised there is little prospect of making the enhancement before 2015. Other options for providing this information to tax agents are being considered.

¦ [Action item 5.1 July 2012] ATO to consider what approach it might take to the exercise of the discretion to extend the period for lodgement of 31 July TFN Reports. The ATO indicated that this date has links to the broader lodgement program, but they undertook to further consider whether this date could nonetheless be extended.

Action item	3.2.3.1 April 2012
Description	Report on other options for providing tax agents with information on TFNs already reported.
Responsibility	Secretariat
Action item	3.2.3.2 April 2012
Description	This action item (about options, if any, for extending the period for lodgement of 31 July TFN Reports) is to be carried over for consideration in respect of the 2013 income year
Responsibility	Tony Poulakis

1.4 Member issues

4.1 What is the practical effect of the Commissioner's view in ATO ID 2012/71?

As submitted by member

In ATO ID 2012/71, the Commissioner concluded that:

Issue

Does subsection 840-805(4) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a foreign superannuation fund that holds an indirect interest in a MIT?

Decision

No. Subsection 840-805(4) of the ITAA 1997 does not apply to a foreign superannuation fund that holds an indirect interest in a MIT because it is a beneficiary in the capacity of a trustee of another trust and paragraph 840-805(4)(c) of the ITAA 1997 is therefore not satisfied.

What are the flow-on consequences of this interpretation?  For example, is it the case that:

¦ distributions will be made out of the superannuation fund (either in the same year, or some future year);

¦  the individuals that receive the distribution will have a liability under Division 840 (query how the Commissioner would collect this tax if the individual is liable at the 30% rate but tax has only been withheld at 15%); and

¦ the fund payment remains NANE under s.840-815.

Alternatively, is the Commissioner suggesting that no entity is liable for tax under Division 840 and therefore the fund payment is not NANE? This would presumably result in taxation of the MIT under s.98.

Meeting discussion

The chair indicated that this issue had been considered at the NTLG International Sub-group meeting on 17 September where the ATO indicated that the ATO ID continued to represent its view of the law. This issue will continue to be managed at the International Sub-group. Updates will be provided to the Trust Sub-group.

Section 840-805 of the ITAA 1997 makes an entity liable to MIT withholding tax on a fund payment made directly or indirectly to it where certain conditions are satisfied. One of those conditions is that the entity in receipt of the fund payment does not receive it in the capacity of a trustee of another trust (refer paragraphs 840-805 (2)(c), (3)(c) and 4(c)).

The rationale for requiring the recipient or beneficiary in relation to whom the withholding tax liability crystallises not to be acting in a trustee capacity can be readily understood in the case of an 'ordinary' trust where it might be expected that it would be possible to 'look through' the trust and identify the ultimate beneficial recipient of the fund payment.

That rationale may not, however, be readily applicable to the case of a superannuation fund that, broadly speaking, is an 'opaque' entity taxed in its own right and in respect of which it is to be expected there may well be no readily identifiable presently entitled beneficiary to whom (indirect) beneficial receipt of the fund payment can be traced.

Unless a withholding tax liability crystallises in the hands of an entity, there is no administrative obligation to withhold from the fund payment (refer subsection 12-385(5) and paragraph 12-390(10)(b) of Subdiv 12-H of Sch 1 to the TAA).

The ATO observed that the result that fund payments made to foreign superannuation funds do not come within the managed funds withholding regime raises the question of whether the law as currently drafted is producing outcomes consistent with policy. The ATO has raised the matter with Treasury for consideration.

Members said practitioners currently apply the law on the basis that MIT fund payments to foreign superannuation funds are within the MIT withholding regime; and the possibility that they are not is of some considerable concern to industry and likely to result in representations being made to Treasury for law reform.

Action item	4.1 September 2012
Description	Issue referred to NTLG International Sub-group for consideration.
Responsibility	Secretariat

4.2: Section 128FA and wholesale funds

As submitted by member

In order for a trust to access the withholding tax concession in s.128FA, it must be an "eligible unit trust". This means that it must be either:

(a) a public unit trust under Division 6B; or

(b) 100% of the units in the trust are held by eligible unit holders (Eligible unitholder test).  

Eligible unitholders are, broadly, Division 6B public unit trusts, superannuation entities, public companies and other 128FA eligible unit trusts. A payment of interest will only be subject to the exemption if a trust is an eligible unit trust and the issue of issue of the relevant instrument and at the time of payment of the interest.

Significant Investors in wholesale trusts include: Australian and foreign governments, sovereign wealth funds, charitable endowments, superannuation funds and statutory bodies.  

Some of these will not be eligible unitholders (eg a charitable trust). 

The presence of a single unitholder that is not an eligible unitholder will prevent the eligible unitholder test from being satisfied. Especially since the test in s.128FA is an ongoing one, it is generally impractical for a wholesale trust to rely in this test (as the introduction of one 'unlisted' investor would cause the test to be failed). Accordingly, in practice the trust can only access s.128FA if it is a Division 6B public unit trust.

The definition of public unit trust in Division 6B does not contain the "20% exempt entities" deeming rule that is (currently) present in Division 6C.  Accordingly, a wholesale fund would need to:

(a) have 50 unitholders, or offer units to the public; and

(b) satisfy the 20 persons / 75% rule. 

Although s.102G(9) permits tracing through trusts in which a beneficiary has a beneficial interest in the assets of the trust, there are no specific deeming rules that apply to superannuation funds, government or charities.

In practice, many wholesale funds will only satisfy the Division 6B tests if it possible to trace through superannuation funds to their members (or through Government entities to their constituents). Does the ATO accept that this is possible in the context of s.128FA? 

For example, would a wholesale trust in which units are held as set out below be an eligible unit trust under s.128FA:

¦ Industry Superannuation Fund - 30%

¦ Australian State Treasury Corporation - 30%

¦ Foreign Sovereign Wealth Fund - 30%

¦ Charitable Trust - 10%.

But for the charitable trust investor, Wholesale Trust may satisfy the Eeligible unitholders test.  This is because the Treasury Corporation and Sovereign Wealth Fund may be public companies and the Industry Super Fund will generally also be an eligible investor.

Further, unless Wholesale Fund can at least trace through the Industry Super Fund or another investor, it will fail the 50 unitholder test and the 20/75% test.

If Wholesale Trust cannot trace, does the ATO agree that it is anomalous that the introduction of the charitable trust as an investor causes s.128FA to cease to apply?

Meeting discussion

The chair indicated that this issue would also be referred to the NTLG International Sub-group and managed at that forum. Updates will be provided to the Trust Sub-group.

While observing that being a public unit trust within the meaning of Division 6B is not the only way in which a trust can qualify as an 'eligible unit trust' for section 128FA purposes, members nonetheless noted that inappropriate outcomes appear to arise if subsection 102G(9) of the ITAA 1936 does not permit tracing, particularly given that it would seem that with suitable structuring this restriction can be gotten around (Part IVA aside).

Action item	4.2 September 2012
Description	Issue to be referred to NTLG International Sub-group for consideration.
Responsibility	Secretariat
Update	The chair understands that a settled ATO view exists that subsection 102G(9) does not permit tracing through a superannuation fund. The issue has however been referred to the NTLG International Sub-group secretariat. The next meeting of that group is scheduled to take place on 5 December 2012.

4.3: application of extended definition of foreign controlled Australian trust

As submitted by member

Is s.820-790(1)(c) intended to apply to widely held fixed trusts?

Section 820-790(1)(c) provides that an entity is a foreign controlled Australian trust if Australian entities have TC control interests of 50% or less, there is at least one foreign beneficiary and a distribution has been made in the relevant year or the previous two years.

For the purposes of determining TC interests in "downstream" entities, each foreign "object" of the s.820-790(1)(c) trust is deemed to have a 100% TC direct control interest in the trust (s.820-860(3)). It is not clear whether the reference only to "objects" in s.820-860(3) is intended to exclude entities with fixed interests.

There is no equivalent provision for companies.

This provision may have been directed towards discretionary or hybrid trusts where:

¦ de facto control rests solely with an Australian entity (and so s.820-790(1)(d) does not apply); but

¦ 50% or more of the distributions are in fact made to non-residents.

The Explanatory Memorandum does not elaborate on the purpose of the provision.

Is it intended that widely held listed trusts that may have 50% foreign beneficiaries (consisting of hundreds or thousands of entities) and their subsidiaries are FCATS?

Meeting discussion

The chair noted that this issue will also be referred to the NTLG International Sub-group and managed at that forum. Updates will be provided to the Trust Sub-group.

Members indicated that this issue is a looming problem as many trusts are approaching more than 50% foreign ownership (which could bring them within the scope of the thin capitalisation provisions). Members were strongly of the view that this was an inappropriate result.

Action item	4.3 September 2012
Description	Issue to be referred to NTLG International Sub-group for consideration.
Responsibility	Secretariat
Update	The issue has been referred to the International Sub-group secretariat for consideration. The next meeting of that group is scheduled to take place on 5 December 2012.

4.4: scope of paragraph 102P(1)(b) of the ITAA 1936

As submitted by member

If a trust makes an offer of its units to the public only in Year 1, does this make the trust a public unit trust for Year 1 only, or for all future years?

Section 102P(1)(b) states:

For the purposes of this Division, but subject to the succeeding provisions of this section, a unit trust is a public unit trust in relation to a year of income if, at any time during the year of income:

(b) any of the units in the unit trust were offered to the public; [emphasis added]

The words of the chapeau to s.102P(1) indicate each of the three tests (listing, 50 members and offer to the public) are required to be applied on an annual basis. As such, if there is an offer of units to the public in Year 1, but not at any subsequent time:

¦ the trust would be a public unit trust in Year 1 (assuming that the closely held test does not apply); and

¦ would not thereafter be a public trust (assuming it does not satisfy one of the other tests in s.102P(1).

Meeting discussion

The ATO agreed that the test was an annual one which requires that one of the three alternative tests in subsection 102P(1) be satisfied in respect of a year of income for the trust to be a public unit trust with respect to that year. Those tests are:

¦ any of the units in the unit trust were listed for quotation in the official list of a stock exchange in Australia or elsewhere;

¦ any of the units in the unit trust were offered to the public; or

¦ the units in the unit trust were held by not fewer than 50 persons.

The ATO confirmed that the test is not satisfied on an on-going basis merely because of an initial public offer that resulted in less than 50 persons acquiring units. For each of the income years following the year in which the public offer was made, one of the other two tests must be satisfied with respect to the relevant year for the trust to continue to be a 'public unit trust' as defined in respect of those later years.

The ATO asked members whether there was a need for an ATO view document on this issue to be created. Members indicated that a record in the Minutes should be sufficient.

4.5 streaming for withholding tax purposes

As submitted by member

Does subsection 128A(3) ITAA 1936 allow streaming for interest, dividends and royalties paid to non-residents? 

Subsection 128A(3) applies to deem a trust beneficiary to derive income consisting of dividends, interest or royalties if they are presently entitled to the dividends, interest or royalties that are included in the income of a trust.

If a trust deed allows the trustee to stream particular classes of income to specific beneficiaries and the trustee distributes say all interest income of the trust to a non-resident beneficiary and all other trust income to a resident beneficiary, it appears section 128A(3) would apply to deem the non-resident to have receive all the interest income of the trust, with the trustee being liable to withholding tax under section 128B and the beneficiary being exempt from income tax on the interest income under section 128D.  The same analysis would apply to dividend and royalty income of the trust that is distributed to a non-resident beneficiary.

ATO response

Subsection 128A(3) forms part of Division 11A of Part III of the Income Tax Assessment Act 1936 which imposes a non-resident withholding tax liability in relation to dividends, interest and royalties. It provides:

'For the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he became so entitled.'

Leaving aside specific exceptions, a liability to withholding tax generally arises where a non-resident 'derives' income consisting of a dividend, interest or royalties (as defined) from an Australian source that is paid to the non-resident by a resident. The liability to withholding tax falls on the non-resident who derives the relevant income. For example, in the case of interest, the relevant subsections which establish the liability are subsections 128B(2),(2A) and (5). Section 128C in turn prescribes when the tax is due and payable.

Again focussing on interest, in the context of a trustee in receipt of interest included in the income of the trust estate, subsection 128A(3) works to ensure that the relevant liability will also arise where a non-resident beneficiary becomes presently entitled to the interest by deeming the non-resident to have 'derived' income consisting of that interest when they became entitled. (See also ABB Australia Pty Ltd v Federal Commissioner of Taxation [2007] FCA 1063 per Lindgren J).

To facilitate collection of the withholding tax due and payable, a corresponding administrative obligation on the trustee to withhold from the amount the non-resident beneficiary is deemed to have derived arises under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953. A credit for the amount withheld and remitted by the trustee is generally available to the beneficiary which offsets its withholding tax liability.

Additionally, section 128D provides that income upon which withholding tax is payable (or on which such tax would be payable but for certain exclusions) is non-assessable non-exempt income (NANE) 'of a person'.

Where, in accordance in accordance with a power in the deed, the trustee specifically makes a non-resident beneficiary presently entitled to interest income that has formed part of the income of the trust estate, subsection 128A(3) will apply to deem the non-resident beneficiary to have derived income consisting of that interest. Similarly in relation to dividends and royalties.

Taxation Ruling IT 2680 confirms this approach.

While section 128D will apply to make the income which has been subject to withholding tax NANE of a person, it is far from clear what follows from this in a Division 6 context.

The income tax liability of the non-resident beneficiary (if any) will be the result of Division 6 applying to assess the non-resident and / or the trustee in respect of the non-resident on a relevant share or individual interest in the net income of the trust. (Subsection 98A(1) applies to the non-resident beneficiary directly and subsections 982A and 98(3) apply to the trustee in respect of that beneficiary).

The High Court in Bamford [2010] HCA 10 has confirmed that Division 6 operates on a proportional basis. What this means where beneficiaries have been made entitled to trust amounts of a particular character has recently been elaborated on by the Full Federal Court in Greenhatch [2012] FCAFC 84. A remaining issue, that is yet to receive judicial consideration, is how the proportional operation of Division 6 interacts with the Division 11A / Schedule 12-F withholding tax provisions, which by contrast to Division 6 apply on a quantum basis.

Meeting discussion

The ATO advised that consistent with ATO ID's 2002/93 & 2002/94 a non-resident beneficiary entitled to such income that is subject to withholding may be taken to have NANE income. [The basis of this view was not discussed in detail - the meeting discussion suggested that this could either be on the basis that so much of the share of the net income of the trust estate upon which they are assessed as is attributable to this income is taken by section 128D to be NANE in their hands, or on the basis that they have an individual interest in this income of the trust that is taken under section 128D to be NANE of the trust. Some members expressed a preference for this latter approach.] Nonetheless, all members agreed that there is some tension between the withholding provisions (which would seem to operate on a so-called 'quantum' basis) and Division 6 (which, since Bamford, clearly operates on a 'proportional' basis). This is particularly the case where the income that has been subject to withholding (and is therefore NANE) nonetheless forms part of the income of the trust estate. Members were hopeful that this issue would be resolved as part of the broad Division 6 review.

4.6: Absolutely entitled trust - cessation of residence

As submitted by member

Trustee ceases to be a resident

If a beneficiary is absolutely entitled to the trust assets as against the trustee, section 106-50 provides that the CGT provisions apply to an act done by the trustee in relation to a trust asset as if it were done by the beneficiary. Does this section apply to a CGT event I2 (section 104-70)? CGT Event I2 happens when a trust stops being a resident trust. This would happen when the trustee ceases to be an Australian resident.

Is the act of the trustee ceasing to be an Australian resident an act done by the trustee in relation to the trust assets? If no, does that mean CGT event I2 would apply to the trustee in relation to the non-taxable Australian property of the trust?

Alternatively, if the act of the trustee ceasing to be an Australian is an act done by the trustee in relation to the trust assets, does this mean the absolutely entitled beneficiary is deemed to do that act i.e. cease to be an Australian resident?  If yes does that mean CGT Event I1 applies to the beneficiary in relation to their non-taxable Australian assets?

Neither of these outcomes is preferred. The logical outcome would be that CGT Events I1 and I2 should not apply in these circumstances where the absolutely entitled beneficiary has not changed residency.  Is there another analysis that achieves this preferred outcome?

Absolutely Entitled Beneficiary ceases to be a resident

If a beneficiary of a trust that is absolutely entitled to the assets of a trust as against the trustee ceases to be an Australian resident CGT event I1 would apply to the non-taxable Australian property that the beneficiary owns.  Does this apply to the property of the trust that the beneficiary is absolutely entitled to i.e. does the beneficiary "own" the property of the trust? In this context is the trustee's ownership of the trust asset seen as an "act of the trustee in relation to the trust asset" and therefore section 106-50 applies to deem that "act" to be done by the absolutely entitled beneficiary and therefore CGT event I1 would apply to the non-taxable Australian property of the trust?

Member update:

The proposed law changes to Subdivision 106-C should fix the problems. Although the discussion paper Changes to support the measures to provide greater consistency in the scrip for scrip rollover and small business provisions issued by Treasury in June 2012 does not identify CGT events I1 and I2 as being problem areas that the proposed measures are meant to deal with, it appears the proposed fix will also resolve the problems highlighted in the agenda items. 

The proposed fix identified in section 3.1 of the Discussion Paper is to amend Subdivision 106-C to treat the asset vested in the trustee as being vested in the absolutely entitled beneficiary. It appears that this should be sufficient to deal with the issues raised in the agenda items. 

Is it intended that the proposed law changes to Subdivision 106-C as identified in the Treasury Discussion Paper will result CGT event I2 not applying when the trustee of an absolutely entitled trust changes residency and CGT event I1 would only happen when the absolutely entitled beneficiary ceases to be an Australian resident?

Meeting discussion

The chair noted the update and indicated that she intended to refer this item to the NTLG Losses and CGT Subcommittee.

Action item	4.6.1 April 2012
Description	Issue to be referred to NTLG Losses & CGT Subcommittee.
Responsibility	Secretariat
Update	The issue has been referred to the NTLG Losses and CGT Subcommittee Secretariat. The next meeting of that group is scheduled to take place on 14 November 2012.

4.7: the ATO's application of Forrest's case and the DIS 

Meeting discussion

A member asked how to determine whether a power to classify or characterise receipts and expenditure as income or capital is an absolute power; or merely an administrative power to honestly classify receipts and expenditure according to law.

The ATO indicated that (in accordance with the Decision Impact Statement issued by the Commissioner in respect of the Forrest decision) the breadth of a power to classify receipts and expenditure must be determined having regard to the settlor's objective intention ascertained from all the provisions of the deed.

In Forrest v Commissioner of Taxation [2010] FCAFC 6, the Full Federal Court held that a clause that appeared to confer upon the trustee an unfettered discretion to determine whether a receipt was capital or income was in fact no more than an administrative power to honestly classify receipts according to law. Relevantly, the Court was of the view that the settlor's intention of creating a fixed trust of income (other than capital gains) would have been defeated if the power had been construed as a discretionary power of recharacterisation.

Based on Forrest, a relevant factor in determining the breadth of such a power is whether there are different income and capital beneficiaries. If there are, then a broad trustee power to characterise income and receipts points strongly against a construction of the power as being unfettered in scope. Therefore, the Forrest decision may also have relevance to a discretionary trust where the beneficiaries or objects that can potentially benefit from income are different from those that can potentially benefit from capital.

1.5 Litigation update

The ATO advised members that:

¦ The taxpayer has sought special leave to appeal to the High Court from the decision of the Full Federal Court in FCT v. Greenhatch [2012] FSAFC84 which involved streaming of capital gains. No date has yet been set for the hearing of the application.

¦ The taxpayer has appealed to the Full Court of the Federal Court from the decision of Justice Nicholas in August v FC of T [2012] FCA 682. The threshold issue in that case was whether the profit made by a trustee on disposal of commercial properties was on income or capital account.

¦ Decision Impact Statements have been published in respect of the following matters:

¦

– Hopkins v. FCT [2012] AATA 324

– Re Atlantis Holdings Pty Limited in its capacity as trustee of the Bruce James Lyon Family Trust [2012] NSWSC 112

¦ The ATO noted the decision of the AAT in Yazbek v. FC of T [2012] AATA 447 which involved the amendment period for trust beneficiaries. In that case, the Tribunal held that a four year period of review applied under item 1(d) in the table in subsection 170(1) of the ITAA 1936 because the taxpayer was a beneficiary of a trust, even though the taxpayer had not received any distribution from the trust in the relevant year. Members expressed some concern given that many beneficiary clauses are very widely drawn such that many people might technically be outside of the shorter period of review provisions (even where they may not know that they are objects of a trust). The ATO indicated that the decision should not be viewed as signalling a change in its broad compliance approach - but it is currently considering the impact of the decision and possible advice to staff.

¦ The ATO also noted the decision of The Trustee for MH Ghali Superannuation Fund [2012] AATA 527 in which the Tribunal held that the reference in the superannuation special income provisions in the former section 273 of the ITAA 1936 to a beneficiary having a 'fixed entitlement' to income or capital took its meaning from the definition of that term in the trust loss provisions in Schedule 2F to the ITAA 1936. Notwithstanding this, the Tribunal held that a SMSF had a fixed entitlement to income of a trust.

1.6 Rulings update

6.1 Draft Taxation Determination TD 2012/D4

The ATO noted that this determination concerning whether CGT event E1 or E2 happen if, pursuant to a valid exercise of a power contained within the trust's constituent document, the terms of the trust are changed, is receiving final approvals and should be published by the end of October.

A limited number of comments were received on the ruling focussing in the main on suggestions as to additional examples that could be usefully included in the ruling (which, where possible, has been done).

6.2 Draft Taxation Determination TD 2012/D5

The ATO noted that this determination is also receiving final approvals and should be published by the end of October. The ATO raised two issues that arose from the submissions on the draft determination:

¦ the first issue is the use of formulaic resolutions - for example:

¦

– an amount of trust income (to the maximum extent it is available) that would ensure that Harry's share of the net income of the trust as determined under section 97 of the ITAA 1936 does not exceed $30,000; or

– an amount of trust income (to the maximum extent it is available) that would ensure that Zac's total taxable income for the 2012 income year does not exceed $80,000

Before discussing the effect of such resolutions, the ATO noted that there is also some debate about the effect of an income equalisation clause generally.

On one view, an income equalisation clause may fail by reason of uncertainty as to its meaning and operation. On another view, it would operate in some cases and in some years, but would fail (so that entitlements under it would abate) in other years.

This may be because, for example, the precise calculation of net income (to which the clause seeks to equate trust income) may depend on the trustee making certain choices (such as which depreciation or valuation methodologies to use, which capital gains to apply capital losses against, etc.), which perhaps have not in fact been made by the time of making the resolution. It may also be because, as defined under section 95, net income may in fact be calculated differently in respect of different beneficiaries.

The ATO noted that subject to the views expressed in Draft Taxation Ruling TR 2012/D1 about the meaning of income of a trust estate for Division 6 purposes, the Commissioner will seek as far as possible to give effect to an equalisation clause. This means that where the Commissioner is of the view that the net income of the trust differs from that originally calculated by the trustee (for example, because the Commissioner or the trustee determines that the net income as originally calculated by the trustee was incorrect), the Commissioner's broad approach will be to treat the income of the trust as always having been that revised amount.

Where the calculation of the net income depends on the exercise of a choice by the trustee, the Commissioner's approach, unless there is evidence to the contrary, will be to assume that the trustee had determined how it would be made prior to 30 June, and that the calculation of the net income of the trust does not vary as between different beneficiaries. In that way, beneficiaries will be treated as having a vested and indefeasible interest in the trust income by 30 June wherever possible. On this basis, formulaic resolutions of the first type (set out above) would generally be effective to create the purported entitlements. However, the Commissioner is not inclined to include such resolutions as examples in the final Determination due to their ostensible purpose of ensuring certain tax outcomes as opposed to particular trust entitlements.

Resolutions of the second type are less certain and the Commissioner would not generally accept such a resolution as being effective to create a present entitlement to the income of the trust by 30 June. There are many matters which may happen after 30 June which could affect the calculation of the beneficiary's taxable income - each may have various choices to make under the tax law.

It is also difficult to see how a resolution of this second type would operate in respect of an entity that is a beneficiary of two trusts where the trustees of both trusts had made similar resolutions.

¦ the second issue is the treatment of resolutions which purport to allocate all of the income of a trust to beneficiaries on a percentage basis which is denominated in dollar terms rather than as a percentage rate. For example, a trustee may resolve to distribute a third of trust income of $120,000 in the form of a $40,000 distribution to three beneficiaries rather than resolve to distribute a one third percentage of such income to three beneficiaries.

One submission indicated that if a trustee cannot distribute a percentage of trust income expressed in dollar terms, many practitioners would regard this as a marked change in practice.

The ATO indicated that the way in which a trustee words a resolution to distribute income is critical in determining its effect.

While the effect of the resolution in the example is that each beneficiary was entitled to one third of the income of the trust as calculated by the trustee, the ATO does not consider that, in the absence of other evidence, the beneficiaries have an entitlement to any more than $40,000.

The result may be different if, for example, the trustee resolution indicated that each beneficiary was entitled to $40,000 "being one third of the income of the trust estate", or alternatively if there was evidence of the trustee otherwise resolving to distribute one third of trust income to each of the beneficiaries that was simply represented in dollar terms when reduced to writing.

Whilst members would have liked to see an example of the formulaic resolution in the first issue included in the final Determination, they did not in the main disagree with these views.

6.3 Draft Taxation Ruling TR 2012/D1

The status of this ruling was discussed. The ATO advised members that at a broad level, the ruling continues to reflect the ATO view which officers will apply, for example, in making assessments in the context of an audit that has resulted in the net (taxable) income of a trust being increased. For this reason the ruling will not be withdrawn.

However, the ATO indicated that it will not commence compliance activity solely with a view to applying its views set out in the ruling - those views will only be applied in an audit commenced for some other reason.

The ATO noted that the ruling does contain alternative views which could, in appropriate circumstances, found a reasonably arguable position in the context of penalties.

The ATO acknowledged a small number of particular errors that were raised in the submissions. For example, the definition of notional expense in paragraph 6 refers to a depletion of a trust estate 'in that year'. The definition has the effect that a prior year loss would be treated as a notional expense. This is unintended.

The ATO is not inclined to deal with these errors by way of reissuing the draft. Nor is the ATO inclined to finalise the ruling while the review of trust taxation is being undertaken.

Accordingly, the ATO proposed, as a matter of priority, to issue a short addendum to the draft ruling to correct the known errors and not finalise that draft whilst the review of trust taxation is being undertaken. Sub-group members supported this approach.

Action item	6.3.1 April 2012
Description	Publish addendum to Draft TR 2012/D1.
Responsibility	Secretariat

Trust tax return - label 64

The ATO noted that it had a received a lot of enquiries regarding the completion of (new) Label 64 in the trust income tax return which asks for the income of the trust estate. Practitioners are concerned that trustees may be exposed to penalties if they do not determine the income for the purpose of completing this label in accordance with TR 2012/D1.

The ATO indicated that trustees are not obliged to apply the view expressed in TR 2012/D1 in completing Label 64. Rather, trustees should include at this Label what they truly think to be the income available for distribution under the trust deed. It was noted that this Label merely collects information and is not part of the calculation of, for example, the trust's net (taxable) income. Instead, the figure shown at this Label will be used for example as a starting point if it becomes necessary to make assessments reflecting adjustments to the net income of a trust.

Update

Following the meeting, the ATO distributed the following information to Sub-group members. The information is intended to better assist practitioners in completing label 64 (and related label 65 W) in the trust income tax return.

What amount is required to be shown at label 64A and 65W?

As per the trust return instructions, the amount to be included at label 64A is the total income of the trust that is legally available for distribution to trust beneficiaries for the income year (distributable income). In determining that amount careful consideration should be given to the trust deed, the trust accounts and relevant resolutions and determinations.

Label 65W records the amount of the trust's distributable income that each beneficiary was presently entitled to by the end of the income year.

Why have labels 64A and 65W been introduced?

These labels have been introduced to assist with the administration of the trust assessing provisions. For example, the figures shown at these labels will provide a starting point for the Commissioner if it becomes necessary to consider what assessments or amended assessments are required as a result of adjustments to the net income of a trust. Other matters that the Commissioner will consider are the terms of the relevant trust deed, any determinations or resolutions made pursuant to it and the trust financial statements.

While these are new labels, the income of the trust is nevertheless a figure that the trustee has been obliged (at least since Bamford) to calculate in order to work out each beneficiary's corresponding share of the trust's net (taxable) income and likewise is an amount that the trustee needs to know for trust purposes in order to determine what amounts can in fact be distributed to beneficiaries.

Should the distributable income shown at label 64A be based on the views expressed by the Commissioner in Taxation Ruling TR 2012/D1?

Draft Taxation Ruling TR 2012/D1 provides guidance on the meaning of distributable income. Under self-assessment, you can follow the meaning as set out in the ruling or, if you disagree with aspects of that ruling, you can apply what you understand the term to mean for the purpose of present entitlement and completing labels 64A and 65W.

The amount which you show at labels 64A should be the trustee's honest determination of the trust's distributable income. The trustee may think that its distributable income is calculated based on one of the alternative views in TR 2012/D1, for example, according to a so-called 'income equalisation clause'. If so, this is the amount it can include at Label 64A.

Even if the Commissioner later takes the view that the trust's distributable income is a different amount, the trustee will have made no error in its completion of Label 64A.

What if I leave the labels blank?

We will use labels 64A and 65W to assist us in identifying what may be contrived differences between the income of the trust estate and the net/taxable income of the trust - for example, for the purposes of obtaining tax benefits. Incomplete labels may increase the likelihood of such a review.

We are aware that some trust returns that have already been lodged have not completed labels 64A or 65W. While we do not currently propose to seek that information from those trustees (solely for the purposes of ensuring those returns are complete), we may do so if we are reviewing the trust return for other reasons (including those mentioned above).

When does the ATO plan to finalise TR 2012/D1?

The draft ruling will not be finalised while the review of trust taxation is being undertaken.

While the draft continues to reflect the ATO view which officers will apply, the ATO will not commence compliance activity solely with a view to applying any of the views set out in the ruling - those views will only be applied if they become relevant in the context of an audit commenced for some other reason, if we are asked to make a private ruling or in litigation.

In addition, the Commissioner notes that the draft Ruling contains a number of alternative views which in relevant cases may form the basis of a reasonably arguable position.

6.4 Other business: ATO ID 2012/63

Two members raised ATO ID 2012/63 which says that CGT event E4 can happen in respect of a distribution from a unit trust of trust income that exceeds trust net (taxable income) because of a timing difference. In the members' view, this is inconsistent with the position previously taken by the ATO.

As this ATOID resulted from discussion at the NTLG Losses & CGT Subcommittee, the chair indicated that the issue would be referred to that Sub-group for further consideration.

Action item	6.4.1 April 2012
Description	Liaise with the NTLG Losses and CGT Subcommittee.
Responsibility	Secretariat
Update	The issue has been referred to the NTLG Losses and CGT Subcommittee Secretariat. The next meeting of that group is scheduled to take place on 14 November 2012

1.7 Standing agenda items

7.1 TIES issues

This is a standing agenda item.

Members were asked whether they were aware of any trust issues that were suitable for submission to the Tax Issues Entry System (TIES).

No suitable issues were identified.

7.2 Possible ruling topics

This is a standing agenda item.

No topics were identified.

7.3 Top 3 issues

This is a standing agenda item.

Members agreed that the Sub-group had only one 'Top 3 issue', that being input into, and implementation of, the trust taxation reforms. Members indicated that the inclusion of only a single issue on this list should be read as highlighting the importance of those reforms.

The following issues were removed from the previous list:

¦ '30 June compliance activities' (as those activities have been concluded)

¦ "Commissioner's view of the meaning of 'income of the trust estate'" (on the basis of the advice provided by the ATO under agenda item 6.4)

Action item	7.3 September 2012
Description	Issue to be included in Sub-group report for December NTLG meeting.
Responsibility	Secretariat
Due date	As requested by NTLG Secretariat.

7.4 ATPF liaison

This is a standing agenda item.

Members agreed that the ATPF should be advised of:

¦ the approach the ATO intends to take in relation to the finalisation of draft taxation ruling TR 2012/D1 and the information required at Label 64 of the trust tax return

¦ the proposed approach to remission of failure to withhold penalties and compliance activities in relation to closely held trust TFN withholding tax

¦ the finalisation of draft taxation determinations TD 2012/D4 and 2012/D5.

Action item	7.4 September 2012
Description	Advice to be provided to ATPF Secretariat.
Responsibility	Secretariat
Update	Advice provided 28 September 2012

^[H10]Next meeting and close

The chair thanked members for their contribution and closed the meeting. No date was set for the next meeting of the group, although it was agreed that a meeting (other than by way of Treasury consultation on the Division 6 review) would probably not be required until early in 2013.

Members agreed that if any urgent matter requires consideration by the Sub-Group, a telephone conference should be held.