House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 10 Extension of transitional family trust and interposed entity election provisions

Introduction

10.1 Schedule 10 to this Bill will amend Schedule 1 to Taxation Laws Amendment (Trust Loss and Other Deductions) Act 1998 (the Trust Loss Act) to allow an extended period for making family trust elections and interposed entity elections. This will enable elections to be made for the purpose of:

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the family trust concessional tracing rule that applies to companies (described in Chapter 9 of this Explanatory Memorandum); and

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the franking credit trading measures to be implemented by Taxation Laws Amendment Bill (No. 2) 1999.

Summary of amendments

Purpose of amendments

10.2 To extend the deadlines for making family trust and interposed entity elections in earlier income years to enable taxpayers to:

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make elections to allow a company to take advantage of the family trust tracing concession that will be available under amendments made by this Bill; and

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make these elections for the purpose of the franking credit trading measures after the relevant amendments have received Royal Assent.

10.3 This requires amendment to the transitional provisions for making family trust and interposed entity elections which are set out in Schedule 1 to the Trust Loss Act.

Date of effect

10.4 These amendments will apply from the day this Bill receives Royal Assent.

Background to the legislation

10.5 Under the existing transitional rule in Schedule 1 to the Trust Loss Act the deadline for making elections for the 1996-97 and the 1997-98 income years is the time for lodging the 1997-98 tax returns which has already passed.

10.6 A trustee of a trust which holds an interest in a company which can benefit from the family trust concession in the 1996-97 or 1997-98 income years which has not made a family trust election for those years may wish to have a family trust election in place for those years. Similarly, companies, trusts or partnerships wishing to be members of the same family group as the trust making the family trust election may wish to make an interposed entity election for those same income years.

10.7 Unless a trust has elected to be a family trust, the 45 day rule, an anti-franking credit trading rule in new Division 1A which will be inserted in Part IIIA of Income Tax Assessment Act 1936 (ITAA 1936) by Schedule 4 to Taxation Laws Amendment Bill (No. 2) 1999, will generally deny beneficiaries of non-fixed trusts the franking rebate and other franking benefits in relation to dividends paid on shares or interests in shares acquired after 3.00 pm on 31 December 1997. However, many taxpayers are understandably reluctant to make an election before the measures are passed by Parliament.

Explanation of amendments

Family trust concessional tracing rule

10.8 This Bill will allow a trustee of a trust which holds an interest in a company which can benefit from the family trust concession to make a family trust election for the 1996-97 and 1997-98 income years. The transitional rule will be available to trusts that pass the family control test (see section 272-87 of the trust loss measures contained in Schedule 2F to the ITAA 1936) at the relevant times ^[F8] and will apply so that:

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taxpayers wishing to make the election for the 1996-97 or 1997-98 income year will be required to do so before taxpayers lodge their 1998-99 tax returns. If no tax return is required for 1998-99, the election will need to be made within 2 months after the end of that income year;

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the election will need to be in a form approved by the Commissioner of Taxation (the Commissioner) but does not need to be lodged with the Commissioner;

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a taxpayer who made the election in 1996-97 or 1997-98 will be required to lodge details of the election as part of their 1998-99 tax return. If no tax return is required for 1998-99, the details will need to be provided within 2 months of the end of the 1998-99 income year or such later day as the Commissioner allows. [Subitems 22(2) (3) and (4) of Schedule 1 to the Trust Loss Act]

10.9 Parallel rules will also allow companies, trusts or partnerships that wish to be a member of the same family group to have interposed entity elections in place for the same income years. [Subitems 23(2) to (4) of Schedule 1 to the Trust Loss Act]

10.10 Alternative transitional rules will come into effect if the amendments to the company loss rules have not been passed by Parliament before the due date for lodging the 1998-99 income tax return. The transitional rule would apply as above except that taxpayers should make the election for the 1996-97, 1997-98 or 1998-99 income year before lodging their return for the 1999-2000 income year and details should be provided as part of their 1999-2000 tax return. [New subitems 22A(1), (3) and (4) and 23A(1) to (3) of Schedule 1 to the Trust Loss Act]

Franking credit trading measures

10.11 A similar transitional rule is required for non-fixed trusts wishing to make family trust elections in the 1997-98 income year if the trust received a franked dividend (within the meaning of Part IIIA of the ITAA 1936) or a distribution attributable to a franked dividend in the 1997-98 income year. The transitional rule will be available where the non-fixed trust passes the family control test at all times in the 1997-98 income year and will apply so that:

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taxpayers wishing to make the election for the 1997-98 income year will be required to do so when lodging their 1998-99 tax returns. If no tax return is required for 1998-99, the election will need to be made within 2 months after the end of that income year or such later day as the Commissioner allows;

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the election will need to be in a form approved by the Commissioner but does not need to be lodged with the Commissioner;

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a taxpayer who made the election in 1997-98 will be required to lodge the election as part of their 1998-99 tax return. If no tax return is required for 1998-99, the details will need to be provided within 2 months of the end of the 1998-99 income year or such later day as the Commissioner allows. [New subitems 22(2A), (3) and (4) of Schedule 1 to the Trust Loss Act]

10.12 Parallel rules will also allow companies, trusts or partnerships that wish to be a member of the same family group to have interposed entity elections in the same income years. [Subitems 23(2) to (4) to Schedule 1 to the Trust Loss Act]

10.13 Alternative transitional rules will come into effect if the franking credit trading measures have not been passed by Parliament before the due date for lodging the 1998-99 income tax return. The transitional rule would apply as above except that taxpayers should make the election for the 1997-98 and 1998-99 income years before lodging their return for the 1999-2000 income year and details should be provided as part of their 1999-2000 tax return. [New subitems 22A(2) to (4) and 23A(1) to (4) of Schedule1 to the Trust Loss Act]

10.14 The above transitional rules contain a special rule to ensure that no family trust distribution tax is payable in earlier income years for which elections are made if the family trust meets a requirement. This is that the trust satisfies, in the income year, the ordinary tests for deductibility of prior or current year losses or debt deductions that will apply to trusts that are not family trusts (ie. the trust is not prevented under the trust loss measures from deducting a tax loss or an amount in respect of a debt, or is not required to calculate its net income and tax loss under Division 268 of Schedule 2F of the ITAA 1936). [New subitems 22(5), 22A(5)]

Continuation of previous transitional provisions

10.15 The repeal of existing items 22 and 23 of Schedule 1 to the Trust Losses Act will not affect a persons right to make elections under those repealed provisions. [Item 11]

Consequential amendment

10.16 Section 262A of the ITAA 1936 is being amended to make it clear that an election made in accordance with the transitional rules must be retained by the taxpayer who made it for 5 years. This is a standard provision for retention of elections of this kind. [Item 1]