TFN withholding for closely held trusts
TFN withholding for closely held trusts
About this information
The government has extended the tax file number (TFN) withholding rules to closely held trusts, including family trusts.
If you are the trustee or beneficiary of a closely held trust, this information will help you understand the operation of the TFN withholding rules for closely held trusts and how they may affect you.
The rules apply from the first income year starting on or after 1 July 2010.
The TFN withholding rules apply to most closely held trusts (including family trusts) and their beneficiaries with some exclusions.
Closely held trusts
A closely held trust for the purposes of the TFN withholding rules is either a:
- trust where an individual or up to 20 individuals have between them - directly or indirectly, and for their own benefit - fixed entitlements to a 75% or greater share of the income or a 75% or greater share of the capital of the trust ('the 20/75 test')
- discretionary trust.
However, a trust is not a closely held trust if the trust is an 'excluded trust'.
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For the purposes of the TFN withholding rules, family trusts are not excluded trusts.
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Individuals
The trustee of a discretionary trust that is a beneficiary of the trust is taken to be an individual if:
- the trustee of the discretionary trust holds a fixed entitlement to a share of the income or capital of the trust
- no person holds that fixed entitlement directly or indirectly through the discretionary trust.
Individuals are taken to be a single individual if they are:
- an individual, whether or not they hold fixed entitlements directly in the trust
- the individual's relatives
- other individuals who in relation to any fixed entitlements of which other individuals are nominees of the individual or of the individual's relatives.
Discretionary trusts
A discretionary trust is a trust that is not a fixed trust within the meaning of section 272-65 of schedule 2F to the Income Tax Assessment Act 1936. Generally, a discretionary trust is a trust where the trustee has the discretion to determine how the trust property or income is distributed to the beneficiaries.
Excluded trusts
A trust will be an excluded trust if it is:
- a complying superannuation fund, complying approved deposit fund or a pooled super trust at the relevant time
- a trust of a deceased estate until the end of the year of income in which the fifth anniversary of the individual's death occurred
- a fixed trust that is a unit trust where exempt entities have fixed entitlements to all the income and capital of the trust
- a unit trust whose units are listed on the stock market operated by ASX Limited
- a trust that is a discretionary mutual fund according to the meaning in subsections 5(5) and 5(6) of the Financial Sector (Collection of Data) Act 2001
- an employee share trust for an employee share scheme that meets the definition under subsection 130-85(4) of the Income Tax Assessment Act 1997
- a law practice trust, which is a trust regulated by a state or territory law for the regulation of legal practices or legal services.
The TFN withholding rules apply to most beneficiaries of closely held trusts, regardless of whether they are an individual, company, partnership, trust or super fund.
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Beneficiaries receiving various pensions and benefits, including the age pension and disability support pension, are not exempt from these rules. Beneficiaries must quote their TFN to the trustee to avoid having amounts withheld from payments made by the trustee.
If beneficiaries cannot find their TFN or are unsure if they have a TFN they can:
- check their most recent correspondence from us
- contact their registered tax agent
- phone us between 8.00am and 6.00pm, Monday to Friday.
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Excluded beneficiaries
The TFN withholding rules do not apply to beneficiaries:
- that are non-residents for tax purposes
- that are exempt entities as defined in the tax laws, such as tax concession charities, deductible gift recipients and other entities that self-assess their status as income tax-exempt
- under a legal disability (for example, minors).
From the first income year that starts on or after 1 July 2010:
- beneficiaries may quote their TFN to the trustee to avoid having amounts withheld from payments made by trustees
- when a beneficiary has quoted their TFN to the trustee, the trustee must lodge a TFN report, which is due on the last day of the month following the end of the quarter in which the TFN was quoted
- the trustee must also lodge an Annual trustee payment report containing details of all payments made to beneficiaries in the income year - this report is lodged by completing information on the trust tax return for the year
- if a beneficiary does not quote their TFN to the trustee before a payment is made to them, the trustee must
- withhold from that payment - and any future payments unless a TFN is quoted
- lodge an Annual TFN withholding report containing details of all payments that were subject to withholding and any withheld amounts
- provide a payment summary to the beneficiary
- register for pay as you go (PAYG) withholding for closely held trusts
- pay any withheld amounts to us
- beneficiaries can claim a credit on their income tax return for any amounts withheld.
You should advise beneficiaries that if they have not quoted their TFN to you in the approved manner before receiving a payment from the trust, you will be required to withhold from that payment.
If beneficiaries have quoted their TFN, you must:
- store and use their TFNs according to the relevant privacy requirements
- lodge a TFN report with us by the last day of the month following the end of the quarter in which the TFNs were quoted to you - if there are no new TFNs to report for a quarter, you do not need to lodge the report
- lodge an Annual trustee payment report with us containing details of total payments made to each beneficiary in the income year - the report is made when lodging the trust tax return by completing the required information in the statement of distribution.
If beneficiaries have not quoted their TFN to you before you make a payment (or we advise you that they are considered not to have quoted their TFN to you) you must:
- withhold from any payments you make to them at the top marginal rate plus the Medicare levy
- register for PAYG withholding for closely held trusts
- lodge an Annual TFN withholding report with us containing details of the amounts paid to beneficiaries and any amounts withheld from those payments
- lodge an annual activity statement with us and pay us any amounts you withheld
- provide a payment summary to each beneficiary that had amounts withheld from payments - you do not need to provide a copy of this payment summary to us.
TFN report
You must lodge a TFN report for any quarter in which a beneficiary quotes their TFN to you. The report is due by the last day of the month following the end of the quarter.
Example 1: When to lodge a TFN report
Tara is a beneficiary of the 'Jackson Trust', which is a closely held trust. Tara provides her TFN and other details to the trustee of the Jackson Trust on 4 July 2011. The trustee must lodge a TFN report with us disclosing Tara's TFN and other details by 31 October 2011.
The TFN report must include the beneficiary's:
- TFN
- full name
- date of birth - for individuals only
- postal address
- business or residential address
- entity type
- Australian business number (ABN) if they have one - only non-individual beneficiaries.
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There are two methods for lodging a TFN report - using the:
- electronic lodgment service (ELS)
- paper version of the TFN report.
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You only need to lodge a TFN report with us if new TFNs have been reported to you. If you have no new TFNs to report for a quarter, you do not need to lodge a report.
We will use the information provided in the TFN report to match against our records. If we are unable to match the beneficiary information to our records we will write to you and advise you to check your records. You may also need to check the details with the beneficiary.
You should lodge a new TFN report with the correct details. If you do not provide us with a TFN report with updated details, we may issue you with a notice advising that the beneficiary has been taken not to have quoted their TFN.
If a beneficiary does not quote their TFN, or is taken not to have quoted their TFN, you are required to withhold at the top rate plus the Medicare levy on any payments made to them from the trust.
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A trustee must keep the TFNs of beneficiaries safe.
Under the TFN guidelines in the Privacy Act 1988, trustees must use secure methods when collecting, storing and disclosing TFN information.
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Annual trustee payment report
After the end of each income year, you must lodge an Annual trustee payment report with us.
The report must include the total of all the payments you have made to each beneficiary for the income year. You must report these amounts, even if all beneficiaries have quoted their TFNs and you have no withholding obligations.
A payment is a:
- distribution from the ordinary or statutory income of the trust
- beneficiary's share of the net income of a trust if they are presently entitled to a share of trust income.
You lodge the report by completing in full the details in the statement of distribution on the trust's tax return.
You will need to complete label S, if you meet all of the following:
- you have made one or more distributions during the income year
- the distributions are wholly or partly from the ordinary or statutory income of the trust for the year
- the total of those distributions exceed the beneficiary's share of the net income of the trust.
Only include the excess of the distribution over the beneficiary's share of the net income of the trust at label S.
You will need to complete label T, if you have amounts withheld from all payments or distributions to the beneficiary, if the beneficiary's TFN was not provided to you.
This includes amounts withheld from payments during the year or as result of determining present entitlement at the end of the year.
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You must lodge an Annual trustee payment report, even if you were not required to withhold any amounts. This is lodged by completing the required information on the trust's tax return.
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Example 2: Completing Annual trustee payment report
The trustee of a closely held trust derives interest income of $12,000 and rental income of $10,000. The section 95 net income of the trust is $20,000 comprising the interest and rental income, less allowable deductions of $2,000. The allowable deductions comprise of $1,000 of capital allowance deductions and $1,000 of rental property expenses.
Under the trust deed, the capital allowance deductions are chargeable against capital. The distributable income of the trust is; therefore, $21,000.
The trust deed allows the trustee to distribute particular classes of income to specific beneficiaries. During the income year $12,000, being the interest derived by the trust, is distributed to beneficiary one.
At the end of the income year, beneficiary two and beneficiary three are made presently entitled in equal shares to the income of the trust that has not previously been distributed.
- Beneficiary one quoted their TFN to the trustee. Beneficiary one's share of net income is $11,428 - that is, $12,000/$21,000 x $20,000 = $11,428.
- Beneficiary two quoted their TFN to the trustee. Beneficiary two's share of net income is $4,286 - that is, $4,500/$21,000 x $20,000 = $4,286.
- Beneficiary three did not quote their TFN to the trustee. Beneficiary three's share of net income is $4,286 - that is, $4,500/$21,000 x $20,000 = $4,286.
To correctly complete an Annual trustee payment report you need to provide the required identity details for each beneficiary in full and for:
- Beneficiary one, include $11,428 at B in the distribution statement and includes $572 at S (difference between amount distributed and beneficiary one's share of the net income, that is, $12,000 - $11,428).
- Beneficiary two, include $4,286 at B in the distribution statement and do not include an amount at S.
- Beneficiary three, include $4,286 at B in the distribution statement, do not include an amount at S, and complete T for the amount withheld $1,993 (that is, $4,286 x 46.5%).
Example 3: Completing Annual trustee payment report
Assume the same facts as in example 2, except that at the end of the income year, beneficiary one and beneficiary three, and not beneficiary two and beneficiary three, are made presently entitled in equal shares to the income of the trust that has not previously been distributed.
- Beneficiary one quoted their TFN to the trustee. Beneficiary one's share of net income is $15,714 - that is, ($4,500 + $12,000) $16,500/$21,000 x $20,000 = $15,714.
- Beneficiary two quoted their TFN to the trustee. Beneficiary two's share of net income is $0.00.
- Beneficiary three did not quote their TFN to the trustee. Beneficiary three's share of net income is $4,286 - that is, $4,500/$21,000 x $20,000 = $4,286.
To correctly complete an Annual trustee payment report you need to provide the required identity details for each beneficiary in full and for:
- Beneficiary one, include $15,714 at B in the distribution statement and do not include an amount at S. There is no disclosure required at S as the distribution ($12,000) does not exceed the share of net income ($15,714).
- Beneficiary two, there is no disclosure requirements in the statement of distribution.
- Beneficiary three, include $4,286 at B in the distribution statement, do not include an amount at S, and complete T for the amount withheld $1,993 ($4,286 x 46.5%).
A payment is a:
- distribution from the ordinary or statutory income of the trust
- beneficiary's share of the net income of a trust if they are presently entitled to a share of trust income.
A beneficiary's present entitlement to trust income is usually determined at the end of the income year.
You must withhold from a payment you make to a beneficiary if the beneficiary has not quoted their TFN to you before you make the payment. If you are required to withhold from a payment you must be registered for PAYG withholding for closely held trust purposes.
Example 4: Withholding from a payment to a beneficiary
The trustee of the 'Kretschmann Trust', which is a closely held trust, made regular payments during the year to its two beneficiaries - Pierce and Regina. Pierce has provided his TFN to the trustee but Regina has not.
The trustee of the Kretschmann Trust must withhold from payments made to Regina until she quotes her TFN. The trustee is not required to withhold from payments made to Pierce because Pierce has quoted his TFN.
Example 5: Withholding from a payment at the end of the income year
The 'ABC Trust', which is a closely held trust, has three beneficiaries - Jo, Rhonda and Sydney Pty Ltd. The trustee has not made any payments to the beneficiaries during the income year.
At the end of the income year, the trustee of the ABC Trust resolves that each beneficiary is entitled to a share of the trust income. Jo and Rhonda quoted their TFNs to the trustee of the ABC Trust before the end of the income year, but Sydney Pty Ltd did not.
The trustee of ABC Trust must withhold from Sydney Pty Ltd's share of the net income of the trust.
If you must withhold an amount from a beneficiary's payment during the year, the obligation to withhold occurs when you make the payment. Any amounts you withhold from payments you make during the income year will reduce the amount you may be required to withhold on a payment that occurs at the end of the income year for that beneficiary, as is shown in example 5.
Example 6: Withholding during the income year
During the income year, the trustee of the 'Mahoney Trust', which is a closely held trust, distributes $200 of ordinary income to each of its beneficiaries - Kate and Tamzin.
At the end of the income year, the trustee of the Mahoney Trust works out:
- the trust's income for the year was $1,000 - its net income was also $1,000
- that each beneficiary is entitled to a share of the trust income - each beneficiary is entitled to $500.
Neither Kate nor Tamzin quoted their TFN to the trustee before the end of the income year. The trustee must withhold on each beneficiary's share of net income but the amount can be reduced by the amount withheld during the year. That is, the trustee had already withheld for each beneficiary on their $200 payment during the year.
For each beneficiary, the trustee can subtract the $200 distribution from their total share of the net income of the trust ($500). This means that for each beneficiary, the trustee has to withhold from the remaining part of the beneficiary's share of the net income of the trust.
As Kate and Tamzin have not quoted their TFNs by the end of the income year, the trustee must withhold for each beneficiary as follows:
- $500 (total share) - $200 (on which an amount was already withheld) = $300
- the trustee must withhold on the further $300 for each beneficiary.
We have the power to remit penalties in appropriate circumstances. As an administrative concession, we will remit penalties when a trustee has not withheld for a beneficiary who was made presently entitled as at 30 June 2012 if:
- you, as trustee, were in the process of obtaining the beneficiary's TFN at 30 June - this would include if you have requested the beneficiary to provide you with their TFN
- there is no significant reason for you to expect that you will not receive that TFN by 30 September 2012
- a valid TFN for that beneficiary is quoted to you, the trustee, by 30 September 2012 and reported to us on the TFN report due 31 October 2012.
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If you pay the amount of the beneficiary's entitlement before receiving the beneficiary's TFN, you may be liable for failure to withhold penalties (for example, if you don't receive the TFN by 30 September 2012) without having access to the amount paid to the beneficiary.
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A similar concession will also apply for the 2013 income year.
The following payments are excluded from the TFN withholding rules:
- Payments that are less than the thresholds set by the regulations - withholding is not required if the payment is below $120 for the whole income year (or if the payment is for part of the income year - 120 multiplied by the number of days to which the payment applies, divided by 365).
- Payments in respect of income of the trust that were subject to the TFN withholding rules in an earlier year - that is, amounts that a beneficiary was presently entitled to but which the trustee did not distribute.
- Payments in respect of income of the trust that the beneficiary was presently entitled to and related to an income year before the TFN withholding rules applied.
- Payments to beneficiaries that are outside the family group if the trust is a family trust, as the trust is subject to family trust distributions tax.
- Payments to trustee beneficiaries, if the trustee is required to make a TB statement under the trustee beneficiary reporting rules.
For more information, see Interaction with other trust rules.
Example 7: No withholding for earlier income year
'Faith Holdings Pty Ltd' is a beneficiary of the 'Hope Trust', which is a closely held trust. In the 2009 income year, Faith Holdings was presently entitled to $1,000 of trust income from the Hope Trust - however, at 30 September 2010, Faith Holding's share of the trust income remained unpaid.
On 1 October 2010, the trustee of the Hope Trust paid $900 to Faith Holdings which represented their share of the 2009 trust net income. The directors of Faith Holdings had not provided the trustee of the Hope Trust with the company's TFN so normally the trustee would be required to withhold from that payment.
However, because the payment was related to the trust net income of the 2009 income year, which is an income year before the TFN withholding rules applied, the trustee of the Hope Trust is not required to withhold from that payment.
The rate to withhold from a payment is the top marginal rate plus the Medicare levy.
Registering for PAYG withholding for closely held trusts
If you are required to withhold amounts from a beneficiary, you must register for PAYG withholding for closely held trusts purposes.
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To register for PAYG withholding for closely held trusts purposes you can:
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If you are already registered for PAYG withholding for other reasons, you will still need to register for PAYG withholding for closely held trust purposes. Existing PAYG withholding registration for employment or other reasons cannot be used for closely held trust purposes.
Trustees registered for PAYG withholding for closely held trusts will receive an Annual activity statement. You should only report amounts withheld from beneficiaries on this annual activity statement.
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All trusts that must withhold under these rules need to be registered for PAYG withholding for closely held trusts purposes.
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If you have been required to withhold amounts from beneficiaries you must lodge an Annual TFN withholding report with us after the end of the income year.
The report must include for each beneficiary the totals of all:
- payments or distributions subject to withholding
- withheld amounts.
If you were not required to withhold any amounts from any beneficiaries you do not need to lodge a report for that year.
You must lodge your report three months after the end of the income year unless we have given you more time to lodge. If you have a 30 June balancing date, the report will be due on 30 September.
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You can lodge your Annual TFN withholding report using:
If you are not required to withhold amounts from beneficiaries, you are not required to lodge an Annual TFN withholding report.
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If you have a withholding obligation, you must pay any amounts withheld to us. You must pay any withholding amounts by the 28th day of the month following the month in which the Annual TFN withholding report is due to be lodged. If you have a 30 June balancing date, the payment will be due to us on 28 October.
The usual remittance cycles for entities, depending on their withholding liabilities, do not apply for these rules. Instead, you will only need to pay amounts withheld annually. Once registered, you will be required to lodge an annual activity statement with payment of any amounts withheld.
If you have a withholding obligation under these rules, you must contact us to register for PAYG withholding for closely held trust purposes.
Example 8: Making a withholding report and payment to us
At the end of the year, the trustee of the 'Popper Trust', which is a closely held trust, has a withholding obligation because two of the beneficiaries (Holly and Harry):
- became presently entitled to a $1,000 share of the trust's income, which is also their share of the trust's net income
- did not provide their TFNs.
To meet this obligation, the trustee withholds 46.5% (the top rate plus the Medicare levy in 2010-11) from each payment - that is, each beneficiary's share of the net income of $1,000, totalling $465 each ($1,000 x 0.465).
The Popper Trust Annual TFN withholding report is due on 30 September 2011. However the trustee lodges the report early on 28 July 2011. Despite the early lodgment of the report, the Popper Trust still has until 28 October 2011 to pay us the $930 it withheld from the beneficiaries' share of the net income of the trust.
When you no longer need to withhold from payments to any of your beneficiaries, you can cancel your PAYG withholding for closely held trusts registration.
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To cancel your PAYG withholding for closely held trusts registration you can:
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Each beneficiary that has received a payment when an amount has been withheld must be given a payment summary.
You must do this no more than 14 days after the due date for lodgment of the Annual TFN withholding report. If you have a 30 June balancing date, you must issue payment summaries by 14 October, unless we have given you additional time.
A payment summary must contain the:
- full name of the trustee
- full name of the trust
- ABN or withholding payer number (WPN) of the trustee
- address of the trustee
- name of the beneficiary
- total of the withholding payments that it covers
- total of the amounts withheld from the payments
- income year of the trust that the payment summary is for.
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In some instances, the total of the withholding payments required in the payment summary may be different from the actual distribution the beneficiary has received from you.
In these circumstances, you should ensure you also provide the beneficiary with details of their share of the trust's net income that they need to include on their tax return.
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The payment summary may be in an electronic form.
You do not need to send a copy of the payment summary to us.
Penalties
Under the existing PAYG withholding arrangements, there are specific penalty provisions that relate to TFN withholding. These include penalties for failure to:
- withhold
- pay an amount withheld by the due date
- lodge reports on time.
These existing penalty arrangements also apply to the TFN withholding rules for closely held trusts.
You must decide whether to quote your TFN to the trustee. You are not required to quote your TFN, but if you do not, the trustee must withhold from any payments from the trust to you at the top marginal rate plus the Medicare levy.
To avoid withholding you may apply for a TFN if you do not have one.
If you are required to lodge a tax return, you must include your share of the net income from a trust.
If the trustee has withheld amounts from payments to you, the only method to redeem this is to claim a credit in your tax return equal to the amount withheld. You should receive a payment summary from the trustee providing the totals of payments and any amounts withheld.
Quoting your TFN to a trustee
To quote your TFN to the trustee, you need to provide your:
- TFN
- full name
- date of birth - individuals only
- postal address
- business or residential address
- entity type
- ABN if you have one - only non-individual beneficiaries.
There is no prescribed format when providing this information. You may provide this either verbally or in writing (including an electronic format) to the trustee to meet the requirements.
Unless your details have changed, the details you provide to the trustee should be the same as what you provided to us on your most recent tax return.
This will increase the likelihood of us being able to match your TFN and other personal details to our records. It will also reduce the possibility of the trustee being notified that the TFN or other details are incorrect and that they will be required to withhold from future payments.
Interaction with other trust rules
Trusts subject to family trust distribution tax
If you, as the trustee of a family trust, make a payment to a beneficiary within the family group, you are subject to the TFN withholding rules.
If you make a payment to a beneficiary outside the family group, you are subject to family trust distribution tax. You are not required to withhold on payments if family trust distribution tax is payable.
Trusts subject to the trustee beneficiary reporting rules
If you have beneficiaries that are themselves a trustee of a trust, the trustee beneficiary reporting rules may apply to you.
If you are required to lodge a TB statement for a trustee beneficiary, you do not apply the TFN withholding rules for that beneficiary. However, you must apply the TFN withholding rules for non-trustee beneficiaries.
Unit trusts
You are only required to withhold once when you make a payment that is subject to withholding for investments or under the closely held trust rules.
In these circumstances, you are required to withhold under the investment rules in priority to the closely held trust rules.
Questions and answers
What happens if a beneficiary fails to provide their TFN to the trustee?
If the beneficiary does not provide their TFN to you, you must withhold from any payments made to the beneficiary.
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Beneficiaries receiving various pensions and benefits, including the age pension and disability support pension, are not exempt from quoting their TFN to the trustee of a closely held trust.
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Can a beneficiary claim a credit for money withheld by the trustee?
Yes, when the beneficiary submits their tax return for the year of income, they may claim a credit for any amounts withheld during the year of income.
What happens if a trustee does not withhold?
The trustee may receive a failure to withhold penalty.
What happens if the quoted TFN is incorrect?
If we are unable to match the beneficiary information in the TFN report, we will write to you and advise you to check your records. You may also need to check the details with the beneficiaries.
If a beneficiary provides new or additional information as a result of your checks, you will need to lodge a new TFN report by the due date of the next quarter.
If you do not have additional or new information to report, you will need to withhold from future payments made to that beneficiary.
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In some circumstances, the beneficiary may have changed their details since their last interaction with us. In these situations, we ask that you advise the beneficiary to contact us to update their details on our records before you submit a new TFN report.
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Do trustees need to register for PAYG withholding if they must withhold?
If you need to withhold amounts from payments under these rules, you must be registered for PAYG withholding for closely held trust purposes. For more information, see Registering for PAYG withholding for closely held trusts.
Do trustees need to register for PAYG withholding if they do not need to withhold?
No, you only need to register for PAYG withholding for closely held trusts if you have an obligation to withhold from payments. If you are about to make a payment to a beneficiary who has not provided their TFN, you will need to contact us to register for PAYG withholding for closely held trust purposes.
How do trustees pay the TFN withholding amount?
Once you have registered for PAYG withholding for closely held trust purposes, we will provide you with an activity statement to complete annually to report and pay amounts withheld from beneficiaries. You will need to lodge this activity statement and pay any withholding amounts to us by the 28th day of the next month, following the day you are required to lodge your Annual TFN withholding report. For normal balancers, the activity statement will be due by 28 October.
For more about the extension of TFN withholding rules to closely held trusts:
- speak to your tax agent
- phone us between 8.00am and 6.00pm, Monday to Friday.
Last Modified: Friday, 12 October 2012
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