Introduction

These instructions will help you complete the Trust tax return 2011 (NAT 0660). They are not a guide to income tax law. You may need to refer to other publications.

When we say 'you' or 'your business' in these instructions, we mean either you as the trust that conducts a business or you as the tax agent or trustee responsible for completing the tax return.

These instructions contain abbreviations for names or technical terms. Each term is spelt out in full the first time it is used and there is a list of abbreviations.

What's new?

Impact of the Bamford decision

In 2010 the High Court handed down its decision in the matters of Commissioner of Taxation v P & D Bamford Enterprises Pty Ltd; Philip and Davina Bamford v Commissioner of Taxation [2010] HCA 10 (Bamford).

The decision settled some basic aspects of the law that have been in contention for a long time about the taxation of trust income. Broadly, following Bamford, it is clear that:

• 'Income of the trust estate' takes its meaning from trust law so that if a trust deed, or a trustee acting in accordance with a trust deed, treats the whole or part of a receipt as income it will then be treated as 'income of the trust estate' even though it might have been received as capital.
• The amount of 'income of the trust estate' to which a beneficiary is presently entitled is determined and converted into a percentage of the total 'income of the trust estate' that could have been distributed once the trustee's outgoings were taken into account. The beneficiary is assessed on that same percentage of the whole of the trust's net income. This is called the proportionate approach.

The Bamford decision applies to all trusts other than superannuation funds and trusts taxed as companies.

Impact on existing rulings and practices

As a result of the Bamford decision, a number of rulings and practice statements were withdrawn. In particular, the following products no longer apply:

• Taxation Ruling TR 95/29: Income tax: Division 16 - Applicability of averaging provisions to beneficiaries of trust estates carrying on a business of primary production
• Taxation Ruling No. IT 331: Adjustments to estate income as returned to arrive at net income of estate for the purposes of section 95
• Law Administration Practice Statement (General Administration)PS LA 2005/1 (GA):Taxation of capital gains of a trust
• Taxation Ruling TR 92/13: Income tax: distribution by trustees of dividend income under the imputation system.

The Commissioner's Decision Impact Statement further outlines the implications of the Bamford decision. See Decision impact statement - Commissioner of Taxation v. Phillip Bamford & Ors; Phillip Bamford & Anor v Commissioner of Taxation.

Improving the taxation of trust income

On 16 December 2010, the Assistant Treasurer announced plans to update the trust taxation provisions in Division 6 of the Income Tax Assessment Act 1936 to address the uncertainties in the law following the Bamford decision.

As part of the update, the Assistant Treasurer asked the Board of Taxation (Board) to consider whether there were any other issues relating to trust taxation that needed to be addressed in the 2010-11.

Following advice from the Board and feedback from interested stakeholders, legislation to enable the streaming of franked dividends and capital gains for tax purposes, as well as targeted anti-avoidance rules, was introduced into Parliament in Tax Laws Amendment (2011 Measures No. 5) Bill 2011. This legislation has recently been enacted and will apply to the 2010-11 income year.

Broadly, the legislation ensures that, where permitted by the trust deed, the trust's capital gains and franked distributions can be effectively streamed to beneficiaries for tax purposes by making those beneficiaries 'specifically entitled' to those amounts. Beneficiaries specifically entitled to franked distributions will, subject to existing integrity rules, also enjoy the benefit of any attached franking credits. The legislation also introduces two specific anti-avoidance rules to address the inappropriate use of exempt entities to 'shelter' the taxable income of a trust.

Managed Investment Trusts have a choice to apply the streaming changes contained in this new legislation for the 2010-11 and 2011-12 income years. The legislation does not otherwise apply to them.

Beneficiaries of primary production trusts that report a loss

• New law has also recently been enacted to restore the pre-Bamford position that enabled beneficiaries to continue to access income averaging and hold Farm Management Deposits in years where a primary production trust reports a loss for trust purposes.
• Although the new law applies from 1 July 2010 and therefore provides a seamless transition for primary producers, trustees of discretionary trusts are now required to choose primary production beneficiaries in writing before lodging your trust return.

See Share of income A and B (below) for more information on how to make an effective choice and how to complete the Statement of Distribution.

Extending tax file number (TFN) withholding to closely-held trusts

TFN withholding arrangements have been extended to most closely held trusts, including family trusts, to ensure that beneficiaries of these trusts include their share of the net income of the trust in their tax returns.

From the first income year starting on or after 1 July 2010, beneficiaries may provide their TFN to the trustee of the trust prior to receiving a distribution or becoming presently entitled to income of the trust. Where a beneficiary has provided their TFN, the trustee is required to report the TFN and other details to the ATO.

Where a beneficiary does not provide their TFN, the trustee is required to withhold an amount from the payment or distribution (at the top marginal rate plus Medicare levy). The trustee will then be required to lodge an annual withholding report and remit the amount withheld to the ATO. The trustee is required to provide beneficiaries with a payment summary where withholding has occurred. When the beneficiary lodges their tax return they will be able to claim a credit for the amount withheld.

Trustees are also required to lodge an annual payment report. The annual payment report can be made by completing the required details in the trust tax return statement of distribution.

Legislation to bring this measure into effect was contained in Act No. 75 - Tax Laws Amendment (2010 Measure No.2) Act 2010 which received royal assent on 28 June 2010.

Deductibility of employer contributions for former employee

Employers can claim a deduction for superannuation contributions made in respect of a former employee within four months of the employee ceasing employment and at any time after the employee ceases employment for defined benefit interests. Currently employers are restricted to a two month time limit.

Special disability trusts: changes to the taxation of net income and to the capital gains tax main residence exemption

In the 2009-10 Federal Budget the Government announced changes to the taxation of special disability trusts.

From the 2008-09 income year the unexpended income of a special disability trust will be taxed at the relevant beneficiary's personal income tax rate rather than automatically at the top personal tax rate plus Medicare Levy. Legislation to bring this measure into effect was contained in Tax Laws Amendment (2010 Measure No.3) Act 2010 which received Royal assent on 29 June 2010. The instructions in this document are relevant for special disability trusts. However, there are some specific requirements to include when completing this return for a special disability trust. These are at the 'businesses' section of www.ato.gov.au

From the 2009-10 income year the capital gains tax main residence exemption will be extended to include a residence that is owned by a special disability trust and used by the relevant beneficiary as their main residence. At the time of preparing these instructions, legislation had not been enacted to give effect to this measure.

Managed investment trusts

Government response to the Board of Taxation's Review

In the 2010-11 Budget the Government announced the intention to introduce a new taxation regime for Australian managed investment trusts (MITs) in response to the Board of Taxation's (Board) Report on its review of the tax arrangements applying to MITs. This change was announced to have effect from 1 July 2011.

The new regime will:

• allow MITs to use an attribution method of taxation (in lieu of the existing present entitlement to income method)
• include a 5% de minimis rule to allow MITs to carry forward under and over distributions into the next income year without adverse taxation consequences, and
• allow unit holders to make, in certain circumstances, adjustments (including upward) to the cost base of their unit holdings to eliminate double taxation that may otherwise arise.

As part of this measure, the corporate unit trust rules will be replaced with an arm's length rule to be included in the public trading trust provisions.

This measure will also amend the 20% tracing rule for public unit trusts so that it does not apply to super funds and exempt entities that are entitled to a refund of excess imputation credits.

At the time of preparing these instructions, legislation had not been enacted to give effect to the measure. See New legislation for more information on the progress of the measures.

Disposals of eligible investments

Tax Laws Amendment (2010 Measures No.1) Act 2010 implemented changes that allow Australian managed investment trusts (MITs) to make an irrevocable election to apply the capital gains tax (CGT) regime as the primary code for taxing certain disposals of eligible investments. Special rules apply to those trusts that are taxed like companies. The changes take effect from the 2008-09 income year. For more information, see Managed investment trusts.

Changes to the definition of a MIT

On 10 February 2010, the Government announced further changes to the definition of a MIT in Subdivision 12-H in Schedule 1 to the TAA 1953. Legislation to bring these changes into effect was contained in Tax Laws Amendment (2010 Measure No.3) Act 2010 which received Royal assent on 29 June 2010.

Removal of the capital gains tax trust cloning exception

The Tax Laws Amendment (2009 Measures No. 6) Act 2010 which received Royal assent on 24 March 2010 removes the CGT trust cloning exception to CGT events E1 and E2. The amendments will apply to CGT events happening on or after 1 November 2008.

Capital gains tax: Roll-over for certain trusts

The Tax Laws Amendment (2009 Measures No. 6) Act 2010 also introduced a CGT roll-over for assets transferred between trusts with the same beneficiaries that satisfy a number of specified requirements with effect from 1 November 2008. As a result of this measure, trustees of certain 'fixed' trusts will be able to defer the CGT consequences of the asset transfer until the receiving trust subsequently deals with the asset. This will allow such trusts to restructure without immediate CGT consequences.

Capital gains tax - extension of roll-over for changes to water entitlements

The Tax Laws Amendment (2010 Measures No.4) Act 2010 extended the capital gains tax (CGT) roll-over for transformation arrangements to any capital gains or losses arising from changes to water entitlements to include pre-transformation transactions. Transformation is the process by which an irrigator permanently changes their right to water against an irrigation infrastructure operator into a statutory licence held by an entity other than the operator. These measures enable taxpayers to defer any CGT consequences arising from the replacement of their water entitlements with one or more different water entitlements.

The measure takes effect from the 2005-06 income year.

Capital gains tax - aligning scrip for scrip roll-over requirements with the Corporations Act 2001

The Tax Laws Amendment (2010 Measures No.4) Act 2010 introduced measures to make it easier for takeovers and mergers regulated by the Corporations Act 2001 to qualify for a scrip for scrip roll-over. For trusts, arrangements involving takeover bids that do not contravene key provisions in Chapter 6 of the Corporations Act 2001 will be excluded from having to meet certain requirements in order to be eligible for the roll-over.

The changes will apply to CGT events that happen on or after 6 January 2010.

Deductions for political contributions and gifts

From 1 July 2008 only individuals can deduct contributions and gifts to political parties and independent members and candidates, and the individual claiming the deduction must not have made the contributions or gifts in the course of carrying on a business.

Repeal of foreign investment fund and deemed present entitlement rules

The Tax laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010 repealed the Foreign Investment Fund (FIF) rules and the deemed present entitlement rules (in relation to non-resident trust estates) of the ITAA 1936. The repeal is applicable to the 2010-11 year of income and later years of income. In the absence of the FIF and deemed present entitlement rules, resident beneficiaries holding interests in foreign trusts will need to apply the ordinary trust rules contained in Division 6 of the ITAA 1936 or the transferor trust provisions of the ITAA 1936 in order to determine their tax obligations. The ordinary trust rules will also continue to apply in precedence to the transferor trust rules.

Taxation of financial arrangements (TOFA)

The key provisions of the TOFA rules are found in Division 230 of the ITAA 1997, which generally provides for:

• methods of taking into account gains and losses from financial arrangements, being accruals and realisation, fair value, foreign exchange retranslation, hedging, reliance on financial reports and a balancing adjustment, and
• the time at which the gains and losses from financial arrangements will be brought to account.

Which trusts are affected?

The TOFA rules apply to the following trusts:

• authorised deposit-taking institutions, securitisation vehicles and financial sector entities with an aggregated annual turnover of $20 million or more
• managed investment schemes or entities with a similar status under foreign law relating to corporate regulation with assets of $100 million or more
• any other trust which satisfies one or more of the following
• • an aggregated turnover of $100 million or more
  • assets of $300 million or more
  • financial assets of $100 million or more.
   

A trust that does not meet these requirements can elect to have the TOFA rules apply to it.

Regardless of whether the TOFA rules would otherwise apply, they apply to all qualifying securities acquired during income years commencing on or after 1 July 2010 that have a remaining life of more than 12 months after the entity starts to have them.

When will the TOFA rules affect a trust's tax return?

The TOFA rules will apply to financial arrangements that an affected trust starts to have in its first income year commencing on or after 1 July 2010 (unless it elected for the rules to apply a year earlier).

Transitional election for existing financial arrangements

Although the TOFA rules generally apply only to new financial arrangements, an affected trust can make a further election to have the TOFA rules apply to its existing financial arrangements. Where this election is made, the rules will also apply to financial arrangements that were entered into before the time that the TOFA rules first apply to the trust if those financial arrangements are held at that time.

A trust must provide a transitional election for existing financial arrangements to the Commissioner by the following dates:

Income year that the TOFA rules first apply to the trust's financial arrangements	Date transitional election must be made by:
2009-10	lodgment date of trust's 2009 tax return
2010-11	The due date for lodgment date of the trust's 2010 tax return
2011-12*	The due date for lodgment date of the trust's 2011 tax return

* This may apply to trusts with a substituted accounting period that have an early balance date.