These instructions will help you complete the Trust tax return 2012. 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 registered 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.
International dealings schedule replaces the Schedule 25A and Thin capitalisation schedules
The International dealings schedule 2012 (IDS) is used for taxpayers to report specific information on international dealings. The requirement to lodge the IDS is dependant on answers provided at specific questions in a Company, Partnership or Trust tax return, these trigger questions are identified on the tax return and in the instructions.
Some elements to note in the IDS include:
- the threshold for reporting details of international related party dealings is now $2 million
- the schedule has specific questions on internally recorded dealings with permanent establishments (branch operations)
- superannuation funds are not required to complete the IDS
- the IDS is available to lodge on a paper form or electronically.
Temporary flood and cyclone reconstruction levy
To assist affected communities recover from the 2010–11 natural disasters, the government introduced a Temporary flood and cyclone reconstruction levy (flood levy) that applies to taxable income for the 2011–12 year only.
The flood levy applies to individuals, but generally not to trusts. However, those trusts where the trustee is taxed on certain trust income as if it was income of an individual will have to pay the levy.
Which trusts have to pay the levy?
Those trusts liable to pay the flood levy, include where:
- individual beneficiaries are presently entitled to income of the trust estate, but are under a legal disability - for example, minors or mentally ill
- resident individual beneficiaries have a vested and indefeasible interest in the income of the trust, but are not presently entitled to that income and the trustee is assessed
- non-resident individual beneficiaries are presently entitled to income and the trustee is assessed.
See Appendix 13 – Table 13.1 to check which Trust distributions are subject to the flood levy.
Can trustees claim an exemption from paying the levy
Individuals affected by a declared natural disaster can claim an exemption from paying the flood levy. The law does not extend the exemption to trusts, as a result, trustees cannot claim an exemption from paying the flood levy.
If a beneficiary completes an income tax return and is eligible for an exemption, they can claim the exemption in their tax return.
How much is the flood levy?
The flood levy is an increase in tax on that part of taxable income above $50,000.
Flood levy payable
$0 to $50,000
$50,001 to $100,000
half a cent for each $1 over $50,000
$250 plus 1 cent for each $1 over $100,000
John is a trustee and distributes $80,000 to Sue, who is under a legal disability. As trustee, John pays the tax liability for Sue. John is assessed as if he is an individual. He does not pay the levy on the first $50,000, he pays the levy on $30,000 ($80,000 – $50,000). John will pay a levy of $150.00.End of example
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  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
Tax Laws Amendment (2011 Measures No.5) Act 2011,which received royal assent on 29 June 2011, implemented changes that enable the streaming of franked dividends and capital gains for tax purposes, as well as introducing targeted anti-avoidance rules. These changes apply for the 2010–11 and later income years.
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 (MITs) have a choice to apply the streaming changes contained in this new legislation. Where a MIT applied the streaming changes for the 2010–11 income year, it will be required to apply these changes for the 2011–12 income year. Where no choice was made for the 2010–11 income year, a MIT can chose to apply the streaming changes for the 2011–12 income year. Where neither of these choices has been made, the legislation does not otherwise apply.
See Improving the taxation of trust income for more information.
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 - this included extending the capital gains tax (CGT) main residence exemption to include a residence that is owned by the trustee of a special disability trust and used by the principal beneficiary as their main residence.
From the 2008–09 income year, the unexpended income of a special disability trust is 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.
In the 2011–12 Federal Budget, the government announced it would backdate the start date for the CGT main residence exemption to apply for CGT events on and after 1 July 2006.
The government also announced that:
- the definition of a special disability trust and principal beneficiary would be extended to include references to those entities in the Veterans' Entitlement Act 1986
- a CGT exemption would apply for all CGT assets transferred into a special disability trust
- a CGT exemption would apply to the intended recipient of the principal beneficiary's main residence after their death, where the intended recipient's ownership interest ends within two years of the principal beneficiary's death. This exemption would apply provided that, at the time of the principal beneficiary's death, the dwelling was the deceased's main residence, the dwelling was not used to produce assessable income, and the trust was a special disability trust.
The start date for these announcements is also effective from 1 July 2006.
Legislation reflecting the changes announced in the 2011-12 Federal Budget is contained in Tax Laws Amendment (2011 Measures No.7) Act 2011.
See Changes to taxation of special disability trusts
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. On 29 November 2011 the government announced that it would defer the start date of the new tax system for MITs from 1 July 2012 to 1 July 2013.
The new regime will:
- allow eligible MITs to use an attribution method of taxation (in lieu of the existing present entitlement to income method)
- include a de minimis rule to allow MITs to carry forward some under and over distributions into the next income year without adverse taxation consequences
- deem as 'fixed trusts' those MITs that clearly define in their constituent documents the rights and entitlements of their beneficiaries, and provide relief from tax consequences that may arise where a trust changes its constituent documents to meet the clearly defined rights requirement, 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.
For more information, see New legislation.