• Introduction

    What's new?

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Repeal of foreign investment fund and deemed present entitlement rules

    The Tax Laws Amendment (Foreign Source Income Deferral) Act (No. 1) 2010 repealed section 96A, Part XI (the FIF rules) and sections 96B and 96C (the deemed present entitlement rules) of the Income Tax Assessment Act 1936 (ITAA 1936). The repeal applies to 2010-11 and later income years. In the absence of the FIF and deemed present entitlement rules, resident beneficiaries holding interests in foreign trusts will need to turn to the ordinary trust rules contained in Division 6 and the transferor trust provisions in Division 6AAA 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.

    TFN withholding for 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 distribution (at the top marginal rate plus Medicare levy). This amount will then be remitted to the ATO. The trustee is required to provide beneficiaries with a payment summary where withholding has occurred. When the beneficiary lodges their annual tax return they will be able to claim a credit for the amount withheld.

    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.

    See TFN withholding for closely held trusts for more information

    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 and reliance on financial reports and balancing adjustment
    • the time when the gains and losses from financial arrangements will be brought to account.

    Which funds are affected?

    The TOFA rules will apply to a fund where the value of the fund's assets is $100 million or more. For the purposes of this test, the value of the fund's assets is worked out at the end of the 2009-10 income year or, where the fund came into existence during the 2010-11 income year, at the end of the 2010-11 income year.

    A fund 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 by a fund during an income year beginning on or after 1 July 2010 (or 1 July 2009 if the early start election was made) and that have a remaining life of more than 12 months after the fund starts to have them.

    Attention

    The aggregated turnover tests may mean that the TOFA rules will apply to funds that do not meet the turnover thresholds in their own right. Aggregated turnover includes the annual turnover of any entity a fund is connected with, or any affiliate of the fund (including overseas entities).

    End of attention

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

    The TOFA rules will apply to all financial arrangements that an affected fund starts to have during 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 fund 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 fund if those financial arrangements are held at that time.

    A fund 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 fund's financial arrangements

    Date transitional election must be made by:

    2010-11

    The due date for lodgment of the fund's 2010 income tax return

    2011-12*

    The due date for lodgment of the fund's 2011 income tax return

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

    Attention

    Elections under the TOFA rules are irrevocable, and therefore should be carefully considered before being made. For more information, see Making elections under the TOFA rules and Guide to the taxation of financial arrangements (TOFA) rules available at www.ato.gov.au/tofa

    End of attention

    TOFArulesandcapitalgainstax(CGT)

    Capital gains tax (CGT) will remain the primary code for calculating a fund's gains and losses from financial arrangements that are presently taxed under the CGT regime. Where a CGT event happens to those types of financial arrangements, the relevant capital gain or loss will continue to be brought to account under the CGT provisions only, and the TOFA rules will not apply.

    Transitional relief for superannuation funds: deductibility of premiums for total and permanent disability insurance cover

    Amendments to the tax law have been enacted to provide transitional relief to complying superannuation funds for income tax deductibility of total and permanent disability (TPD) insurance premiums. These amendments ensure that complying superannuation funds can deduct in full the insurance premiums commonly regarded as TPD policy premiums for the income years from 2004-05 to 2010-11. The transitional relief is intended to minimise the disruption to the superannuation industry by providing superannuation funds with time to make any necessary changes to their insurance policies in order to qualify for a deduction for disability superannuation benefits under the Income Tax Assessment Act 1997(ITAA 1997).

    For more information, see New legislation

    Deductibility to funds of cost of providing terminal medical condition benefits

    In the 2010-11 Budget the Government announced the intention to extend the range of benefits that are deductible by complying superannuation funds and retirement savings account providers to include terminal medical condition (TMC) benefits. The measure will have effect from 16 February 2008, the date the TMC condition of release was introduced into the superannuation legislation.

    At the time of publishing these instructions the changes had not become law.

    For more information see New legislation

    Deduction notices for successor fund transfers

    For 2010-11 and future years an individual is allowed to give a notice of intent to deduct a contribution (made to an original fund) to a successor superannuation fund. Successor fund transfers commonly occur where funds are merged, for example, following a corporate restructure.

    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.

    Capital gains tax - limiting the trading stock exception for superannuation funds

    In the 2011-12 Budget the Government announced the intention to remove the trading stock exception to the 'capital gains tax (CGT) primary code rule' for complying superannuation entities for specified assets, with effect from 7.30 pm (AEST) 10 May 2011.

    This measure will ensure gains or losses on specified assets (primarily shares, units in a trust and land) are subject to CGT, consistent with CGT being the primary code for taxing gains and losses of complying superannuation entities. Complying superannuation entities will not be able to treat shares as trading stock, so as to deduct losses on their shares against income other than capital gains.

    The intention is that there will be provision for transitional rules to ensure that assets held or accounted for as trading stock before 7.30 pm (AEST) 10 May 2011 are unaffected.

    At the time of publishing these instructions the changes had not become law.

    For more information see New legislation.

    Capital gains tax - amendments to the scrip for scrip roll-over

    In the 2011-12 Budget the Government announced the intention to ensure that the scrip for scrip roll-over integrity provisions that apply to individuals and companies also apply appropriately to trusts, superannuation funds and life insurance companies.

    This measure is intended to apply for CGT events happening after 7.30pm (AEST) on 10 May 2011.

    At the time of publishing these instructions the changes had not become law.

    For more information see New legislation.

    Last modified: 11 Jan 2012QC 28016