Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 3 - Closely held trusts
Outline of Chapter
3.1 The amendments to the Income Tax Assessment Act 1936 (ITAA1936) and associated tax laws:
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- allow the Commissioner to permit extensions of time for lodgment of ultimate beneficiary;
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- allow ultimate beneficiary statements to be corrected in certain circumstances;
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- provide trustees of closely held trusts with the power to recover the ultimate beneficiary non-disclosure tax they paid (including any additional tax or penalty) from ultimate beneficiaries, trustee beneficiaries, or interposed trustees or partnerships whose provision of incorrect information, or refusal to provide information, led to the liability to ultimate beneficiary non-disclosure tax, but only where the gross amount has been distributed;
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- make it clear that section 254 extends to ultimate beneficiary non-disclosure tax and related interest charge obligations; and
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- make some minor clarificatory changes.
Background to the legislation
3.2 A New Tax System (Closely Held Trusts) Act 1999 inserted Division 6D into the ITAA 1936 to amend the tax laws to ensure that the trustee of a closely held trust with a trustee beneficiary presently entitled to net income or tax-preferred amounts discloses to the Commissioner of Taxation (Commissioner) the identity of the ultimate beneficiaries within a specified period after the end of the year of income.
3.3 Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within the specified period, the measures specifically impose taxation on the trustee at the top marginal rate plus Medicare levy, in the case of net income. Offences under the Taxation Administration Act 1953 (TAA 1953) may arise if known information is not provided, or if reasonable effort to obtain information is not made, in the case of tax-preferred amounts.
3.4 A number of amendments will be made to the Division to improve its practical operation.
Summary of new law
3.5 The following amendments will be made to Division 6D and section 254 of the ITAA 1936:
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- section 102UH will be amended so as to grant the Commissioner the power to give extensions of time to lodge ultimate beneficiary statements;
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- new subsection 102UK(2A) will be inserted and will permit trustees to make corrections to incorrect ultimate beneficiary statements in certain circumstances;
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- new subsection 102USA will be inserted and will give trustees and members of the trustee group a right to recover ultimate beneficiary non-disclosure tax in certain circumstances;
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- subsections 102UE(3) and (4) will be amended to ensure that the provisions operate as intended;
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- paragraphs 254(1)(d), (e) and (h) will be amended to ensure that they extend to ultimate beneficiary non-disclosure tax obligations; and
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- new section 102URA will be inserted and will provide trustees with the formal ability to require a notice of ultimate beneficiary non-disclosure tax liability.
Detailed explanation of new law
3.6 Section 102UH is being amended to give the Commissioner the discretion to extend the ultimate beneficiary statement period. For example, the Commissioner might, in genuine cases, allow a trustee an extension of time to lodge a ultimate beneficiary statement in circumstances where the trustee cannot obtain the required information from the ultimate beneficiary because the ultimate beneficiary is temporarily overseas. [Item 3 of Schedule 3, new paragraph 102UH(b)]
3.7 The Commissioner will have the power to give a further ultimate beneficiary statement period in those cases where the year of income in question ended before the commencement of Schedule 3, and so the ultimate beneficiary statement period may have already expired without a request to extend the period. [Subitem 9(2) of Schedule 3]
Amendment of incorrect ultimate beneficiary statements
In what circumstances will amendments to ultimate beneficiary statements be permitted?
3.8 New subsection 102UK(2A) enables trustees of closely held trusts to amend incorrect ultimate beneficiary statements about amounts of net income outside the ultimate beneficiary statement period where certain conditions are satisfied. These conditions are as follows:
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- the correction must be made before the ultimate beneficiary non-disclosure tax becomes due and payable or within 4 years of any such tax becoming due and payable;
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- the trustee must have believed on reasonable grounds that the statement was a correct ultimate beneficiary statement when it was made in respect of the amount that the correction relates to; and
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- the event that led to the need to correct the original statement could not reasonably have been foreseen by the trustee.
[Item 5, new subsection 102UK(2A)]
3.9 New subsection 102UK(2A) is only meant to apply in those cases where the trustee has lodged a ultimate beneficiary statement in the mistaken belief that it is correct, and has found out at some later time that the statement is incorrect. Where a trustee has lodged a ultimate beneficiary statement which he or she knows to be incorrect, or could reasonably have foreseen might be incorrect, then the trustee may not amend the ultimate beneficiary statement under new subsection 102UK(2A) . These requirements are intended to ensure that the correction provision will not encourage or permit unreasonable behaviour by trustees, as otherwise the main purpose of obtaining full and accurate information from trustees promptly could be jeopardised.
3.10 The trustee may amend the entire amount subject to error or only part of the amount subject to error. Therefore, the trustee does not have to get everything right in order to make a valid correction of what the trustee does get right.
3.11 An example of a situation where a trustee of a closely held trust may wish to amend an ultimate beneficiary statement is where that trustee has relied on information provided to it by the trustee beneficiary that has later proven to be incorrect because of an amendment to the return of that trustee beneficiary. If the trustee of the closely held trust had reasonable grounds to believe that the original statement was a correct ultimate beneficiary statement, and he or she could not reasonably have foreseen the amendment to the trustee beneficiarys return, then the ultimate beneficiary statement for the closely held trust can be amended to reflect the changes that arise as a result of the changes made to the return of the trustee beneficiary. However, this can only be done within 4 years of the ultimate beneficiary non-disclosure tax becoming due and payable. This period is consistent with a range of other tax amendment provisions.
What are the consequences of amending an incorrect ultimate beneficiary statement under subsection 102UK(2A)?
3.12 If the conditions outlined in paragraph 3.8 are satisfied, the trustee will be treated as having always made a correct ultimate beneficiary statement under section 102UK of the ITAA 1936. This means that ultimate beneficiary non-disclosure tax will not be payable under the section and will never have been payable under the section in respect of the particular amount of income for which the statement has been corrected.
Power for trustees to recover ultimate beneficiary non-disclosure tax
3.13 New section 102USA provides trustees of closely held trusts (including directors where the trustee of the closely held trust is a company) with a power to sue relevant ultimate beneficiaries, trustee beneficiaries or interposed trustees or partnerships for damages recovering the ultimate beneficiary non-disclosure tax (and any general interest charge) paid by them where the trustee beneficiary has received the full distribution. The effect is to enable the trustee of the closely held trust to recover the tax to the extent that they have actually distributed the gross entitlement (including the tax).
What are the conditions that must be satisfied before a trustee (or a member of a trustee group) may sue for recovery of ultimate beneficiary non-disclosure tax under this provision?
3.14 Broadly, there are 4 requirements that must be satisfied before the trustee may sue for recovery of ultimate beneficiary non-disclosure tax under this provision:
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- the trustee must pay ultimate beneficiary non-disclosure tax;
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- an amount in respect of which ultimate beneficiary non-disclosure tax has to be paid has been fully distributed (i.e. not net of the ultimate beneficiary non-disclosure tax);
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- there must be an incorrect statement by the trustee or a refusal or failure to provide information by the trustee because of a person failing or refusing to provide the information or providing incorrect information which the trustee reasonably believed; and
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- the person failing or refusing to provide the information or providing incorrect information to be an ultimate beneficiary, or a trustee beneficiary, or the trustee of an interposed trust, or a partner in an interposed partnership through which an ultimate beneficiary is presently entitled to some or all of the head trust amount concerned.
[Item 7, new section 102USA]
Requirement for payment of ultimate beneficiary non-disclosure tax
3.15 Ultimate beneficiary non-disclosure tax will have been paid for the purposes of this provision if:
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- the trustee of a closely held trust does not make a correct ultimate beneficiary statement during the ultimate beneficiary statement period in relation to a year of income;
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- as a result, the trustee becomes liable, or the persons in the trustee group become jointly and severally liable under section 102UK, to pay ultimate beneficiary non-disclosure tax; and
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- the trustee or any of the persons pays an amount being some or all of the tax or any additional tax under section 102UP by way of general interest charge in relation to the tax.
[Item 7, new subsection 102USA(2)]
3.16 An example of a case where this may happen is where the trustee does not make a correct ultimate beneficiary statement and becomes liable to and pays ultimate beneficiary non-disclosure tax.
Requirement for full distribution
3.17 The trustee of the closely held trust must have fully distributed some, or all, of the share of the net income to the trustee beneficiary. If the trustee has withheld an amount under section 254 of the ITAA 1936 or otherwise in respect of the recoverable amount, then this requirement will not be satisfied. If the trustee has not yet paid out the amount in full, and so can retain part of the amount to cover the tax liabilities, the trustee has no need and no right to recover. [Item 7, new paragraph 102USA(3)(b)]
Requirement for refusal or failure to provide information or for an incorrect statement
3.18 If the trustee of the closely held trust:
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- was unable to make a correct ultimate beneficiary statement because another person refused or failed to give information to the trustee; or
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- the trustee of the closely held trust made an incorrect ultimate beneficiary statement because it contained incorrect information given to the trustee of the closely held trust by another person (referred to as the information source) and the trustee honestly believed on reasonable grounds that the information was correct,
then the requirement in subsection 102USA(3) will be satisfied. [Item 7, new paragraph 102USA(3)(a)]
3.19 For example, if a trustee beneficiary has failed to provide the details of a ultimate beneficiary to a head trustee, and the head trustee was therefore unable to make a correct ultimate beneficiary statement, then this requirement will be satisfied.
Requirement for person refusing or failing to provide information, or providing incorrect information, to be a ultimate beneficiary, trustee beneficiary or a trustee or partner of an interposed trust or partnership
3.20 The person failing or refusing to provide the information or providing incorrect information to be an ultimate beneficiary, or a trustee beneficiary, or the trustee of an interposed trust, or a partner in an interposed partnership through which an ultimate beneficiary is presently entitled to some or all of the head trust amount concerned. This person is described as the information source. [Item 7, new subsection 102USA(4)]
3.21 So, if the trustees error was due to some other information source, one outside the chain of trustee beneficiary, interposed trust or partnership, or ultimate beneficiary, the trustee cannot recover from such a source under this special provision.
What are the consequences of section 102USA applying?
3.22 If section 102USA applies, the trustee or the person in the trustee group that paid the recoverable amount may sue for that amount in a court of competent jurisdiction and recover it from the information source. If there is more than one information source, then the recoverable amount may be recovered from those persons jointly and severally.
3.23 In most cases, the information source will be the trustee beneficiary to whom the gross amount was paid. However, the information source is liable even if the gross amount has not gone to the source but elsewhere in the chain to the ultimate beneficiary.
3.24 A number of minor clarificatory amendments will be made to Division 6D to ensure that it operates as intended. These are as follows:
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- section 254 of the ITAA 1936 will be amended to ensure that it extends to ultimate beneficiary non-disclosure tax obligations;
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- the full absorption test for determining whether a lower level trust is an ultimate beneficiary, in subsection 102UE(4) of the ITAA 1936, will be amended so that it operates as intended; and
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- an amendment will be made to enable trustees to request a notice of ultimate beneficiary non-disclosure tax liability.
Extension of section 254 of the ITAA 1936 to ultimate beneficiary non-disclosure tax and related interest charge obligations
3.25 Amendments will be made to section 254 of the ITAA 1936 to put it beyond doubt that section 254 of the ITAA 1936 extends to ultimate beneficiary non-disclosure tax.
3.26 Paragraphs 254(1)(d), (e) and (h) of the ITAA 1936 will be amended to make it clear that both ultimate beneficiary non-disclosure tax and the general interest charge payable under section 102UP in respect of ultimate beneficiary non-disclosure tax fall within the definition of tax for the purposes of those provisions. [Item 8 of Schedule 3, new subsection 254(3)]
3.27 This ensures that trustees are required to retain amounts from present entitlements to income on account of ultimate beneficiary non-disclosure tax liabilities and authorised to account to beneficiaries on the basis of such deductions.
3.28 Existing paragraph 102UE(4)(c) of the ITAA 1936 will be replaced and the following new formula will be substituted.
The head trust amount is not greater than the amount worked out using the following formula:
lower level trust deductions - lower level trust assessable income
3.29 Lower level trust assessable income is defined to mean the assessable income of the lower level trust (not including any amount attributable to the head trust amount) taken into account in working out the net income of the lower level trust for the year of income. The existing paragraph could have been read as including the head trust amount in the net lower level loss to which it was being compared.
3.30 Lower level trust deductions is defined to mean the allowable deductions that are taken into account in working out the net income of the lower level trust for the year of income.
Example 3.1
The head trust amount is $500. The lower level trust assessable income is $1,000. The lower level trust deductions are $1,800. The lower level trust will be an ultimate beneficiary under subsection 102UE(4) because the head trust amount of $500 is less than the amount worked out using the formula ($800).
3.31 Subsection 102UE(4) is meant to apply to those cases where the head trust amount is fully absorbed by a lower level trust generally because that lower level trust is a loss trust. [Item 2, new paragraph 102UE(4)(c)]
3.32 If a person is an ultimate beneficiary in respect of a particular head trust amount under subsection 102UE(4), then they will not be an ultimate beneficiary in respect of that same head trust amount under subsection 102UE(3). At present the 2 subsections overlap, making it difficult for trustees to state correctly the basis for an intermediary trust to be considered an ultimate beneficiary. [Item 1, new paragraph 102UE(3)(c)]
Request for notice of liability
3.33 The current administrative position is that the Commissioner will provide trustees with a notice of ultimate beneficiary non-disclosure tax liability if requested. However, trustees do not have the formal right to compel the Commissioner to issue such a notice.
3.34 New section 102URA gives trustees this formal right. The Commissioner must comply with the request unless he considers that the notice cannot be given because he requires further information. If the Commissioner does consider that the notice cannot be given without further information, he must request that the trustee provide the requisite information. If such information is not provided, the Commissioner does not need to comply with the trustees request. [Item 6, new section 102URA]
Application and transitional provisions
3.35 These provisions will apply as if they had been part of Division 6D of the ITAA 1936 when that Division was originally inserted. [Subitem 9(1) of Schedule 3]
Extension of time for lodgment of ultimate beneficiary statement
3.36 New paragraph 102UH(b) gives the Commissioner the power to extend the time for lodgment of a ultimate beneficiary statement. Subitem 9(2) of Schedule 3 makes it clear that the Commissioner may allow a further period under new paragraph 102UH(b) in respect of a year of income that ended before the commencement of this Schedule.
3.37 Amounts for which a trustee can make retentions under section 254 of the ITAA 1936, and which a trustee may recover under new section 102USA , include both ultimate beneficiary non-disclosure tax and general interest charge under section 102UP. Possible substituted accounting periods including 13 August 1998 and only before 1 July 1999 could have triggered general interest charge under item 93 of Schedule 2 of the A New Tax System (Pay As You Go) Act 1999 and additional tax under section 102UP of the ITAA 1936. Item 10 ensures that retentions and recovery by trustees include these possible amounts.