House of Representatives

Taxation Laws Amendment Bill (No. 7) 2000

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 Pay as you go (PAYG) instalments for certain beneficiaries of trusts

Outline of Chapter

2.1 This Chapter explains the amendments to the PAYG instalments regime that are contained in Schedule 2 to this Bill.

2.2 The PAYG instalments regime replaces the existing company and superannuation fund instalment system and provisional tax system with effect for the 2000-2001 income year and later income years. Broadly, the regime ensures that entities pay:

quarterly or annual instalments of their tax liabilities that reflect their current trading and investment conditions;
annual instalments based on last year's tax liabilities; or
quarterly instalments based on last year's tax liabilities with an adjustment for gross domestic product.

2.3 Schedule 2 will amend the PAYG instalments legislation to insert special rules that, broadly, affect the way beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income. It will also make minor amendments consequential upon measures contained in New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

2.4 Unless otherwise stated, legislative references are to provisions in Schedule 1 to the Taxation Administration Act 1953 .

Context of reform

2.5 Under the PAYG instalments regime, taxpayers will generally be required to pay quarterly instalments of their tax liability for a year. They will work out the amount of their quarterly PAYG instalment by multiplying the instalment income they earn in that quarter by an instalment rate calculated by the Commissioner of Taxation or a rate they choose.

2.6 The general rule for most taxpayers is that the instalment income for a quarter is the ordinary income the taxpayer earns in that quarter. Sales, fees, interest, dividends and royalties are examples of ordinary income. However, an amount that is not assessable income of the income year that includes the relevant instalment quarter is not included in the taxpayer's instalment income. In addition, there are a limited number of special rules that require taxpayers to include other amounts in their instalment income. One of these special rules affects beneficiaries of trusts.

2.7 Under the PAYG instalments regime, a beneficiary is required to include in instalment income for an instalment period a share of the instalment income of each trust of which they are a beneficiary during that period. The share of the trust's instalment income is worked out having regard to the beneficiary's assessable income from the trust for the previous year and the trust's instalment income of the previous year. In essence, the beneficiary is required to report instalment income from the trust on an 'entitlements basis'.

2.8 Indirectly, this means that the trustees of trusts are required to provide the beneficiaries with details of the trust's instalment income for both the current quarter and the preceding income year. This imposes a significant compliance burden on trustees of some investment trusts many of which have large numbers of beneficiaries. It also imposes an unnecessary compliance burden on the trustees of some trusts whose beneficiaries are absolutely entitled to the trust assets.

2.9 The proposed amendments will:

simplify the way some beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income; and
minimise the compliance burden on the trustees of those trusts,

while maintaining the PAYG instalments base.

2.10 The PAYG instalments legislation also contains special rules for life insurance entities. Two of the proposed amendments will be made to those special rules and are consequential upon changes made by the New Business Tax System (Miscellaneous) Bill (No. 2) 2000. They are minor corrections.

Summary of new law

2.11 As a result of the proposed amendments, some beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment unit trusts will be required to include in their instalment income the amount that:

the trust earns in the period; or
the investment trust distributes to them, or applies for their benefit, during the instalment period.

For the beneficiaries of investment unit trusts, the amount distributed or applied will be included in their instalment income regardless of whether the distribution or applied amount will be assessable income of those beneficiaries for the income year in which the distribution or application occurs. Without this aspect of the new rules, there would be a loss of revenue.

2.12 When this Chapter refers to a beneficiary who is absolutely entitled to the assets of a trust, it will generally be referring to a beneficiary of trust where:

the trustee of that trust does not have any active duties to perform in the management of the trust (other than to deal with the income and capital of the trust according to the instructions of the beneficiary of the trust);
the beneficiary of the trust is absolutely entitled to its interest in the trust assets; and
the beneficiary has a vested and indefeasible interest in the income of the trust.

2.13 The new rules for working out the instalment income of beneficiaries of investment unit trusts fall into 2 categories.

2.14 First, all of the beneficiaries of certain broadly held trusts will include in their instalment income any amount the trust distributes to them, or applies for their benefit. This rule applies to all the beneficiaries of a trust if it:

is a unit trust that is a resident unit trust;
only carries on specified investment activities; and
has at least 50 members, or is offered to the public or has its units listed on a stock exchange. (This is the basic test to determine whether a trust is 'broadly held'.)

2.15 There will be a requirement that a trust is genuinely broadly held in that the beneficial interests in the trust will have to be held by more than 20 individuals.

2.16 Secondly, certain beneficiaries of resident investment unit trusts that are not broadly held will include in their instalment income any amount the trust distributes to them, or applies for their benefit. This rule applies to a beneficiary that is:

a broadly held resident investment unit trust;
a resident investment trust in which the beneficiaries are absolutely entitled to the trust assets and which satisfies certain other conditions;
exempt from tax;
a superannuation entity; or
the statutory fund of a life insurance company.

2.17 The PAYG instalments legislation will also be amended to make minor amendments consequential upon reforms to the way in which the income of life insurance entities are taxed contained in the New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

2.18 The amendments will apply to the 2000-2001 income year and later income years as does the PAYG instalments regime.

Comparison of key features of new law and current law
New law Current law
The instalment income of a beneficiary that is absolutely entitled to the assets of a trust will include that beneficiary's proportional interest in the instalment income earned by the trust.

The instalment income of a beneficiary of a broadly held resident investment unit trust will include the amounts distributed to, or applied for the benefit of, the beneficiary by the trustee. This is so, regardless of whether that amount is assessable income of the year in which it is distributed or applied.

The instalment income of certain beneficiaries of resident investment unit trusts that are not broadly held will include the amounts distributed to, or applied for the benefit of, the beneficiary by the trustee. This is so, regardless of whether that amount is assessable income of the year in which it is distributed or applied. The beneficiary must be:

an entity that is exempt from tax;
the trustee of a broadly held resident investment unit trust;
the trustee of a complying superannuation fund, complying approved deposit fund or pooled superannuation trust;
a statutory fund of a life insurance company (which includes the life insurance business of a friendly society); or
a trustee of a trust that meets specified requirements including that the beneficiaries are absolutely entitled to the assets of the trust.

The instalment income of all beneficiaries of trusts, other than a corporate unit trust or public trading trust, is determined on an 'entitlements basis' having regard to:

the beneficiary's assessable income of the previous year;
the trust's instalment income of the previous year; and
the trust's instalment income of the current instalment quarter or year.

Detailed explanation of new law

2.19 The special rule for beneficiaries in subsection 45-280(1) of the PAYG instalments regime, requires beneficiaries to include in their instalment income for an instalment period, a share of the instalment income of each trust of which they are a beneficiary during that period. The share of the trust's instalment income is worked out having regard to the beneficiary's assessable income from the trust for the previous year and the trust's instalment income of the previous year. In essence, the beneficiary is required to report instalment income from the trust on an 'entitlements basis'.

2.20 Apart from minor consequential amendments, the amendments proposed to the PAYG instalments regime will constitute exceptions to the special rule in subsection 45-280(1).

Instalment income of beneficiaries who are absolutely entitled to the assets of a trust

2.21 A new exception to the special rule in subsection 45-280(1) - the first new exception - will be added for beneficiaries who are absolutely entitled to the assets of a trust. Such a beneficiary will include in its instalment income for an instalment period, its proportionate share of the instalment income earned by the trust in that period. [Schedule 2, item 1, subsection 45-280(6)]

2.22 This first new exception applies to a beneficiary if:

the trustee's only active duties in managing the trust are to deal with trust income and trust capital according to the requests or directions of the beneficiary or beneficiaries;
the beneficiary is, or beneficiaries are, absolutely entitled to the trust assets; and
the beneficiary has a vested and indefeasible interest in all of the trust income or, if there is more than one beneficiary, each beneficiary has a vested and indefeasible interest in a proportion of the trust income that corresponds with the beneficiary's proportional interest in the trust capital.

[Schedule 2, item 1, paragraphs 45-280(6)(a) to (c)]

2.23 A beneficiary of one of these trusts will be treated as having received its share of the trust income as soon as that income is earned in the trust. This will relieve the trustee of the compliance burden imposed by subsection 45-280(1).

2.24 Whether or not a particular trust comes within the terms of this exception must be determined on a case by case basis. However, a trustee will not be taken to have active duties in managing the trust simply because that trustee performs those duties that the trust law requires all trustees of trusts, which satisfy the requirements of subsection 45-280(6), to perform. Such duties include keeping records appropriate to the trust, accounting to the beneficiaries and maintaining the trust property. Similarly, such a trustee will not be taken to have active duties simply because it incurs expenditure in carrying out those duties required by trust law or because it is entitled to reimburse itself from the trust funds for such expenditure.

Instalment income of beneficiaries of broadly held resident investment unit trusts

2.25 Another new exception to the special rule in subsection 45-280(1) - the second new exception - will be added for the beneficiaries of certain investment unit trusts. Instead of applying subsection 45-280(1) when working out its instalment income, a beneficiary of one of these unit trusts will apply the rules in new subsection 45-285(1) . [Schedule 2, item 1, subsection 45-280(5)]

2.26 This second new exception will achieve 2 outcomes. First, it will simplify the way these particular beneficiaries work out their instalment income from the trust because they will work out their instalment income on what is effectively a 'receipts basis'. Secondly, it will relieve the trustees of the indirect requirement to notify the beneficiaries of the trust's instalment income for each instalment quarter of the current year and the instalment income of the preceding year.

2.27 The beneficiary's instalment income for an instalment period will include any trust income or trust capital that the trust distributes to them, or applies for their benefit, during the instalment period. This is why the beneficiaries are said to determine their instalment income on a 'receipts basis'. [Schedule 2, item 2, subsection 45-285(1)]

2.28 In working out the instalment income on this 'receipts basis', the rule is that it will not matter whether the trust income or trust capital is included in the beneficiary's assessable income for the income year in which the distribution or application occurs. [Schedule 2, item 2, subsection 45-285(1)]

2.29 There are 2 reasons for this rule. First, it is necessary to protect the PAYG instalments base. Without this rule, only so much of the amount distributed or applied as assessable income of the income year in which the amount is distributed or applied, would be included in instalment income. As there is generally one quarterly or one half yearly distribution made by these trusts after the end of the income year to which the amount relates, these amounts would not be instalment income and there would be a cost to the revenue. Secondly, in practice, the trustees of these trusts will not be able to determine how much of the amount distributed, or applied, is assessable income until after the end of the income year. This makes the rule a practical necessity.

2.30 A unit trust will be required to satisfy 4 conditions before the beneficiaries are entitled to determine their instalment income on a 'receipts basis' under subsection 45-285(1) (rather than on the 'entitlements basis' required by subsection 45-280(1)).

The unit trust must be resident

2.31 The unit trust must be a resident unit trust within the meaning of section 102Q of the Income Tax Assessment Act 1936 (ITAA 1936) for the income year of the trust that is, or includes, the instalment period. [Schedule 2, item 2, paragraph 45-285(1)(a)]

2.32 A unit trust is resident under that section if:

either any property of the unit trust is situated in Australia or the trustee carries on business in Australia; and
either the central management and control of the unit trust is in Australia or Australian residents hold more than 50% of the beneficial interests in the income or property of the trust.

The unit trust must be broadly held

2.33 The unit trust will be broadly held for the purposes of these provisions if, throughout the relevant instalment period, the units in the unit trust were:

listed on a stock exchange in Australia or elsewhere;
offered to the public; or
held by at least 50 persons.

[Schedule 2, item 2, paragraph 45-285(1)(b)] 2.34 When a trust is working out how many unit holders it has, the trustee may count the beneficiaries of a trust that holds its units instead of those trustee unit holders. This rule will apply if:

there is another trust (the 'holdingtrust') that is a unit holder in the unit trust;
the holding trust is a trust of the kind covered by subsection 45-280(6), that is a trust in which the beneficiaries are absolutely entitled to the assets of the trust as discussed in paragraph 2.22; and
the beneficiary's or beneficiaries' absolute entitlement exists at all times while the holding trust is in existence.

[Schedule 2, item 2, subsection 45-285(3)]

Ownership of the trust must not be concentrated in 20 or fewer individuals

2.35 The trust must satisfy tests relating to the 'ownership' of the trust contained in new section 45-287 . [Schedule 2, item 2, paragraph 45-285(1)(c)]

2.36 The tests are that the beneficial interests in a unit trust must not be concentrated in the hands of 20 or fewer individuals. They will be so concentrated if an individual, or up to 20 individuals, hold between them directly or indirectly and for their own benefit, interests in the trust carrying:

fixed entitlements to at least 75% of the trust's income or the trust's capital; or
at least 75% of the voting rights of the trust if applicable.

[Schedule 2, item 2, subsection 45-287(1)]

2.37 An individual and his or her associates and nominees are taken to be a single individual for the purposes of those tests. [Schedule 2, item 2, subsection 45-287(2)]

2.38 The beneficial interests in a unit trust will also be taken to be concentrated in the hands of 20 or fewer individuals if it is reasonable to conclude that the beneficial interests in the unit trust are concentrated in terms of subsection 45-287(1), having regard to:

any constituent document, contract, agreement or instrument that authorises the variation or abrogation of the rights attaching to any of the interests in the trust or relates to conversion, cancellation, extinguishment or redemption of those interests;
any contract, arrangement, option or instrument under which a person has power to acquire an interest in the trust; or
any power, authority or discretion in a person in relation to the rights attaching to any of the interests in the trust.

[Schedule 2, item 2, subsection 45-287(3)]

2.39 Indirectly, the rule in subsection 45-287(1) requires the trustee of the unit trust to determine how many individuals ultimately hold an interest in the units. This is because the information that the beneficiary will require from the trust will be affected by the outcome.

2.40 If a trustee or company holds the units, it will be necessary to trace through to individuals. If a government body holds units in the trust, it will not be necessary to trace through to the individuals.

2.41 The tracing process will be simplified by a special rule for the trustees of superannuation funds where:

a superannuation fund with more than 50 members is a unit-holder in the unit trust, those units will be taken to be held by more than 20 individuals instead of by the superannuation fund [Schedule 2, item 2, paragraph 45-287(4)(a)] ; and
a superannuation fund with 50 or fewer members is a unit-holder in the unit trust, those units will be taken to be held by each member in equal proportions instead of by the superannuation fund [Schedule 2, item 2, paragraph 45-287(4)(b)] .

2.42 These 2 rules for superannuation funds are similar to tracing rules used for the purposes of the trust loss rules of Schedule 2F to the ITAA 1936.

The unit trust's activities must be limited to certain investment activities

2.43 The unit trust's activities will have to consist only of the investment activities listed in the section 102M of the ITAA 1936 definition of 'eligible investment business'throughout the relevant instalment period [Schedule 2, item 2, paragraph 45-285(1)(d)] . These activities will include investing in land to earn rent. They also include investing or trading in various securities including:

loans (which includes deposits with financial institutions);
bonds, debentures or stocks;
shares;
units in a unit trust;
futures and forward contracts;
interest rate and currency swap contracts;
forward exchange rate and interest rate contracts;
life insurance policies; and
rights or options over such loans, securities and shares.

Instalment income of beneficiaries of certain other resident investment unit trusts

2.44 The third new exception to the special rule in subsection 45-280(1), like the second exception, is contained in subsection 45-280(5). It will apply to the beneficiaries of certain 'narrowly held' resident investment unit trusts. Instead of applying subsection 45-280(1), some of the beneficiaries of these unit trusts will also determine their instalment income from the trust on a 'receipts basis' under the rule in new subsection 45-285(2) . [Schedule 2, item 1, subsection 45-280(5)]

2.45 The proposed rules will relieve the trustee of the unit trust of the burden of notifying specified beneficiaries of the trust's instalment income for an instalment quarter and the preceding income year even if the trust is not broadly held.

2.46 The instalment income of a specified beneficiary for an instalment period will include any trust income or trust capital that a unit trust distributes to, or applies for the benefit of, the beneficiary during the instalment period. As with subsection 45-285(1), it will not matter whether the trust income or trust capital that the trust distributes to them, or applies for their benefit, is included in the beneficiary's assessable income for the income year in which the distribution or application occurs. [Schedule 2, item 2, subsection 45-285(2)]

2.47 If a particular beneficiary is to determine its instalment income from a unit trust on a 'receipts basis' under subsection 45-285(2) (rather than on the 'entitlements basis' required by subsection 45-280(1)), there are conditions that the unit trust and the beneficiary must satisfy.

2.48 The tests that the unit trust must satisfy are that:

the unit trust is a resident trust within the meaning of section 102Q of the ITAA 1936 (that test was discussed in paragraphs 2.31 and 2.32) [Schedule 2, item 2, paragraph 45-285(2)(b)] ; and
the trust's activities consisted only of the activities listed in the section 102M of the ITAA 1936 definition of 'eligible investment business' (that test was discussed in paragraph 2.43) [Schedule 2, item 2, paragraph 45-285(2)(c)] .

2.49 The first condition the beneficiary must satisfy is that the beneficiary must not be required to include the trust income or trust capital distributed to, or applied for, it under subsection 45-285(1) [Schedule 2, item 2, paragraph 45-285(2)(a)] . The second condition is that the beneficiary must, throughout the instalment period, be one of the following:

the trustee of a trust that is a broadly held resident investment unit trust that satisfies all the tests of paragraphs 45-285(1)(a) to (d);
exempt from tax;
a complying superannuation fund, complying approved deposit fund or pooled superannuation trust;
a statutory fund of a life insurance company (which includes a friendly society in respect of its life insurance business); or
the trustee of one or more trusts covered by new section 45-288 .

[Schedule 2, item 2, paragraph 45-285(2)(d)]

2.50 New section 45-288 is expressed to cover a trust if all of the following conditions are satisfied:

the trust is a resident trust within the meaning of section 102Q of the ITAA 1936 (that test is discussed in paragraphs 2.31 and 2.32);
the trust is a trust of the kind covered by subsection 45-280(6) (that subsection is discussed in paragraphs 2.21 to 2.24);
the investment activities carried out by the trustee at the direction or request of the beneficiary or beneficiaries are within the activities listed in the section 102M of the ITAA 1936 definition of 'eligible investment business' (that test was discussed above in paragraph 2.43);
all of the beneficiaries became beneficiaries of the trust as a result of an offer made to the public to invest in the trust; and
the trust has at least 50 members or if the trustee of the trust is also the trustee of one or more other trusts that satisfy the above conditions, those trusts together have at least 50 beneficiaries.

[Schedule 2, item 2, paragraphs 45-288(a) to (e)]

Diagram 2.1

Example 2.1: Analysis of Diagram 2.1

The 20,000 beneficiaries of the Trust No. 2 will determine their instalment income from it on a 'receipts basis' under subsection 45-285(1) if it is a resident trust within the meaning of section 102Q of the ITAA 1936.

The trustees of the Trust No. 2 will determine their instalment income from the Trust No. 1 on a 'receipts basis' under subsection 45-285(2) if the Trust No. 2 is a resident trust within the meaning of section 102Q of the ITAA 1936. However, it will be unlikely that its trustees will need to work out the instalment income of the Trust No. 2. This is because, in practice, such trustees will rarely be liable to be assessed for income of the trust to which no beneficiaries are presently entitled, or for a beneficiary who is presently entitled but is under a legal disability. (Generally, these trusts do not permit investment by minors or other persons under a legal disability).

The 15 beneficiaries of the Family Trust will determine their instalment income from that trust on an 'entitlements basis' under subsection 45-280(1).

As the beneficiaries of the Family Trust need to determine their instalment income from that trust on an 'entitlements basis', the trustees of that trust also need to determine the trust's instalment income so that they can notify the beneficiaries of the Family Trust. The trustees of the Family Trust will determine the instalment income of that trust on an 'entitlements basis' under subsection 45-280(1). That is because:

the Trust No. 1 is not a broadly held trust of the type covered by subsection 45-285(1); and
the Family Trust is not a beneficiary of the kind covered by paragraph 45-285(2)(d).

The 2 superannuation funds will determine their instalment income from the Trust No. 1 on a 'receipts basis' provided that the Trust No. 1 is a resident trust. This is because each superannuation fund is a beneficiary of the kind covered by paragraph 45-285(2)(d).

Diagram 2.2

Example 2.2: Analysis of Diagram 2.2

Diagram 2.2 differs from Diagram 2.1 only because of the addition of the Trust No. 3 as an investor in the Trust No. 1.

As a result of adding the Trust No. 3, which is assumed to be a trust in which all of the beneficiaries are absolutely entitled to the assets of the trust, all of the beneficiaries of the Trust No. 1 will be able to determine their instalment income on a 'receipts basis' under subsection 45-285(1). This is because the 100 beneficiaries of the Trust No. 3 who directed their investment to the Trust No. 1 would be counted as members of that trust under subsection 45-285(3).

Further, on the facts assumed, ownership of the Trust No. 1 will not be concentrated in the hands of 20 or fewer individuals. While there is clearly 20% of the interests in the trust in the hands of the 15 individual beneficiaries of the Family Trust, 50% of the interests in the trust are held in the hands of 40 or more individuals according to paragraph 45-285(4)(a).

Minor technical amendments consequential upon New Business Tax System (Miscellaneous) Bill (No. 2) 2000

2.51 Section 45-290 contains references to the terms 'life insurance entity', 'registered organisation' and 'CS/RA class of its assessable income'. Each of these expressions takes its meaning from aspects of the tax laws dealing with life insurance entities.

2.52 New Business Tax System (Miscellaneous) Bill (No. 2) 2000 contains amendments which reform the tax laws dealing with life insurance entities. That Bill uses the defined term 'life insurance company' to replace references to 'life insurance entity' and 'registered organisation'. It also uses the expression 'complying superannuation class of its taxable income' instead of 'CS/RA class of its assessable income'.

2.53 Subsection 45-290(3) will be consequentially amended to delete references to the existing terms and substitute references to the new terms [Schedule 2, items 3 and 4] . These consequential amendments were omitted from the New Business Tax System (Miscellaneous) Bill (No. 2) 2000.

Application and transitional provisions

2.54 Schedule 2 will apply to the 2000-2001 income year and later income years. This will ensure that the amendments made by this Schedule apply for the same period as the PAYG instalments regime. [Schedule 2, item 5]

Consequential amendments

2.55 There are no consequential amendments arising from the amendments contained in Schedule 2 .

Regulation impact statement

Policy objective

2.56 The amendments to the PAYG instalments regime, other than the minor consequential amendments, will modify the way in which beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain broadly held investment trusts are required to work out their instalment income from those trusts.

2.57 The proposed amendments will insert limited exceptions to an existing special rule that specifies how beneficiaries of trusts should work out their instalment income from the trusts. They will:

simplify the way beneficiaries of such trusts work out their instalment income; and
relieve the trustees of those trusts of a compliance burden,

while maintaining the PAYG instalments base.

Implementation options

2.58 In so far as the PAYG instalments measures affect the beneficiaries who are absolutely entitled to the assets of a trust, where that trust is not involved in the investment industry, the only effective implementation option was the one adopted in this Bill. It reflects the current administrative practice and taxpayer behaviour.

2.59 In so far as the PAYG instalments regime affects the beneficiaries of resident investment unit trusts 3 options were considered.

2.60 None of these options were considered to be appropriate if they did not incorporate a collection measure to maintain the PAYG instalments base.

Option 1: Beneficiaries of investment trusts with 300 or more beneficiaries

2.61 The first option considered was that only beneficiaries of resident investment unit trusts with 300 or more beneficiaries would potentially come within the proposed measures and be entitled to work out their instalment income from the trust on a receipts basis rather than an entitlements basis as required by the current law.

Option 2: Beneficiaries of investment trusts with 50 or more beneficiaries

2.62 The second option considered was that only beneficiaries of resident investment unit trusts with 50 or more beneficiaries would potentially come within the proposed measures and be entitled to work out their instalment income from the trust on a receipts basis rather than an entitlements basis as required by the current law.

Option 3: Beneficiaries of investment trusts with 50 or more beneficiaries and certain beneficiaries of other investment trusts

2.63 The third option considered was that both:

beneficiaries of resident investment unit trusts with 50 or more beneficiaries; and
certain types of beneficiaries of other investment trusts,

would potentially come within the proposed measures and be entitled to work out their instalment income from the trust on a receipts basis rather than an entitlements basis as required by the current law.

2.64 The third option is reflected in the proposed amendments. It is proposed because, of the 3 options, it provides the best balance between the objects of the PAYG instalments regime and minimising the compliance burden on trustees of certain trusts operating within the investment and financial services industry. It also relieves beneficiaries who are absolutely entitled to the assets of trusts of an unnecessary compliance burden.

Assessment of impacts

2.65 As stated above, the proposed PAYG instalments amendments will:

simplify the way beneficiaries who are absolutely entitled to the assets of a trust and beneficiaries of certain investment trusts work out their instalment income; and
minimise the compliance burden imposed on the trustees of those trusts,

while maintaining the PAYG instalments base.

Impact group identification

2.66 First, the proposed PAYG instalments amendments may affect many different kinds of investors in resident investment unit trusts including:

individuals (including retirees, whether self-funded or pensioners);
superannuation funds (including both small self-managed funds and large industry funds);
life insurance and other companies.

2.67 Secondly, the proposed amendments will affect beneficiaries who are absolutely entitled to the assets of a trust, whether or not they are investment trusts.

2.68 Thirdly, the amendments will affect the trustees of trusts in which the beneficiaries are absolutely entitled to the assets of the trust, and the trustees of certain resident investment unit trusts. It has been estimated that this has the potential to benefit up to 20,000 trusts (and their beneficiaries).

Analysis of costs / benefits

Compliance costs

2.69 Trustees of the affected investment trusts will benefit from the proposals as they will be able to rely on existing systems they have in place to notify their beneficiaries of their entitlements under the trust. They will not have to put in place additional computer and other systems to comply with the notification requirements of the PAYG instalments legislation as currently enacted.

2.70 Beneficiaries of the affected trusts will have greater certainty as to how to work out their instalment income.

Administration costs

2.71 The proposed PAYG instalments amendments do not require a change to any of the administrative systems established by the ATO for the PAYG instalments regime. However, they will require changes to material prepared for use for taxpayer education about the regime.

Government revenue

2.72 The proposed amendments will result in a gain to revenue of $60 million in 2000-2001 and $5 million in subsequent years. The $5 million gain in the 2001-2002 year and subsequent years is attributable to growth in the investment industry. The $60 million arises because the revenue impact of the PAYG instalments regime as originally introduced into Parliament, so far as it related to beneficiaries of trusts, assumed that three-quarters of the income earned by trusts in the period 1 July 2000 to 30 June 2001 would be included in instalment income during that period. The other one-quarter was assumed to be collected in the period, 1 July 2001 to 30 June 2002 in the instalment payable on 21 July 2001. Therefore, in the 2001-2002 and subsequent years, a full year's trust income is collected through the PAYG instalments regime, being one-quarter of the trust's income of the previous year and three-quarters of the current year's trust income.

Economic benefits

2.73 By reducing the compliance costs faced by the trustees of investment unit trusts, the proposed PAYG instalments amendments ensure that the trustees and beneficiaries of those trusts do not incur higher administration costs. This ensures that the return on the funds invested by the affected trusts is not reduced by increased administration costs incurred by the investment trusts.

Other issues - consultation

2.74 The policy for these measures was developed with input from investment and financial services industry representatives. Draft legislation was also released to those representatives for their comment. The amendments have industry support.

Conclusion and recommended option

2.75 The PAYG instalments amendments should be adopted to reduce the compliance costs which would otherwise be incurred by the affected beneficiaries and trustees.


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