House of Representatives

Tax Laws Amendment (2007 Measures No. 4) Bill 2007

Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007

Taxation (Trustee Beneficiary Non-disclosure Tax) Act (No. 1) 2007

Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 2) 2007

Taxation (Trustee Beneficiary Non-disclosure Tax) Act (No. 2) 2007

Explanatory Memorandum

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

Chapter 4 Trustee beneficiary reporting rules

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1936 (ITAA 1936) so that trustees of closely held trusts are no longer required to report to the Commissioner of Taxation (Commissioner) details of the trust's ultimate beneficiaries. Instead, trustees of closely held trusts may now be required to report details of the trust's trustee beneficiaries.

Context of amendments

4.2 The ultimate beneficiary rules in Division 6D of Part III of the ITAA 1936 were introduced in 1999 as an integrity measure aimed at preventing complex chains of trusts being used to avoid or indefinitely defer tax.

4.3 The current rules may require the trustee of a closely held trust to provide the Commissioner with an ultimate beneficiary statement where one or more trustee beneficiaries are interposed between the closely held trust and its ultimate beneficiaries. That statement must disclose the identity of the ultimate beneficiaries in respect of the trust's net income and tax-preferred amounts. In order to meet this requirement, the trustee must trace these through trustee beneficiaries to ultimate beneficiaries.

4.4 The trustee is liable to pay ultimate beneficiary non-disclosure tax at the top marginal tax rate plus the Medicare levy if they fail to correctly identify the ultimate beneficiaries and their entitlements within the specified period, or where there are no ultimate beneficiaries. Failure to provide information about the entitlement of ultimate beneficiaries to tax-preferred amounts may trigger an offence under the Taxation Administration Act 1953 (TAA 1953).

4.5 These amendments will reduce the costs of complying with the ultimate beneficiary rules by requiring trustees of closely held trusts to only report to the Commissioner details of trustee beneficiaries, rather than trace amounts through to ultimate beneficiaries.

Summary of new law

4.6 Ultimate beneficiary statements will be replaced by trustee beneficiary statements in the approved form.

4.7 A trustee of a closely held trust must make a correct trustee beneficiary statement to the Commissioner in respect of each trustee beneficiary who has a share of the trust's net income or is presently entitled to tax-preferred amounts. Trustee beneficiary statements must be provided by the due date for the trust's tax return (or within a further time allowed by the Commissioner). However, the Commissioner can make a determination not to require statements in certain circumstances.

4.8 Trusts that are covered by a family trust election, or an interposed entity election, or wholly-owned by the family trust are not covered by these trustee beneficiary reporting requirements. These trusts are restricted in the range of beneficiaries they can distribute to without penalty tax. Any distributions outside the family group are subject to penalty tax at a rate of 46.5 per cent via the family trust distribution tax. Therefore, it is not necessary to include family trusts (or their related trusts) in these reporting rules. The Commissioner already has an avenue for obtaining information about these trusts and their beneficiaries. In addition, any distributions by these trusts to non-resident trustee beneficiaries will be subject to taxation at 45 per cent under subsection 98(4) of the ITAA 1936.

4.9 A statement in respect of a resident trustee beneficiary will be a correct trustee beneficiary statement if it discloses the beneficiary's name and tax file number (TFN) and their share of the trust's net income or tax-preferred amounts. The requirements are the same for non-resident trustee beneficiaries, except that the statement must disclose their address rather than their TFN.

4.10 However, a trustee need not report amounts to the extent they have been taxed to the trustee of the closely held trust, or to an earlier trustee in the chain, under certain other provisions of the tax law. For example, a trustee need not report any part of the trustee beneficiary's share of trust net income upon which the trustee, or an earlier trustee, has been assessed and liable to pay tax under subsection 98(4) of the ITAA 1936. That provision taxes a trustee on behalf of a trustee beneficiary who is a non-resident at the end of the income year. However, it only taxes a share of net income to the extent it is attributable to Australian sources. It is therefore possible for Division 6D to apply to that same share of net income to the extent it is attributable to foreign sources.

4.11 Where the trustee of the closely held trust does not make a correct trustee beneficiary statement within the specified period in respect of a trustee beneficiary's share of the trust's net income, the trustee is liable for trustee beneficiary non-disclosure tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007. Tax is levied on the trustee beneficiary's share of net income at 46.5 per cent. Failure to provide a correct trustee beneficiary statement within the specified period in respect of a trustee beneficiary's share of the trust's tax-preferred amounts may be an offence under the TAA 1953.

4.12 Penalty tax is also imposed where a share of the net income of a closely held trust is included in the assessable income of a trustee beneficiary and the share (or part of it) 'comes back' to the closely held trust in the sense that the trustee of the closely held trust becomes presently entitled to income attributable to the share (or part of it). This penalty tax is imposed, on the share or part that 'comes back', under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 2) 2007. Again, the penalty tax is 46.5 per cent.

Comparison of key features of new law and current law

New law Current law
The trustee of a closely held trust must advise the Commissioner of certain details about each trustee beneficiary that is entitled to a share of the trust's net income or tax-preferred amounts. This advice is contained in a trustee beneficiary statement (in the form approved by the Commissioner) and must be provided by the due date for lodgment of the closely held trust's tax return (or further period allowed by the Commissioner). However, the Commissioner can make a determination not to require statements in certain circumstances. The trustee of a closely held trust that has a trustee beneficiary which is entitled to a share of the trust's net income or a tax-preferred amount, must advise the Commissioner of certain details about the trust's ultimate beneficiaries. This advice is contained in an ultimate beneficiary statement and must be provided by the due date for lodgment of the closely held trust's tax return (or further period allowed by the Commissioner).
Trusts that are covered by a family trust election, or an interposed entity election, or wholly-owned by the family trust are not covered by these trustee beneficiary reporting requirements. No equivalent.
The trustee of a closely held trust need not report amounts to the extent that they have been taxed to the trustee of the closely held trust, or to an earlier trust in the chain, under certain other provisions of the tax law. No equivalent.
Where required, if the trustee of the closely held trust does not make a correct trustee beneficiary statement in respect of a share of net income within the specified period, the trustee is liable for trustee beneficiary non-disclosure tax. The current provisions impose ultimate beneficiary non-disclosure tax where the trustee of the closely held trust does not provide a correct ultimate beneficiary statement where there are one or more ultimate beneficiaries presently entitled to the share.
Trustee beneficiary non-disclosure tax is payable where a share of the net income of a closely held trust is included in the assessable income of a trustee beneficiary and the share (or a part of it) 'comes back' to the closely held trust. Ultimate beneficiary non-disclosure tax is payable by a closely held trust where a share of its net income is included in the assessable income of a trustee beneficiary and there is no ultimate beneficiary in respect of the whole or part of the share.
Where a trustee beneficiary is presently entitled to tax-preferred amounts, the trustee of the closely held trust must provide a correct trustee beneficiary statement for those amounts (unless the Commissioner has made a determination that a statement is not required). Where a trustee beneficiary is presently entitled to tax-preferred amounts, the trustee of the closely held trust must provide a correct ultimate beneficiary statement or a correct statement in writing that there is no ultimate beneficiary.

Detailed explanation of new law

4.13 Amendments are made to Division 6D of Part III of the ITAA 1936 to reflect the replacement of ultimate beneficiary statements by trustee beneficiary statements in the approved form.

4.14 The broad structure of Division 6D has not been changed. However, the core penalty provisions (sections 102UK, 102UM and 102UT) have been rewritten, as has the definition of an 'ultimate beneficiary statement' in section 102UG (now called a 'trustee beneficiary statement').

4.15 Further, the concept of an 'untaxed part' has been introduced, primarily to prevent double taxation as a result of the introduction, in Tax Laws Amendment (2007 Measures No. 3) Bill 2007, of subsection 98(4) of the ITAA 1936 and Subdivision 12-H of the TAA 1953 both of which, like Division 6D, may tax a trustee in respect of a trustee beneficiary's share of the trust's net income. For completeness, the overview in subsection 102UA(1) is amended to reflect the shift in focus from ultimate beneficiaries to trustee beneficiaries. [Schedule 4, item 1, subsection 102UA(1) of the ITAA 1936]

Requirement to report the details of the trustee beneficiary in a trustee beneficiary statement

4.16 Where a share of the net income of a 'closely held trust' for a year of income is included in the assessable income of a trustee beneficiary under section 97 of the ITAA 1936 and:

·
the share comprises or includes an 'untaxed part'; or
·
if a trustee beneficiary of a closely held trust is presently entitled at the end of a year of income to a share of a tax-preferred amount of the trust,

the trustee of the closely held trust must make a correct trustee beneficiary statement (unless the Commissioner has made a determination under subsection 102UK(1A) not to require a correct trustee beneficiary statement).

4.17 A 'closely held trust' is defined in section 102UC of the ITAA 1936, and by amendment to the definition of 'excluded trust', does not include a trust:

·
that is covered by a family trust election or an interposed entity election; or
·
that is member of the family group of a family trust within the meaning of subsection 272-90(5) of Schedule 2F to the ITAA 1936.

4.18 Consequently, these trusts are not covered by these trustee beneficiary reporting requirements. [Schedule 4, item 13, definition of 'excluded trust', subsection 102UC(4) of the ITAA 1936]

4.19 'Tax preferred amount' is defined in section 102UI of the ITAA 1936. This definition remains unchanged.

4.20 The Commissioner may make a determination under subsection 102UK(1A) that a specified class of trustees is not required to make a correct trustee beneficiary statement. The determination may be expressed to be subject to conditions and may cover more than one year of income. The determination power will allow the requirement for an annual statement to waived if, for example, the Commissioner is satisfied with other information provided by trustees or held by the Commissioner about the trustee of the closely held trust or its trustee beneficiaries, that would allow net income or tax-preferred amounts to be traced to relevant taxpayers. Another example may be where a trustee of a closely held trust has given the Commissioner a correct trustee beneficiary statement in a year of income, and in future years, the only change may be to the amounts paid to the trustee beneficiaries.

4.21 Where required to make a correct trustee beneficiary statement, the trustee must give the Commissioner the following details:

·
if the trustee beneficiary is a resident at the end of the year of income - the name and TFN of the trustee beneficiary and the amount of the 'untaxed part' of their share or the amount of their share of the tax-preferred amount; or
·
if the trustee beneficiary is a non-resident at the end of the year of income - the name and address of the trustee beneficiary and the amount of the 'untaxed part' of their share or the amount of their share of the tax-preferred amount.

[Schedule 4, items 4, 15 and 19, definition of 'correct TB statement' in sections 102UB, 102UG and subsection 102UK(1A) of the ITAA 1936]

4.22 The trustee beneficiary statement must be in the approved form; therefore the Commissioner may require the details to be provided in the trust's tax return.

4.23 Where a closely held trust has more than one trustee beneficiary presently entitled to income of the trust, the trustee of the closely held trust must provide the relevant details for each trustee beneficiary and their respective share of net income or tax-preferred amounts. [Schedule 4, item 15, subsection 102UG(3) of the ITAA 1936]

A trustee beneficiary may quote their tax file number to the trustee of a closely held trust

4.24 Where a trustee beneficiary has a share of the net income of a closely held trust, or is presently entitled to a tax-preferred amount of the trust, the trustee beneficiary may quote his or her TFN to the trustee of the closely held trust in order for it to make a correct trustee beneficiary statement about that share. [Schedule 4, item 41, section 102UU of the ITAA 1936]

4.25 Where a trustee of a closely held trust has to make a correct trustee beneficiary statement, section 102UV applies to override section 8WB of the TAA 1953 so that the trustee can, in connection with making the statement:

·
record the TFN or maintain such a record;
·
use the TFN in a manner connecting it with the identity of the trustee beneficiary; or
·
divulge or communicate the TFN to a third person.

[Schedule 4, item 41, section 102UV of the ITAA 1936]

Amounts to which Division 6D applies (the 'untaxed part')

4.26 Section 102UE defines the 'untaxed part' of a share of the net income of a closely held trust. The use of this concept removes the requirement for a closely held trust to provide details to the Commissioner in respect of a share of net income that has been taxed under certain other provisions of the law (or has been taxed under a previous application of Division 6D). That is, only untaxed amounts are subject to the trustee beneficiary reporting rules. The aim of section 102UE is to remove the potential for double taxation.

4.27 Therefore, a trustee does not need to include in a trustee beneficiary statement details of any share of net income covered by subsection 102UE(2). A share of net income is covered by subsection 102UE(2) if:

·
the trustee of the closely held trust is assessed and liable to pay tax under subsection 98(4) of the ITAA 1936 in respect of the share (which applies where a trustee beneficiary that is non-resident at year end has a share of net income attributable to Australian sources);
·
the share is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and liable to pay tax under subsection 98(4);
·
the share is represented by or reasonably attributable to an amount from which an entity was required to withhold an amount under Subdivision 12-H in Schedule 1 to the TAA 1953 (which applies where an Australian managed fund or custodian pays certain amounts to non-residents including non-resident trustees); or
·
the share is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate was liable to pay trustee beneficiary non-disclosure tax.

4.28 If the net income is subject to tax under Division 6D, paragraph 102UK(2)(b) or paragraph 102UM(2)(b) operate so that the net income will not be included in the assessable income of the trustee beneficiary, except for the purpose of sections 99, 99A, 99B and Division 6D. Therefore, subsection 98(4) will not operate to tax it again. [Schedule 4, items 12 and 14, definition of 'untaxed part' in sections 102UB and 102UE, items 19 and 23, paragraphs 102UK(2)(b) and 102UM(2)(b) of the ITAA 1936]

Example 4.1 A trustee of a closely held trust (Trust A) has three trustee beneficiaries. The trustee of Trust B is a resident and their share of the closely held trust's net income is $5,000. The trustee of Trust C is a resident and is presently entitled to a tax-preferred amount of $2,000. The trustee of Trust D is a non-resident and their share of the closely held trust's net income is $4,000, all of which is attributable to foreign sources.To make a correct trustee beneficiary statement, in respect of each trustee beneficiary, the trustee of the closely held trust (Trust A) must report:

·
the name and TFN of the trustee of Trust B and their share of the trust's net income ($5,000);
·
the name and TFN of the trustee of Trust C and the share of the trust's tax-preferred amount to which they are presently entitled ($2,000); and
·
the name and address of the trustee of Trust D and their share of the trust's net income ($4,000) - foreign source income is not taxed under subsection 98(4) of the ITAA 1936 and therefore the trustee of Trust D's share of net income is not excluded from the trustee beneficiary reporting requirements under subsection 102UE(2).

Example 4.2 A trustee of a closely held trust (Trust A) has two trustee beneficiaries. The trustee of Trust B is a resident and their share of the closely held trust's net income is $3,000. The trustee of Trust C is a non-resident and their share of the closely held trust's net income is $10,000, all of which is attributable to Australian sources. Under subsection 98(4) of the ITAA 1936, the trustee of Trust A is assessed and liable to pay tax on the trustee of Trust C's share of the net income ($10,000).To make a correct trustee beneficiary statement the trustee of Trust A must report the name and TFN of the trustee of Trust B and their share of the closely held trust's net income ($3,000).There is no need for the trustee of Trust A to report the name and address of the trustee of Trust C or its share of the trust's net income ($10,000) as the whole of the share has been taxed under subsection 98(4) of the ITAA 1936 and is therefore excluded by virtue of paragraph 102UE(2)(a).

Example 4.3 Following on from Example 4.2, Trust C (which is not a closely held trust) has a resident trustee beneficiary (Trust D) whose share of Trust C's net income is $10,000. Trust D is a closely held trust and has other income of $5,000 from Australian sources. Its net income is therefore $15,000. Trust D has a resident trustee beneficiary (trustee of Trust E) whose share of Trust D's net income is this $15,000.The trustee of Trust D must provide the name and TFN of the trustee of Trust E and disclose the amount of $5,000 of net income from Australian sources included in Trust E's assessable income.The trustee of Trust D need not report on the $10,000 share of net income from non-resident Trust C as it is reasonably attributable to an amount taxed to the trustee of Trust A under subsection 98(4) in Example 4.2 (and is therefore excluded by virtue of paragraph 102UE(2)(b)).

Example 4.4 A managed investment trust (MIT Fund) makes a distribution to a non-resident trustee beneficiary (OS Trust) of $10,000. The trustee of MIT Fund is liable to withhold tax on that distribution at 30 per cent under Subdivision 12-H in Schedule 1 to the TAA 1953. OS Trust's net income is $10,000. OS Trust has a resident trustee beneficiary (trustee of Trust A) whose share of OS Trust's net income is $10,000.Trust A is a closely held trust that has a resident trustee beneficiary (the trustee of Trust B). The trustee of Trust A is not required to report the details of Trust B's share of trust net income because it is reasonably attributable to an amount subject to withholding under Subdivision 12-H in Schedule 1 to the TAA 1953 and is therefore excluded from the operation of the trustee beneficiary reporting rules by virtue of paragraph 102UE(2)(c).

'Trustee beneficiary statement period'

4.29 Where the trustee of a closely held trust is required to make and give to the Commissioner a correct trustee beneficiary statement, it must be given within the trustee beneficiary statement period. The 'TB statement period' is the period from the end of the year of income until the end of the period within which the trustee is required to give the Commissioner the trust's return of income for the year of income (or such further period as the Commissioner allows). [Schedule 4, items 7 and 16, definition of 'TB statement period' in sections 102UB and 102UH of the ITAA 1936]

The trustee beneficiary non-disclosure tax is payable if a correct trustee beneficiary statement is not made

4.30 Where a share of the net income of a closely held trust for a year of income is included in the assessable income of a trustee beneficiary of the trust under section 97 and, during the trustee beneficiary statement period, the trustee of the closely held trust is required to give the Commissioner a correct trustee beneficiary statement about the share, but it does not, a liability to tax is imposed by the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007 on the share of the net income at the rate of 46.5 per cent. [Schedule 4, item 8, definition of 'trustee beneficiary non-disclosure tax' in section 102UB, and item 19, section 102UK of the ITAA 1936 ; Schedule 4, items 3 and 4, of the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No . 1) 2007]

4.31 Where the trustee of the closely held trust is a corporate trustee, the trustee and the directors of the company are jointly and severally liable to pay the tax. This is consistent with the current law. [Schedule 4, item 19, paragraph 102UK(2)(a) of the ITAA 1936]

Example 4.5 A trustee of a closely held trust (Trust A) has one trustee beneficiary (the trustee of Trust B) whose share of the closely held trust's net income is $5,000. The trustee of the closely held trust fails to make a correct trustee beneficiary statement about the share in the trustee beneficiary statement period.The trustee of the closely held trust (Trust A) is therefore liable to trustee beneficiary non-disclosure tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007 on the share of the net income at the rate of 46.5 per cent.

4.32 Where a trustee beneficiary's share of net income is subject to trustee beneficiary non-disclosure tax, the share is not included in the assessable income of the trustee beneficiary under section 97, except for the purposes of sections 99, 99A and 99B, and Division 6D of the ITAA 1936. [Schedule 4, items 19 and 23, paragraphs 102UK(2)(b) and 102UM(2)(b) of the ITAA 1936]

Example 4.6 Following on from Example 4.5, Trust B's assessable income for Division 6D purposes includes the $5,000 of Trust A's net income.Trust B has a resident trustee beneficiary (trustee of Trust C) who has a share of Trust B's net income. The trustee of Trust B is not required to report in respect of the $5,000 as it is excluded by virtue of paragraph 102UE(2)(d) - that is, the trustee of Trust A was liable to pay trustee beneficiary non-disclosure tax on the net income.

4.33 The trustee of a closely held trust may amend an incorrect statement that does not meet the requirements of section 102UG. Generally, this is where the trustee, at the time of making the statement, believed on reasonable grounds it was a correct trustee beneficiary statement about a share of the net income of the trust, and:

·
the trustee could not have reasonably foreseen the event that caused the statement not to be a correct trustee beneficiary statement; or
·
the statement is not a correct trustee beneficiary statement because of an inadvertent error.

4.34 The amendment must be made within a specified period. This is largely consistent with the existing provisions which allow the trustee of a closely held trust to amend an incorrect statement in certain limited circumstances, however, the scope of the provision now also covers inadvertent errors. [Schedule 4, item 19, subsection 102UK(2A) of the ITAA 1936]

Amounts that the trustee of a closely held trust are presently entitled to from a trustee beneficiary

4.35 Section 102UM applies where a share of the net income of a closely held trust is included in the assessable income of a trustee beneficiary of the trust under section 97 and the trustee of the closely held trust becomes presently entitled to income that is reasonably attributable to a part or the whole of the untaxed part of the share. An exclusion applies where trustee beneficiary non-disclosure tax is payable by the trustee of a closely held trust on the untaxed part of the share under paragraph 102UK(2)(a). [Schedule 4, item 23, subsection 102UM(1) of the ITAA 1936]

4.36 The purpose of section 102UM is to discourage the use of a chain of trusts to channel income through a circular chain of trusts to disguise the identity of the final beneficiary in receipt of the income. In such a round robin arrangement, amounts are included in the assessable income of a trustee beneficiary of a closely held trust under section 97 and the amount (or part of it) 'comes back' to the trustee of a closely held trust.

4.37 Where this section applies, penalty tax is payable by the trustee of a closely held trust on the whole or that part of the untaxed part as imposed by the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 2) 2007 at a rate of 46.5 per cent. [Schedule 4, items 8 and 23, definition of 'trustee beneficiary non-disclosure tax' in section 102UB and subsection 102UM(2) of the ITAA 1936 ; Schedule 4, items 3 and 4 of the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No . 2) 2007]

Example 4.7 A chain of four Trusts exists (Trusts A to D) each of which is a closely held trust.Trust A has net income of $100,000 in an income year. The trustee of Trust A makes a correct trustee beneficiary statement advising the Commissioner that the trustee of Trust B's share of that net income is $100,000. The trustee of Trust A is therefore not liable to tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007.The trustee of Trust B also makes a correct trustee beneficiary statement advising the Commissioner that the trustee of Trust C's share of Trust B's net income is $100,000. The trustee of Trust B is therefore not liable to tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007.The trustee of Trust C also makes a correct trustee beneficiary statement advising the Commissioner that the trustee of Trust D's share of Trust C's net income is $100,000. The trustee of Trust C is therefore not liable to tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007.The trustee of Trust A is presently entitled to income of Trust D that is reasonably attributable to the share of trust income reported by the trustee of Trust A in respect of trustee beneficiary B (ie, the trustee of Trust B).The trustee of Trust A will be liable to pay tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 2) 2007 on this net income as the trustee is presently entitled to an amount that is reasonably attributable to the whole or a part of the untaxed part of the share and trustee beneficiary non-disclosure tax is not payable on the untaxed part of the share under paragraph 102UK(2)(a).

4.38 Where the trustee of the closely held trust is a corporate trustee, the trustee and the directors of the company are jointly and severally liable to pay the tax. This is consistent with the current law. [Schedule 4, item 23, paragraph 102UM(2)(a) of the ITAA 1936]

The recovery of trustee beneficiary non-disclosure tax from trustee beneficiaries providing incorrect information

4.39 These amendments to section 102USA reflect the change in focus to requiring closely held trusts to report details of trustee beneficiaries, rather than details of ultimate beneficiaries. The trustee of a closely held trust may sue to recover trustee beneficiary non-disclosure tax from a trustee beneficiary in certain circumstances.

4.40 In brief, this is where:

·
the trustee beneficiary, when requested to do so, refused or failed to give information to the trustee of the closely held trust; or
·
the trustee beneficiary provided incorrect information and the trustee of the closely held trust honestly believed on reasonable grounds that the information was correct,

and the trustee of the closely held trust has distributed to the trustee beneficiary an amount representing some or all of the share of the net income without withholding an amount under section 254 of the ITAA 1936 in respect of the recoverable amount. [Schedule 4, item 36, subsections 102USA(1) to (3) of the ITAA 1936]

4.41 In these circumstances, the trustee of the closely held trust or the persons liable to pay trustee beneficiary non-disclosure tax may, in a court of competent jurisdiction, sue for the recoverable amount and recover it from the trustee beneficiary. [Schedule 4, item 36, subsection 102USA(4) of the ITAA 1936]

Trustee beneficiaries: tax-preferred amounts

4.42 Section 102UT applies if, at the end of the income year, a trustee beneficiary of a closely held trust is presently entitled to a share of a tax-preferred amount of the trust. Unless the Commissioner has made a determination under subsection 102UK(1A) to not require a correct trustee beneficiary statement, the trustee of the closely held trust must provide to the Commissioner a correct trustee beneficiary statement covering the share of the tax-preferred amount during the trustee beneficiary statement period. [Schedule 4, item 38, subsection 102UT(1) of the ITAA 1936]

4.43 The trustee of a closely held trust may commit an offence under section 8C of the TAA 1953 if the trustee is required to provide a correct trustee beneficiary statement to the Commissioner about tax-preferred amounts but does not.

Example 4.8 A trustee of a closely held trust (Trust A) has one trustee beneficiary (Trust B). The trustee of Trust B is a resident and they are presently entitled to a tax-preferred amount of $4,000 from Trust A. The trustee of the closely held trust (Trust A) makes a correct trustee beneficiary statement to the Commissioner by reporting the name and TFN of the trustee beneficiary (Trust B) and the tax-preferred amount to which the trustee is presently entitled.

Example 4.9 Following on from Example 4.8, Trust B has two trustee beneficiaries (Trust C and Trust D). The trustee of Trust C (is a non-resident) and is presently entitled to a tax-preferred amount of $2,000 from Trust B. The trustee of Trust D is a resident and is also presently entitled to a tax preferred amount of $2,000 from Trust B.The trustee of Trust B fails to provide the Commissioner with a correct trustee beneficiary statement that includes the name and address of the non-resident trustee beneficiary (the trustee of Trust C) and the tax-preferred amount to which the beneficiary is entitled. The trustee also fails to make a correct trustee beneficiary statement about the tax-preferred amount to which the trustee of Trust D is entitled. Accordingly, the trustee of Trust B has committed two offences under section 8C of the TAA 1953.

4.44 The trustee of a closely held trust will not be taken to have committed an offence against section 8C of the TAA 1953 if:

·
the trustee did not know all the information required to be included in the required statements;
·
the trustee had taken reasonable steps to ascertain the information that he or she did not know; and
·
if the trustee did know some of the information, he or she included it in a statement that he or she sent to the Commissioner during the trustee beneficiary statement period.

[Schedule 4, items 39 and 40, subsection 102UT(3) and paragraph 102UT(3)(c) of the ITAA 1936]

Example 4.10 Following on from Example 4.9, the trustee of Trust B took reasonable steps to obtain the TFN of the trustee of Trust D, who is a resident. The trustee of Trust D failed to provide this information. During the trustee beneficiary statement period, the trustee of Trust B advises the Commissioner that they could not obtain the TFN of the trustee of Trust D. Because of actions of the trustee of Trust B and subsection 102UT(3) of the ITAA 1936, the trustee of Trust B will not be guilty of an offence under section 8C of the TAA 1953 in relation to its reporting obligations in regard to the trustee of Trust D.

Repeal of Acts

4.45 To reflect the new reporting requirements for closely held trusts, the following Acts are repealed:

·
the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Act (No. 1) 1999 ; and
·
the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Act (No. 2) 1999 .

[Schedule 4, items 49 and 50]

4.46 They are replaced by:

·
the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 1) 2007; and
·
the Taxation (Trustee Beneficiary Non-disclosure Tax) Bill (No. 2) 2007.

Application and transitional provisions

4.47 The amendments made by Schedule 4 apply to the first income year starting on or after the day on which this Bill receives Royal Assent and later income years. [Schedule 4, item 51]

4.48 The amendments to Division 6D discussed earlier in this chapter ensure that trustee beneficiary non-disclosure tax is not payable in respect of an amount that is liable to taxation under subsection 98(4) of the ITAA 1936 or subject to withholding under Subdivision 12-H in Schedule 1 to the TAA 1953. The purpose of the transitional rule in item 52 is to ensure that the same outcome arises in respect of ultimate beneficiary non-disclosure tax payable under the current rules, because the new trustee beneficiary rules in this Schedule take effect at a later time.

4.49 This transitional rule is needed because it is expected that subsection 98(4) and Subdivision 12-H in Schedule 1 to the TAA 1953, inserted by the Tax Laws Amendment (2007 Measures No. 3) Bill 2007, will apply before the amendments to Division 6D take effect (depending on the date of Royal Assent of that Bill).

4.50 Therefore, the trustee of a closely held trust will not be liable to pay ultimate beneficiary non-disclosure tax on a share of net income under current section 102UK or 102UM to the extent that the share has been taxed under subsection 98(4) of the ITAA 1936 or Subdivision 12-H in Schedule 1 to the TAA 1953. In addition, the trustee will not be liable to pay tax on a share of income to the extent that the share is represented by or reasonably attributable to an amount which was liable to tax under section 255 of the ITAA 1936 (this is effectively the precursor to new Subdivision 12-H in Schedule 1 to the TAA 1953, under which managed investment trusts currently withhold tax on distributions to non-residents). [Schedule 4, item 52]

Consequential amendments

4.51 As the reporting requirement on trustees of closely held trusts is being changed from reporting details of ultimate beneficiaries to the details of trustee beneficiaries, a number of references to 'ultimate beneficiary' or 'UB' are being omitted or being substituted with references to 'trustee beneficiary' or 'TB' respectively. In addition, a number of provisions are being repealed as they are no longer applicable, for example, the definitions of 'ultimate beneficiary', 'correct UB statement', presently entitled indirectly' and 'listed person'. [Schedule 4, items 2, 4 to 11, 18, 20 to 22, 24 to 35, 37, 39, 40, 42 to 48, paragraph 102UA(2)(a), section 102UB and definition of 'correct TB statement', 'correct UB statement', 'listed person', 'TB statement period', 'trustee beneficiary non-disclosure tax', 'UB statement period', 'ultimate beneficiary' and 'ultimate beneficiary non-disclosure tax', heading 'Subdivision 6DC - Trustee beneficiary non-disclosure tax on share of net income', subsection 102UL(2), paragraphs 102UL(3)(a), (4)(a), (4)(c) and (5)(a), subparagraphs (102UL(5)(b)(i) and (ii), heading 'Subdivision 6DD - Payment etc, of trustee beneficiary non-disclosure tax', subsections 102UN(1) and (2), subsection 102UO(1), paragraph 102UO(1)(a), subsections 102UO(2) to (4), note under subsection 102UO(4), section 102UP, paragraph 102UR(1)(a), subsections 102UR(2) and 102URA(1), paragraph 102US(1)(d), heading 'Subdivision E - Making correct TB statement about trustee beneficiaries of tax-preferred amounts', subsection 102UT(3), paragraph 102UT(3)(c), sub-subparagraph 47A(18)(d)(i)(G), subparagraph 102AAE(2)(c)(i), sub-subparagraph 102AAU(1)(c)(i)(C), item 18 in the table in subsection 170(10) and paragraph 254(3)(a) of the ITAA 1936 and item 1AA in the table in subsection 8AAB(4) and item 5 in the table in subsection 250-10(1) of the TAA 1953]

REGULATION IMPACT STATEMENT

Background

4.52 The ultimate beneficiary rules (Part III, Division 6D of the ITAA 1936) were announced in the Government's A New Tax System package and came into effect in July 1999. The amendments were aimed at addressing arrangements whereby taxpayers used complex chains of trusts to effectively obscure the ultimate beneficiary of the assessable trust income.

4.53 Under these rules, the trustee of a closely held trust with any trustee beneficiaries must disclose to the Commissioner the identity (including the TFN) of the ultimate beneficiaries of certain net income and tax-preferred amounts of the trust. This requires the trustee to trace each distribution made to a trustee beneficiary through to the final recipient(s) of the distribution. This information must be disclosed to the Commissioner within a specified period after the year of income through the preparation of an ultimate beneficiary statement. The intention was that this information would then allow the Australian Taxation Office (ATO) to check whether the assessable income of the ultimate beneficiaries correctly includes the share of net income disclosed by the trustee.

4.54 When the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within the specified time period, or where there are no ultimate beneficiaries of net income, then the trustee is liable to pay 'ultimate beneficiary non-disclosure tax' at the rate of 46.5 per cent, which is equivalent to the top marginal tax rate plus the Medicare levy.

4.55 In response to taxpayer complaints about the compliance burden imposed by the ultimate beneficiary rules, in 2001 the Commissioner released Law Administration Practice Statement PS LA 2001/12, which stated that for 2000-01 and subsequent income years, trustees are to indicate on their trust return if they are notionally required to lodge a ultimate beneficiary statement under the income tax legislation. However, lodgment of an ultimate beneficiary statement is only required where the trustee has an ultimate beneficiary non-disclosure tax liability for the year under consideration or the Commissioner requests an ultimate beneficiary statement. The practical effect of this Practice Statement has been that many trustees have not been required to lodge an ultimate beneficiary statement since 2000-01. In spite of this, many taxpayers have continued to argue that their compliance costs have not been reduced as they still need to go through a tracing process to ascertain whether they have an ultimate beneficiary non-disclosure tax liability.

Policy objective

4.56 The objective of the changes is to reduce the compliance burden and cost for taxpayers of complying with the reporting requirements under the ultimate beneficiary rules in Division 6D of Part III of the ITAA 1936.

4.57 The size and complexity of the ultimate beneficiary statements prepared by taxpayers have created an unnecessary compliance burden. Furthermore, there are concerns that these provisions have been triggered inadvertently by taxpayers who have not been seeking to avoid tax through the use of more than one trust.

Implementation options

4.58 Only one option has been analysed in detail - that the trustee of a closely held trust need identify only the first-tier trustee beneficiaries, rather than the ultimate beneficiaries.

4.59 The option of repealing the ultimate beneficiary rules was not considered feasible. While this option would remove the burden of complying with the provisions, it would also leave a gap in the integrity provisions. There is a risk that some taxpayers would start using complex chains of trusts to avoid paying tax. On this basis this option was not assessed further.

Option 1 - Simplifying the reporting requirements

4.60 The preferred option is to amend the ultimate beneficiary rules so that a trustee of a closely held trust is only required to identify the relevant details of first-tier trustee beneficiaries through the lodgment with the ATO of a 'trustee beneficiary statement'. Relevant details include the trustee beneficiary's name, TFN and their share of the trust's net income or tax-preferred amounts. The trustee beneficiary statement will replace the old ultimate beneficiary statement, but can form part of a trust income tax return.

4.61 A provision is also included that will allow the Commissioner to make a determination that allows him not to require trustees to lodge annual trustee beneficiary statements in circumstances where he considers it unnecessary (eg, because he already has sufficient information on the trust and its beneficiaries). This provision will allow the general effect of his current Practice Statement 2001/12 (as currently applied to ultimate beneficiary statements) to be maintained for trustee beneficiary statements.

4.62 A trust that has made a family trust election (or an entity that has made an interposed entity election to be in the family group) will not be subject to the trustee beneficiary reporting rules. These trusts are restricted in the range of beneficiaries they can distribute to, and any distributions outside the family group are subject to the family trust distribution tax, which is levied at 46.5 per cent.

4.63 The new rules replace the current situation where the trustee has to trace the distribution through what potentially could be multiple layers of trusts and beneficiaries in order to provide the information to the Commissioner in an ultimate beneficiary statement. Under the current provisions, a trustee could be liable to pay ultimate beneficiary non-disclosure tax or a penalty if a mistake is made in completing the ultimate beneficiary statement by any trust anywhere along the chain. Making each trust responsible for correctly reporting only the first-tier trustee beneficiaries will address this concern.

4.64 As is currently the case, if a trustee of a closely held trust does not provide the correct information to the Commissioner in a trustee beneficiary statement by the required time, they will be subject to a non-disclosure tax, now called 'trustee beneficiary non-disclosure tax', which is levied on the trustee beneficiary's share of net income at 46.5 per cent, as is the case with the old ultimate beneficiary non-disclosure tax.

4.65 Penalty tax is currently in place where there are in fact no ultimate beneficiaries. As the reporting focus is changing, penalty tax at the rate of 46.5 per cent will now be imposed where a share of the net income of a closely held trust is included in the assessable income of a trustee beneficiary and the share (or part of it) 'comes back' to the closely held trust in the sense that the trustee of a closely held trust becomes presently entitled to income attributable to the share (or part of it). Penalty tax is imposed at 46.5 per cent.

Assessment of impacts

Impact group identification

4.66 The proposal will impact on trustees of closely held trusts which distribute to trustee beneficiaries. There are closely held trusts spread across micro, small, medium and large businesses across different industries. Precise data on how many of these trusts distribute to trustee beneficiaries is not available.

Analysis of costs / benefits

Taxpayers

4.67 The proposal will reduce significantly ongoing compliance costs for trustees and beneficiaries when compared with the costs imposed under the existing ultimate beneficiary rules. Instead of having to trace distributions through multiple layers of trusts and beneficiaries to the final recipient, trustees will only have to report first-tier trustee beneficiaries. This should lead to a reduction in record keeping, information collection, and planning effort.

4.68 In many cases, the identity of any first-tier trustee beneficiary is already being provided by trustees in the distribution statement which is attached to the trust tax return.

4.69 The provision allowing the Commissioner to make a determination that allows him not to require trustees to lodge annual trustee beneficiary statements in circumstances where he considers it unnecessary, would remove the need for a large number of trustees to prepare a trustee beneficiary statement. This will further reduce significantly ongoing compliance costs for taxpayers.

4.70 Trusts that have made a family trust election (or have made an interposed entity election to be in the family group, or owned by a family group within the terms of section 272-90 of Schedule 2F to the ITAA 1936) will be excluded from being subject to the trustee beneficiary reporting rules. This eliminates the compliance costs for trustees of these trusts, with respect to these rules.

4.71 There may be a small increase in transitional compliance costs for trustees, beneficiaries and their agents as they familiarise themselves with the simplified reporting requirements under the new trustee beneficiary rules.

Australian Taxation Office

4.72 The proposal is expected to have benefits for the ATO in terms of administration as it should reduce the volume of paperwork required to be collected. The provisions currently result in the ATO receiving large amounts of duplicated information due to multiple trusts in a chain reporting the same information.

4.73 It is expected that there will be small increase in transitional costs for the ATO to administer the new trustee beneficiary rules.

4.74 The revenue impact for this proposal is unquantifiable but expected to be minimal against the forward estimates. In any case, the ultimate beneficiary rules were designed to change behaviour, not to generate tax revenue. This remains the case with the trustee beneficiary rules.

Consultation

4.75 Consultation on the draft legislation was undertaken on a confidential basis with the ATO, major accounting groups, and some tax practitioners.

4.76 The provision allowing the Commissioner to make a determination that allows him to not require trustees to lodge annual statements in circumstances where he considers it unnecessary, and the decision to exclude family trusts from the trustee beneficiary reporting requirements, reflect deliberations after the consultation process.

Conclusion and recommended option

4.77 Simplifying the reporting requirements for the ultimate beneficiary rules by removing the need to trace ultimate beneficiaries and instead identify only first-tier trustee beneficiaries will significantly reduce compliance costs for taxpayers. The additional steps of allowing the Commissioner to make a determination that allows him to not require trustees to lodge annual statements where he considers it unnecessary, and excluding family trusts from the trustee beneficiary reporting requirements will further reduce ongoing compliance costs.

4.78 This change will maintain the integrity of the tax system and will also assist the ATO in the administration of the provisions.

4.79 Treasury and the ATO will monitor this taxation measure, as part of the whole taxation system, on an ongoing basis.

4.80 This measure may be subject to review five years after introduction, if not reviewed beforehand.


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