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House of Representatives

A New Tax System (Closely Held Trusts) Bill 1999

A New Tax System (Closely Held Trusts) Act 1999

A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999

A New Tax System (Ultimate Beneficiary Non-disclosure Tax ) Act (No. 1) 1999

A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999

A New Tax System (Ultimate Beneficiary Non-disclosure Tax ) Act (No. 2) 1999

Explanatory Memorandum

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

General outline and financial impact

Amends the Income Tax Assessment Act 1936 and other taxing laws, and introduces specific taxing Bills, to ensure that, broadly speaking, the trustee of a closely held trust with a trustee beneficiary discloses to the Commissioner of Taxation the identity of the ultimate beneficiaries of certain net income and tax-preferred amounts of the trust within a specified period after the end of the year of income.

Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within the specified period the measures specifically impose taxation of that part of the net income of the trust at the top marginal rate plus Medicare levy. For tax-preferred amounts such a failure may produce offences under the Taxation Administration Act 1953.

Where there are no ultimate beneficiaries of net income of the closely held trust, the measures specifically impose taxation of that part of the net income of the trust at the top marginal rate plus Medicare levy.

Date of effect: The amendments apply to present entitlements created after 4.00p.m. on 13 August 1998 AEST.

Proposal announced: Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System and the Treasurers Press Release No. 77 on 13 August 1998.

Financial impact: This measure was estimated to raise revenue of $30million in each of 1999-2000 and 2000-2001.

Compliance cost impact: Compliance costs will be kept to a minimum, as outlined below.

SUMMARY OF REGULATION IMPACT STATEMENT

Policy objective:

The policy objective of this measure is to ensure that the assessable income of ultimate beneficiaries correctly includes any required share of net income, and that the net assets of ultimate beneficiaries reflect the receipt of tax-preferred amounts.

Impact: Low.

Main points:

Compliance costs will be kept to a minimum because:

a number of trusts have been carved out of the measure; and

in certain circumstances identification of lower level beneficiaries in chains of trusts is sufficient disclosure.

Chapter 1 - Closely held trusts

Overview

1.1 A New Tax System (Closely Held Trusts) Bill 1999, A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999, and A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No.2) 1999 will amend the income tax laws to ensure that the trustee of a closely held trust with a trustee beneficiary discloses to the Commissioner of Taxation (Commissioner) the identity of the ultimate beneficiaries of certain net income and tax-preferred amounts of the trust within a specified period after the end of the year of income.

1.2 Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within the specified period the measures specifically impose taxation at the top marginal rate plus Medicare levy, in the case of net income. Offences under the Taxation Administration Act1953 (TAA) may arise if information is not provided, in the case of tax-preferred amounts.

1.3 Where there are no ultimate beneficiaries of net income of the closely held trust, the measures specifically impose taxation at the top marginal rate plus Medicare levy.

Summary of amendments

Purpose of amendments

1.4 The purpose of the amendments is to ensure that necessary information is available to allow the Commissioner to check whether the assessable income of ultimate beneficiaries correctly includes any required share of net income, and that the net assets of ultimate beneficiaries reflect the receipt of tax-preferred amounts. In default of that information, the measures impose taxation on trustees, with consequential exemption of the net income. Offences under the TAAmay also arise if information is not provided.

Date of effect

1.5 The amendments apply to present entitlements created after 4.00p.m. on 13 August 1998 AEST. [Item 3 of Schedule 1]

Background to the legislation

1.6 The taxation of trusts is covered by provisions in Division 6 of Part III of the Income Tax Assessment Act 1936 (the Act). In summary, trust net income is taxed to either the trustee or beneficiary as follows:

·
if the beneficiary is presently entitled to a share of the income of the trust estate, is not under a legal disability, and is not a non-resident at the end of the year of income, the beneficiary is assessable on that share of the net income;
·
if the beneficiary is presently entitled to a share of the income of the trust estate but is either under a legal disability or is a non-resident at the end of the year of income, the trustee is assessable on behalf of the beneficiary on that share of the net income; and
·
if no beneficiary is presently entitled to some part of the income of the trust estate the trustee is assessable on that part of the net income of the trust estate.

1.7 A trustee of a trust estate is required to lodge a tax return each year in respect of every trust estate, notwithstanding that a trust is not a separate legal entity and, generally speaking, no tax is imposed on the trust itself. Ordinarily, this return enables the Commissioner to determine the taxable income of the trust as a whole and the identities of the beneficiaries who are entitled to the various elements of the trust income. This further enables the Commissioner to reconcile that relevant shares of trust income have been included in appropriate beneficiaries returns and enables assessments to be issued to the trustee in respect of other components of net income to which no beneficiary is assessed.

1.8 However, these requirements may be ineffective in certain circumstances, including where all or a part of the net income of a trust estate is passed through a series of trusts with no ultimate beneficiary being assessed on that net income, either because there is no ultimate beneficiary or because the ultimate beneficiary cannot be identified.

Explanation of amendments

Overview

1.9 Schedule 1 to the A New Tax System (Closely Held Trusts) Bill 1999 inserts new Division 6D into PartIII of the Act. The purpose of the division is to ensure that the trustee of a closely held trust with a trustee beneficiary advises the Commissioner of the ultimate beneficiaries of:

·
certain net income of the trust; and
·
tax-preferred amounts of the trust;
within a specified period after the end of the year of income. [Item 2 of Schedule 1; new subsection 102UA(1)]

1.10 To achieve this purpose the amendments provide for the trustee to correctly disclose the identity of ultimate beneficiaries within a specified period after the end of the year of income and, so far as the trustee fails to do so (whether because the trustee chooses not to disclose, because the trustee is unable to disclose, or because there are no such ultimate beneficiaries), provides for taxation at the top marginal rate plus Medicare levy (in the case of net income) or offences under the TAA (in the case of non-disclosure in relation to tax-preferred amounts). [Item 2 of Schedule 1; new subsection 102UA(2)]

Operative provisions

1.11 New Division 6D applies if 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 of the Act and the trustee of the closely held trust does not correctly disclose to the Commissioner the identity of the ultimate beneficiaryentitled to the share of the net income within the specified time period, or if there is no ultimate beneficiary. It also applies if a share of a tax-preferred amount of a closely held trust for a year of income is included in the present entitlement of a trustee beneficiary of the trust. [Item 2 of Schedule 1; new subsections102UK(1), 102UM(1), and 102UT(1)]

What type of trusts do the amendments apply to?

1.12 The amendments only apply to closely held trusts where a trustee beneficiary is presently entitled to a share of a tax-preferred amount in the trust, or where a share of the net income of the trust is included in the trustee beneficiarys assessable income. A closely held trust for the purpose of the amendments is:

·
a trust where an individual has, or up to twenty individuals have between them, directly or indirectly, and for their own benefit, fixed entitlements to a 75% or greater share of the income, or a 75% or greater share of the capital, of the trust (that is, no more than twenty people have no less than three-quarters of the income, or no less than three-quarters of the capital, of the trust); or
[Item 2 of Schedule 1; new paragraph 102UC(1)(a)]
·
a discretionary trust (that is, a trust that is not a fixed trust within the meaning of section 272-65 of Schedule 2F of the Act). In other words, a trust which is not entirely fixed is a discretionary trust, even if some income or capital entitlements in the trust are fixed.
[Item 2 of Schedule 1; new paragraph 102UC(1)(b)]

1.13 For the purposes of the definition of a closely held trust, an individual and his or her relatives and their nominees are treated as being one individual. This will prevent an individual circumventing the intent of the 20/75 rule by having family members or their nominees holding units. [Item 2 of Schedule 1; new subsection 102UC(3)]

1.14 The trustee of a discretionary trust may hold a fixed entitlement to a share of the income or capital of a fixed trust directly or indirectly and no other person holds that entitlement directly or indirectly. That is, the fixed entitlement may be held subject to a discretion. Then, in working out whether a fixed trusts is closely held, the trustee of the discretionary trust is taken to hold that fixed entitlement directly or indirectly as an individual and for the individuals own benefit. [Item 2 of Schedule 1; new subsection 102UC(2)]

What is a discretionary trust?

1.15 A discretionary trust means a trust that is not a fixed trust (within the meaning of section 272-65 of the Act). A fixed trust is a trust where all of the income and capital of the trust is the subject of fixed entitlements held by persons. A person includes a natural person, a company, a trustee, or the partners in a partnership. So if any of the income or capital of a trust is not the subject of fixed entitlements the trust is a discretionary trust. [Item 2 of Schedule 1; new subsection 102UC(4)]

What is a fixed entitlement to income or capital?

1.16 The term fixed entitlement has the meaning given by sections272-5, 272-10, 272-15, and 272-40 in Schedule 2F of the Act. Broadly speaking, a person will have a fixed entitlement to either income or capital of a trust where the beneficiary has a vested and indefeasible interest in a share of the income of the trust that the trust derives from time to time (ie. current and future income), or a share of capital of the trust (see section 272-5 of Schedule 2F of the Act). [Item 2 of Schedule1; new subsection102UC(4)]

1.17 Similarly, a person has a fixed entitlement to income of a company if the person is the beneficial owner of shares in the company that carry a right to receive dividends that might be paid by the company (see subsection 272-10(1) of Schedule 2F of the Act). [Item 2 of Schedule1; new subsection 102UC(4)]

1.18 Further, a person has a fixed entitlement to capital of a company if the person is the beneficial owner of shares in the company that carry a right to receive any return of capital in the company (eg. in the event of a winding-up or a capital reduction of the company; see subsection 272-10(2) of Schedule 2F of the Act). [Item 2 of Schedule 1; new subsection 102UC(4)]

1.19 For partnerships a person will have a fixed entitlement to either income or capital (whichever is applicable) where the following conditions are met (see section 272-15 of Schedule 2F of the Act):

·
the person is entitled to a share of the income of the partnership that the partnership derives from time to time (ie. current and future income), or a share of capital of the partnership; and
·
the share is not able to be varied, or the circumstances nevertheless support the person being treated as being a fixed entitlement.

[Item 2 of Schedule 1; new subsection 102UC(4)]

What is a vested interest?

1.20 A person has a vested interest in something if the person has a present right relating to the thing. Stated simply, a vested interest is one that is bound to take effect in possession at some point in time. A vested interest is to be contrasted with a contingent interest which may never fall into possession. If an interest of a beneficiary in income or capital is the subject of a condition precedent, so that an event must occur before the interest becomes vested, the beneficiary does not have a vested interest to the income or capital since such an interest is instead contingent upon the event occurring.

1.21 Broadly speaking, a person can be said to be either vested in possession or vested in interest. A present interest, ie. one that is being enjoyed, is said to be vested in possession; a future interest, ie. one which gives its holder a present right to future enjoyment, is said to be vested in interest. A person is vested in possession where the person has a right to immediate possession or enjoyment of the thing in question. In the definition of fixed entitlement, vested includes both vested in possession and vested in interest.

1.22 Because vested interests include future interests, a person can have a vested interest in a thing even though the persons actual possession and enjoyment of the thing is delayed until some time in the future.

When is a vested interest indefeasible?

1.23 A vested interest is indefeasible where, in effect, it is not able to be lost. A vested interest is defeasible where it is subject to a condition subsequent that may lead to the entitlement being divested. A condition subsequent is an event that could occur after the interest is vested that would result in the entitlement being defeated, for example, on the occurrence of an event or the exercise of a power. For example, where a beneficiarys vested interest is able to be taken away by the exercise of a power by the trustee or any other person, the interest will not be a fixed entitlement.

1.24 Where the trustee exercises a power to accumulate income or capital of the trust in accordance with the trust deed, the accumulation does not result in a beneficiarys interest being taken away or defeased as long as the beneficiary nevertheless remains entitled at some future time to enjoy his or her share of the income or capital which has been accumulated.

Commissioners discretion to treat an entitlement as not being able to be varied

1.25 The adoption of the meaning of fixed entitlement provided in subsection 272-5(3) of the Act allows the Commissioner a discretion to determine that an interest of a beneficiary to income or capital that is not vested and indefeasible can be treated as vested and indefeasible. This in turn would mean the interest could be treated as a fixed entitlement. The Commissioner could exercise this power having regard to the:

·
circumstances in which the beneficiarys interest would not become vested or would be defeased;
·
likelihood of the interest not vesting or not being defeased; and
·
nature and type of the trust.

[Item 2 of Schedule 1; new subsection 102UC(4)]

1.26 This provision is intended to provide for special circumstances where there is a low likelihood of a beneficiarys vested interest being taken away or defeated and, having regard to the scheme of the trust loss provisions to prevent the transfer of the tax benefit of losses and other deductions incurred by trusts, it would be unreasonable to treat the beneficiarys interest as not constituting a fixed entitlement.

What happens if a beneficial owner of an entitlement dies?

1.27 The adoption of the meaning of fixed entitlement provided in section 272-40 of the Act allows special provision to be made in the situation where an individual who directly or indirectly holds a fixed entitlement in a trust dies. This is necessary to prevent a trust falling into the measure merely because a stakeholder in the trust dies. Where the individual dies, the fixed entitlement is taken to continue to be owned by the individual as long as the:

·
entitlement is held by the trustee of the dead persons estate; or
·
entitlement is held by a person as a beneficiary of the dead persons estate.

[Item 2 of Schedule 1; new subsection 102UC(4)]

When is a fixed entitlement held indirectly?

1.28 The term indirectly takes its meaning from section 272-20 of the ACT. Broadly speaking, a fixed entitlement will be taken to be held by an individual indirectly where the entitlements are held through fixed entitlements in one or more interposed companies, trusts, or partnerships. [Item 2 of Schedule 1; new subsection 102UC(4)]

Excluded trusts

1.29 Certain trusts are expressly excluded from the application of the measure. These trusts, each referred to as an excluded trust in the amendments, are:

·
complying superannuation funds, complying approved deposit funds, or pooled superannuation trusts;
·
deceased estates until the end of the year of income in which the fifth anniversary of the death occurs;
·
fixed unit trusts where all the capital and income of the trust is the subject of fixed entitlements held by persons all of whose income is exempt from tax under section 23 of the Act or Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997); that is, fixed unit trusts whollyowned by wholly income tax exempt persons; and
·
unit trusts whose units are listed on the Australian Stock Exchange Limited.

[Item 2 of Schedule 1; new subsection 102UC(4)]

1.30 The definitions of a complying superannuation fund, a complying approved deposit fund and a pooled superannuation trust are in section 272-140 of the Act.

1.31 The term deceased estate has its ordinary meaning. It is the trust which arises upon the death of a person for the administration of the deceaseds estate by his or her personal representative in accordance with the will or codicil of the deceased or the intestacy laws of the relevant jurisdiction. It does not, however, include a testamentary trust (ie. a trust, other than the deceased estate itself, established under the terms of a will or codicil).

1.32 Further, a deceased estate will only be treated as an excepted trust during a reasonable administration period. This period is the part of the income year from the date of death of the person and the next five full income years. This will give the trustee of the deceased estate the opportunity to complete the administration of the estate. [Item 2 of Schedule 1; new subsection102UC(4)]

What is a trustee beneficiary?

1.33 The amendments require the trustee of a closely held trust to disclose the identity of the ultimate beneficiary entitled to any net income of the trust included in the income of another trust. The amendments also apply where another trust is presently entitled to tax-preferred amounts of the trust. The trustee of the additional trust is referred to as the trustee beneficiary in the amendments.

1.34 A trustee beneficiary of the closely held trust is defined to mean a beneficiary of the trust in the capacity of trustee of another trust. [Item 2 of Schedule 1; new section102UD]

1.35 In circumstances where a partnership is a beneficiary of a closely held trust and a partner in the partnership is the trustee of his or her interest in the partnership, the partner will also be taken to be a trustee beneficiary of the closely held trust. This is because only the partners can be beneficiaries of a trust, but this is commonly effected by a reference to the partnership as the beneficiary.

Who is an ultimate beneficiary?

1.36 New section 102UE provides for three different categories of ultimate beneficiaries. The effect of the amendments is that once a share of net income or a share of a tax-preferred amount is traced from a closely held trust to an ultimate beneficiary, it need be traced no further. For example, if a closely held trust has a complying superannuation fund as an ultimate beneficiary no further identification of lower level beneficiaries is required (say, members of the fund).

Present entitlement case

1.37 The first category of ultimate beneficiary is in the present entitlement cases. In these cases a person is an ultimate beneficiary in respect of a part of a share of the net income, or a part of a share of a tax-preferred amount, of a closely held trust if the person is a listed person (explained below) and is:

the trustee beneficiary in whose income the share of net income is included, or who is presently entitled to the share, or a part of the share, of a tax-preferred amount; or

presently entitled to a part of that share of the trustee beneficiary through one or more interposed partnerships or trusts (other than any that are ultimate beneficiaries in their own right).

[Item 2 of Schedule 1; new subsection 102UE(2)]

1.38 For this purpose a listed person is:

·
an individual (other than in the capacity of trustee of a trust);
·
a company (other than in the capacity of trustee of a trust);
·
the trustee of a trust that is not a closely held trust;
·
a pooled superannuation trust within the meaning of section48 of the Superannuation Industry (Supervision) Act 1993, in relation to the income year concerned;
·
a complying superannuation fund within the meaning of section45 of the Superannuation Industry (Supervision) Act 1993, in relation to the income year concerned;
·
a complying approved deposit fund within the meaning of section47 of the Superannuation Industry (Supervision) Act 1993, in relation to the income year concerned;
·
an institution all of whose income of the year of income concerned is exempt from tax under section 50 of the ITAA1997; or
·
a fund, authority or institution in Australia that is mentioned in section 30-15 of the ITAA 1997 that is, gifts to the body are deductible for income tax purposes as set out in that section.

[Item 2 of Schedule 1; new section 102UF]

1.39 New section 102UJ provides that if a person is presently entitled indirectly through one or more interposed partnerships or trusts to a share of the income of a trust derived in a year of income, then by express provision the person is presently entitled indirectly through the one or more partnerships or trusts to that share of the net income of the trust. [Item 2 of Schedule 1; new subsection102UJ(1)]

1.40 An ultimate beneficiary in respect of present entitlement cases is illustrated below.

Present entitlement case

When is a beneficiary presently entitled?

1.41 Present entitlement takes its ordinary meaning. Broadly speaking, a person is presently entitled to a distribution when the person has a present legal right to demand and receive the distribution. For example, in the case of a partnership a partner would be presently entitled to a distribution of income or capital when the profits of the partnership are divided among the partners or when the partner becomes entitled to withdraw capital.

No present entitlement case

1.42 The second category of ultimate beneficiary is referred to in the provisions as the no present entitlement case. In these cases a person is an ultimate beneficiary in respect of a part of a share of the net income, or a part of a share of a tax-preferred amount, of a closely held trust if the person:

·
is the trustee beneficiary in whose income the share of net income is included, or who is presently entitled to the share of a tax-preferred amount, or a part of a share of a tax-preferred amount; or
·
is the trustee of a trust who is presently entitled to a part of that share of the trustee beneficiary through one or more interposed partnerships or trusts (other than any that are ultimate beneficiaries in their own right); and
·
in either case, no beneficiary of the trust of which the person is trustee is presently entitled to a share of the net income of the closely held trust indirectly as a beneficiary of that trust. [Item 2 of Schedule 1; new subsection102UE(3)]

1.43 An ultimate beneficiary in respect of no present entitlement cases is illustrated below.

No Present entitlement case

Full absorption case

1.44 The third and final category of ultimate beneficiary is referred to in the provisions as the full absorption case. In these cases a person will be an ultimate beneficiary in respect of a part of a share of the net income of the closely held trust if:

·
the person is the trustee of another closely held trust; and
·
the person is the trustee beneficiary or is presently entitled to a part of a share of the net income of the closely held trust through one or more interposed partnerships or trusts (other than any that are ultimate beneficiaries in their own right); and
·
the part of a share of net income of the closely held trust is absorbed by allowable deductions in working out the net income of the trust in which the person is trustee.

[Item 2 of Schedule 1; new subsection102UE(4)]

1.45 For example, if a closely held trust makes a distribution to another trust, and that other trust derives $200 in assessable income and $200 in allowable deductions for a year of income, the trustee of that other trust will be an ultimate beneficiary for the purposes of these measures.

1.46 An ultimate beneficiary in respect of a full absorption case is illustrated below.

Full absorption case

How does a trustee correctly disclose the identity of the ultimate beneficiary?

1.47 New section 102UG defines a statementby a trustee of a closely held trust, referred to in the amendments as a correct UB statement, that correctly discloses the identity of ultimate beneficiaries of the trust. A correctUB statement is made where the trustee of the closely held trust correctly states in writing certain information including:

·
the amount of the net income of the closely held trust or of the tax-preferred amount of the closely held trust that is attributable to each ultimate beneficiary;
·
the category of ultimate beneficiary (ie. present entitlement, no present entitlement, and full absorption categories);
·
the ultimate beneficiarys name and tax file number, in the case of ultimate beneficiaries who are resident at the end of the year of income; and
·
the ultimate beneficiarys name and address, in the case of ultimate beneficiaries who are not resident at the end of the year of income.

[Item 2 of Schedule 1; new section 102UG]

1.48 Ordinarily, section 8WA of the TAA would make it an offence for a person to require or request another person to quote the other persons tax file number unless provision is made by a taxation law for the other person to quote the number. New section 102UU provides that a request by the trustee of the closely held trust for the tax file number of an ultimate beneficiary is not an offence, because it provides for the ultimate beneficiary to quote the number. [Item 2 of Schedule 1; new section102UU]

1.49 Similarly, new section 102UV ensures that no offence is committed under section 8WB of the TAA where the trustee of a closely held trust:

·
records and maintains the tax file number quoted by the ultimate beneficiary;
·
uses the tax file number in a manner connecting it with the identity of the ultimate beneficiary; and
·
divulges or communicates the tax file number to a third person;
in connection with making a correct UB statement. [Item 2 of Schedule1; new section102UV]

When does a correct UB statement need to be made?

1.50 The amendments provide that the trustee of a closely held trust is required to make and give to the Commissioner a correct UB statement within a specified period, the UB statement period. The UB 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 furnish to the Commissioner the trusts return of income for the income year (generally speaking, 31October after the end of the year of income). [Item 2 of Schedule 1; new section 102UH]

What are the consequences if a correct UB statement about a share of net income is not made?

1.51 Where the trustee of the closely held trust does not make and give to the Commissioner a correctUB statement during the UB statement period, a liability to tax is imposed by A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999 on the relevant share of the net income. [Item 2 of Schedule 1; new subsection102UK(2)]

1.52 The provisions within A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999 set this rate of tax at 48.5%. [Items 3 and 4]

Whom does the liability to Ultimate Beneficiary Non-disclosure Tax fall upon?

1.53 The trustee is assessed and liable to pay the tax. 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. [Item 2 of Schedule 1; new subsections 102UK(2) and (3)]

Exclusion of directors from liability to pay

1.54 New section 102UL applies to excuse a director of a company from the liability to pay Ultimate Beneficiary Non-disclosure Tax in circumstances where it would be unreasonable that the director be liable for the tax. The provision applies to a director who would otherwise be one of those persons who would be jointly and severally liable to pay the family trust distribution tax.

1.55 A director will be not be jointly and severally liable to pay the tax if:

·
because of illness or for some other good reason, the director did not take part in any decision not to make a correct UB statement; [Item 2 of Schedule1; new subsection102UL(2)]
·
the director did not take part in any decision not to make a correct UB statement and the director was not aware of the proposal to make such a decision; [Item 2 of Schedule1; new subparagraph 102UL(3)(a)(i)]
·
the director did not take part in any decision not to make a correct UB statement and the director was aware and took reasonable steps to prevent the making of the decision; [Item 2 of Schedule1; new subparagraph 102UL(3)(b)(ii)]
·
the director took part in any decision not to make a correct UB statement and voted against, or otherwise disagreed with the decision, and took reasonable steps to ensure that a correct UB statement would be made; or [Item2 of Schedule1; new subsection 102UL(4)]
·
no decision was made not to make a correct UB statement and:

-
the director took reasonable steps to ensure that a correct UB statement would be made; or
-
the director, because of illness or for some other good reason, was not involved in the management of the company during the UB statement period in relation to the year of income.
[Item 2 of Schedule 1; new subsection 102UL(5)]

What happens if a correct UB statement about net income can't be made because there are no ultimate beneficiaries?

1.56 If a share of the net income of a closely held trust is included in the assessable income of a trustee beneficiary under section 97 of the Act and there is no ultimate beneficiary in respect of that share, a liability to tax is imposed by A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999 on the relevant share of the net income. Where the Commissioner is unaware whether there are ultimate beneficiaries or not, the Commissioner may have to assess to tax on both bases; tax law supports the Commissioners capacity to do this. However, in such cases, the correct amount of tax can be collected only once. [Item2 of Schedule1; new subsection102UM(2)]

1.57 The provisions contained in the A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999 set this rate of tax at 48.5%. [Items 3 and 4]

1.58 The trustee is assessed and liable to pay the tax. 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. [Item 2 of Schedule 1; new subsections102UM(2) and (3)]

1.59 Unlike the tax imposed by the failure to disclose the identity of ultimate beneficiaries to net income, there are no exclusions under new section 102UM for which directors can rely on. This is because there is no relevant action or decision by the trustee from which the individual director can be disassociated.

1.60 If the tax liabilities arising under new subsections 102UK(2) and 102UM(2) are not separate subjects of taxation to the income tax generally and to each other (for the purposes of section 55 of the Constitution), they do not need to be separately imposed. The scope of the income tax as a single subject of taxation is wide and not technical, but for the avoidance of doubt in any future judicial proceedings they have been separately imposed: A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 1) 1999 in the case of failure to disclose the identity of ultimate beneficiaries to net income of the closely held trust; and A New Tax System (Ultimate Beneficiary Non-disclosure Tax) Bill (No. 2) 1999 in the case where there are no ultimate beneficiaries to net income of the closely held trust.

Payment of Ultimate Beneficiary Non-disclosure Tax

1.61 Ultimate Beneficiary Non-disclosure Tax is due and payable at the end of twenty-one days after the end of the UB statement period. If there are special circumstances why a taxpayer cannot pay the tax within the specified time the Commissioner may allow such an extension of time for payment as would be reasonable. [Item 2 of Schedule1; new subsection102UO(1)]

1.62 Ultimate Beneficiary Non-disclosure Tax is a debt due to the Commonwealth and payable to the Commissioner when it becomes due and payable. [Item 2 of Schedule1; new subsection102UO(2)]

Additional tax for late payment

1.63 The Bill imposes additional tax which is a penalty on overdue amounts of Ultimate Beneficiary Non-disclosure Tax. If any amount of tax is outstanding at the end of 60 days after the due date for payment, additional tax will be imposed at the rate of 16% per annum on the unpaid amount. The interest will be calculated as from the end of the 60 day period. [Item 2 of Schedule1; new subsection102UP(1)]

1.64 New subsection 102UP(2) provides that the Commissioner has the discretion to remit the additional tax, in whole or in part, under certain circumstances. These circumstances are as follows:

·
where the circumstances that contributed to the delay in payment were not due to an act or omission of the person or persons liable to pay the tax, and the persons have taken reasonable steps to mitigate the circumstances; [Item 2 of Schedule1; new subsection102UP(3)]
·
those circumstances were due to an act or omission by the person or persons liable to pay, but the person or persons have taken reasonable steps to mitigate the effect of those circumstances, and it would be fair and reasonable to remit; or [Item 2 of Schedule1; new subsection102UP(4)]
·
where there are special circumstances that make it fair and reasonable to remit. [Item 2 of Schedule1; new subsection 102UP(5)]

1.65 The effect of new subsection 102UP(6) is to ensure that additional tax continues to accrue in respect of the unpaid Ultimate Beneficiary Non-disclosure Tax notwithstanding that judgment for payment of the unpaid tax has been given by, or entered in, a court. Where, in such a case, the judgment debt itself carries interest, the additional tax otherwise payable is to be reduced by the amount of interest that relates to the unpaid family trust distribution tax.

Recovery of tax

1.66 The Commissioner can sue for any unpaid Ultimate Beneficiary Non-disclosure Tax or unpaid additional tax payable under new section102UQ in a court of competent jurisdiction. [Item 2 of Schedule1; new section102UQ]

Notice of liability

1.67 The Commissioner is authorised to serve a notice on a person or persons, by post or otherwise, that specifies the amount of Ultimate Beneficiary Non-disclosure Tax they are liable to pay and also the day from which the tax is due and payable. [Item 2 of Schedule1; new section102UR]

1.68 A persons liability to the Ultimate Beneficiary Non-disclosure Tax and the due date for payment are not dependent on, or affected by, the serving of a notice in respect of an amount. This will mean, for example, that a liability for the tax will exist regardless of whether the trustee has received the notice. [Item 2 of Schedule1; new section102UR]

1.69 The Commissioner is authorised to amend a notice at any time. An amended notice is a notice for the purposes of this section. If more than one notice has been issued then the later notice prevails over an earlier notice so far as there is an inconsistency. [Item 2 of Schedule1; new subsections102UR(3) and (4)]

Review of notice

1.70 The notice system provides a mechanism through which a taxpayer may object or appeal against a decision of the Commissioner that Ultimate Beneficiary Non-disclosure Tax is payable. For example, a trustee could seek the Commissioners opinion on whether Ultimate Beneficiary Non-disclosure Tax is payable by asking the Commissioner to issue a notice. If the trustee does not agree with the Commissioners opinion, they could object against the notice in the normal manner for objecting against taxation decisions. [Item 2 of Schedule1; newsubsection102UR(5)]

Evidentiary effect of notice

1.71 A notice served under new section 102UR or another document that is signed by the Commissioner and appears to be a copy of a notice of this kind is conclusive evidence that the notice was duly served and that the amount of Ultimate Beneficiary Non-disclosure Tax as shown in the notice became due and payable by the person or persons on whom it was served on the date specified in the notice. [Item 2 of Schedule1; newsection102US]

1.72 This section does not apply in proceedings under Part IVC of the TAA, that is on an objection to the notice or a review or appeal relating to the objection decision. [Item 2 of Schedule1; new subsection102US(2)]

Income tax exemption for taxed distributions

1.73 Where a trustee of a closely held trust is subject to Ultimate Beneficiary Non-disclosure Tax on a share of the net income of the closely held trust, the trustee beneficiary and any other person presently entitled then or later to a part of the share of the net income is not required to include it in their assessable income. [Item 2 of Schedule 1; newparagraphs 102UK(2)(b) and 102UM(2)(b)]

1.74 A consequence of this approach is that any losses or outgoings incurred in deriving the distribution will be excluded from income and will not be deductible to the person to whom the distribution is made.

1.75 If the distribution not included in assessable income is a dividend from a company, the grossed-up amount of the dividend is not included in the assessable income of the person entitled to the distribution and any franking credits associated with the dividend do not, therefore, flow to the person.

1.76 However, the amount of Ultimate Beneficiary Non-disclosure Tax payable is reduced by the amount of any offset to which the trustee of the closely held trust would be entitled in an assessment under section99A of the Act if it were assumed that the trustee were assessed and liable to pay tax under that section on the whole, or the part, of the share of net income. This is because there would otherwise be no credit, rebate or offset; the existing provisions allow such credit, rebate or offset only in respect of net income included under those provisions and the new provisions expressly prevent any such inclusions. [Item 2 of Schedule 1; new subsection 102UN(2)]

Ultimate beneficiaries to Tax-preferred amounts

1.77 New section 102UT also imposes a requirement on the trustee of a closely held trust to disclose the identity of ultimate beneficiaries entitled to a share of a tax-preferred amount.

1.78 New subsection 102UT(1) 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. The trustee of the closely held trust must provide to the Commissioner a correct UB statement (or a true statement that there are no ultimate beneficiaries) covering the tax-preferred amount during the UB statement period. [Item 2 of Schedule 1; new subsection 102UT(1)]

What is a tax-preferred amount?

1.79 The term tax-preferred amount is any income of the trust that is not included in assessable income to calculate the trusts net income, and any capital of the trust. [Item 2 of Schedule 1; new section 102UI]

What are the consequences if a correct UB statement is not made?

1.80 If a trustee of a closely held trust fails to comply with newsection 102UT the trustee may be found guilty of committing an offence under section 8C of the TAA. Section 8E of the TAA provides that an offence against section 8C is punishable on conviction by penalties rising to a fine of $5,000 or imprisonment for a period not exceeding twelve months, or both, in the case of third and subsequent offences. [Item 2 of Schedule 1; new subsection 102UT(2)]

1.81 The trustee of a closely held trust will not be taken to have committed an offence against section 8C of the TAA 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 required information, he or she included it in a statement that he or she sent to the Commissioner during the UB statement period.

[Item 2 of Schedule 1; new subsection 102UT(3)]

1.82 The burden of proof that the trustee bears in this regard is the burden of adducing or pointing to evidence that suggests a reasonable possibility that the matter in question existed. These onus provisions are necessary because there may be no direct relationship between the trustee and the ultimate beneficiary and so an obligation on the trustee to take reasonable steps to obtain any unknown information is necessary to give reasonable operation to the new provisions. [Item 2 of Schedule 1; newsubsection102UT(4)]

1.83 Specific amendments have been made to change the offences under the TAA for the non-disclosure of ultimate beneficiaries to tax-preferred amounts, so as to require trustees of affected closely held trusts to take reasonable steps to obtain information they dont have. Other offences under the TAA apply unamended. For example, if a trustee of a closely held trust makes a false or misleading UB statement in respect of ultimate beneficiaries of net income of the closely held trust, or if the trustee makes a false statement that there are no ultimate beneficiaries, the other offence provisions of the TAA would have their general application.

Consequential amendments

1.84 A number of consequential amendments are made to other provisions in the tax laws to deal with the effect of Ultimate Beneficiary Non-disclosure Tax.

Amendment of assessments

1.85 Section 170 of the Act provides rules dealing with how assessments can be amended by the Commissioner. An assessment can normally only be amended within 4 years. However, in a range of cases under the new provisions this would be inappropriate. Accordingly, an amendment has been made to subsection 170(10) of the Act so that section 170 does not prevent the amendment of an assessment where a trustee incurs a liability to Ultimate Beneficiary Non-disclosure Tax more than four years after assessment. [Item11 of Schedule 2; amends subsection 170(10)]

Prevention of double taxation

1.86 Subsection 128B(3) of the Act has been amended so that a liability to non-resident withholding tax does not arise on an amount of income or capital that is exempt from income tax by virtue of newparagraphs 102UK(2)(b) and 102UM(2)(b) of the A New Tax System (Closely Held Trusts) Bill 1999 . [Item 10 of Schedule2; amends subsection 128B(3)]

Prevention of avoidance of superannuation contributions tax

1.87 The exemption from income tax for amounts that have been subject to Ultimate Beneficiary Non-disclosure Tax is intended to ensure that there is no double taxation of income. It is not intended to be a means for avoidance of the superannuation contributions tax. In the absence of any special provision, tax planning opportunities could arise under which distributions are deliberately made subject to Ultimate Beneficiary Non-disclosure Tax in order to reduce the taxable income of an individual to a level where the superannuation contributions tax could be avoided.

1.88 Accordingly, an amendment has been made to the definition of adjusted taxable income in section 43 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 so that this amount will also include amounts that would have been in the taxable income of a person if it were not for the operation of new paragraphs 102UK(2)(b) and 102UM(2)(b) of the A New Tax System (Closely Held Trusts) Bill 1999. [Part 3 of Schedule 2; amends section 43 of the Superannuation Contributions Tax (Assessment and Collection) Act1997]

Other consequential amendments

1.89 Other consequential amendments have also been made to the Act and the ITAA 1997 to ensure that certain provisions in these Acts apply appropriately. [Parts 1 and 2 of Schedule 2; amend paragraph 26(b) and subsections 47A(18), 86(2), 102AAE(2), 102AAM(4), and 102AAU(1) of the Act and paragraph 42-295(3)(b) of the ITAA 1997]

Transitional measure extension of statement deadline

1.90 As a transitional measure if, in relation to the first year of income to which the amendments apply, the end of the UB statement period occurs before the commencement of this Schedule, the end of the UB statement period is taken instead to occur after ninety days have elapsed from commencement of this Schedule. This concessional amendment will ensure that trustees of closely held trusts have additional time and notice to lodge correct UB statements. [Item 4 of Schedule 1]

Regulation Impact Statement

Specification of policy objective

1.91 The policy objective of this measure is to ensure that income tax is paid on all net income distribute through chains of trusts. This is done by establishing a tax liability in cases where closely held trusts distribute to other trusts and the ultimate beneficiary of the distribution is not accurately and sufficiently identified. Where entitlements that are not to net income are distributed through such chains of trusts, the policy objective is to facilitate the correct application of income tax to ultimate beneficiaries. This is done by establishing an obligation on trustees to identify the ultimate beneficiary of such entitlements accurately and sufficiently, or at least to take reasonable steps to do so.

Identification of implementation options

Background

1.92 While there are many legitimate reasons for trust structures containing multiple trusts some taxpayers are using multiple trust arrangements to avoid or indefinitely defer tax. Complex chains of trusts also make it difficult for the Australian Taxation Office (ATO) to piece together the trail of distributions from trust to trust so that the ATO is unable to identify an ultimate beneficiary to establish tax liability. The ATO has also identified situations where one trust, the original trust, distributes to another trust which in turn distributes to the original trust so that it is impossible to identify the identity of the ultimate beneficiary. Where net income is involved, this avoids or defers tax on the net income. Where other entitlements are involved, this can allow some taxpayers to claim that increases in their assets are attributable to untraceable entitlements of this kind, allowing them to avoid or defer tax on income wrongly described as such an entitlement.

Implementation option

1.93 To address situations where a distribution is made from a trust and is passed through a series of trusts and there is no apparent ultimate beneficiary that can be assessed on the distribution, it was announced in Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System that trustees of closely held trusts (including all discretionary trusts) would be required to disclose, in the trusts tax return, the identity of the individual or company beneficiary who would ultimately be entitled to any distributions (either taxable or tax-preferred) made by the trust after 13August1998.

1.94 Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within a specified period the amendments provide for taxation at a penalty rate, equivalent to the top marginal rate plus Medicare levy.

Assessment of impacts (costs and benefits)

Impact group identification

1.95 It is estimated that there are approximately 60,000 trusts that make a distribution to another trust. To the extent that any of these trusts are closely held, the trustees of these trusts will now be required to identify the ultimate beneficiary. The measure will impact on these trusts, including high wealth individuals, whose trust structures contain multiple trusts.

1.96 The measures do not apply to certain excluded trusts, even if they are closely held, including:

·
complying superannuation funds, complying approved deposit funds, or pooled superannuation trusts;
·
deceased estates within the first five years of administration;
·
certain fixed trusts; and
·
unit trusts whose units are listed on the Australian Stock Exchange.

1.97 Subjecting these entities to the measure would produce inappropriate outcomes.

1.98 Certain entities that, strictly speaking, might not be ultimate beneficiaries are treated as such for the purposes of the measure. These entities are complying superannuation funds, complying approved deposit funds, and complying pooled superannuation trusts, and charitable organisations (which have purposes, not beneficiaries). To do otherwise would result in undue compliance costs in attempting to look beyond these other entities.

1.99 Similarly, distributions to certain other trusts do not require the immediate further disclosure of an ultimate beneficiary. These trusts are trusts that are not closely held, deceased estates within initial time for administration (first 5 years), and closely held trusts to the extent that allowable deductions absorb the distribution of net income.

Analysis of the costs and benefits

Compliance Costs

1.100 The gross compliance cost for taxpayers is estimated at $0.6million. The net compliance cost, after the cost is claimed as a tax deduction, is estimated at $0.4 million. These compliance costs relate to the costs of preparing additional schedules in trust tax returns disclosing the ultimate beneficiary of a trust to trust distribution.

Administrative Costs

1.101 The proposal will have an impact on the resources of the ATO. To implement the measure the ATO will need to amend return form stationery, modify internal systems and devote some resources to compliance improvement activities associated with the measure. The total cost to the ATO cannot be accurately estimated, however, they are expected to approximate $0.5 million. These costs will be absorbed in the general running costs of the ATO.

Government Revenue

1.102 This measure was estimated to raise revenue of $30 million in each of 1999-2000 and 2000-2001. After these periods the effect of the measure is likely to be absorbed by the entities taxation proposal announced in Tax Reform: not a new tax, a new tax system: The Howard Governments Plan for a New Tax System, if it is implemented as announced from 2000-2001.

Economic Costs

1.103 The proposal will result in more detailed reporting of flows of income from trusts. As such, it will result in some increased integrity of the tax system, with associated benefits. Other than this, the impact on the level and nature of economic activity should be limited.

Consultation

1.104 As this was an anti-avoidance measure it was not appropriate to seek wider consultation before decisions were taken.

Conclusion

1.105 There is only one option for achieving the governments policy objective: that is, to require trustees to identify the ultimate beneficiaries of distributions from closely held trusts to intervening trusts. Where the trustee of the closely held trust fails to correctly identify the ultimate beneficiaries within a specified period the amendments provide for taxation at a penalty rate, in the case of net income. In the case of other entitlements, the trustee is required to provide the information or at least take reasonable steps to obtain it.

1.106 The identification of the ultimate beneficiary of distributions from a trust will improve compliance and therefore integrity in the tax system.

1.107 There will be some increase in compliance costs for trustees of closely held trusts. However, the benefits from the measure, including improvements to the integrity of the tax system, substantially outweigh these costs.

1.108 This measure is an anti-avoidance measure which is intended to apply until superseded by the new entity tax system outlined in A New Tax System. The ATO and Treasury will closely monitor developments in this area.


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