The government has introduced legislation which applies from 1 July 2010 which requires “closely held trusts” to withhold tax from distributions to beneficiaries where the beneficiary has not provided its tax file number (TFN) to the trust and the trust has not reported the TFN to the Australian Taxation Office (ATO) within a specified time frame.
For the purpose of this legislation a closely held trust includes a family trust (a discretionary trust which has made a Family Trust Election).
As a transitional measure, closely held trusts were able to report the tax file numbers of beneficiaries to the ATO as part of the 30 June 2010 tax return. However, generally only beneficiaries in receipt of a distribution had such information disclosed. Consequently, it would be prudent for other beneficiaries (and especially those who are to be in receipt of a distribution for the 30 June 2011 tax year) to provide their tax file numbers to the trustee of the closely held trust so that the trustee can report the TFNs to the ATO (via a TFN Report). The due date for lodgement of the report depends on the particular circumstances of the trust.
If the 30 June 2011 trust tax return is lodged electronically by a tax agent the TFN report must be lodged electronically with the ATO by the due date of 30 June 2011 tax return (generally 15 May 2012). Alternatively, if the trust return is either not lodged by a tax agent or not lodged electronically the TFN Report must be lodged either electronically or by paper by 31 August 2011.
Summary of the TFN Rules
The TFN rules only apply to closely held trusts. This includes:
- Family trusts;
- Discretionary trusts;
- A trust where up to 20 individuals have between them fixed entitlements to 75% or greater of the income or capital of the trust.
The rules apply to all beneficiaries other than:
- Non-resident beneficiaries;
- Exempt entities (eg. charities);
- Beneficiaries under a legal disability (eg. minors)
Under the rules, where a beneficiary quotes its TFN to the trustee, the trustee is required to lodge a TFN report with the ATO by the last day in the month following the quarter in which the TFN was quoted.
The trustee is also required to lodge an Annual Trustee Payment Report containing details of all payments made to beneficiaries in the income year. This report is lodged with the tax return of the trust for the year in question.
Where a beneficiary does not quote a TFN before a distribution or payment is made to it the trustee must withhold tax at the rate of 46.5% and remit it to the ATO by 28 October following the year of income in which the distribution or payment is made (via an activity statement). It will be necessary for the trust to register for PAYG withholding for closely held trusts.
The trustee is also required to lodge an annual TFN Withholding Report containing details of all payments made where withholding is required and the amount withheld. This report is required to be lodged with the ATO by the 30 September following the tax year of the trust.
Where tax is withheld the trustee is also required to provide a payment summary to the beneficiary. The beneficiary can then claim a credit for the tax withheld in the beneficiary’s own tax return.
In conclusion, while these rules have the potential to be a significant issue for trustees of closely held trusts if care is taken to ensure that all beneficiaries or potential beneficiaries (and we suggest that this includes minors where they have a TFN) of the closely held trusts provide the TFN to the trustee and that these are reported to the ATO by 31 August 2011 or 15 May 2012, depending on the trust’s circumstances, there should be no TFN withholding requirements to deal with.
Thereafter, any new or potentially new beneficiaries should quote their TFNs to the trustee of a trust before the end of a particular year of income and the trust lodge a TFN Report with the ATO by the end of the month following the quarter in which the TFN is quoted. Practically, if the TFN is quoted in the last quarter of the year the report would need to be lodged by 31 July of that year. We suggest this be done irrespective of whether or not the beneficiary receives a distribution from the trust. Provided this is done as a matter of course, the trustee should be able to avoid any withholding of tax from distributions or any reporting thereof.
Should you wish to discuss the impact of this legislation on you please do not hesitate to contact us.