The Australian government has released a discussion paper on its 2009-10 budget policy to extend the tax file number (TFN) withholding arrangements to closely held trusts, including family trusts.
In the late 1990s, the then government became aware that complex chains of trusts were being used to avoid or indefinitely defer tax. In order to address this issue, it introduced legislation to require a trustee of a closely held trust to advise the Commissioner of Taxation of certain details about a trust’s ultimate beneficiaries and tax-preferred distributions to beneficiaries.
Failure to do this, or there being no ultimate beneficiary, rendered the trustee liable to pay an ‘ultimate beneficiary non-disclosure tax’ at the top marginal tax rate plus Medicare levy.
The purpose of that measure was to allow the Commissioner to check that the assessable income of ultimate beneficiaries correctly included their share of trust income, and that the net assets of ultimate beneficiaries reflected their receipt of tax-preferred amounts. However, this measure proved to be very difficult to comply with for some trustees of closely held trusts.
Consequently, from the 2008-09 fiscal year, new rules apply requiring that the trustee of a closely held trust reports information to the Commissioner in respect of each beneficiary that is itself a trustee entitled to a share of the trust’s net income, or to receive tax-preferred amounts.
In addition, as part of the 2009-10 budget, the government announced that it would extend the current TFN withholding arrangements to closely held trusts, including family trusts, to ensure that the assessable distributions to beneficiaries of those trusts align with the amounts included by those beneficiaries in their tax returns.
This approach will assist the Australian Taxation Office with its compliance activities to help ensure that beneficiaries of these trusts pay their fair share of tax.
In summary, the TFN withholding arrangements will apply to the trustees of closely held trusts, including family trusts, where the trustee makes an assessable distribution to a beneficiary that has not provided their TFN to the trustee.
"This measure is part of a government's initiative to improve fairness and integrity in the tax system and will help ensure everyone is paying their fair share of tax," Assistant Treasurer, Nick Sherry, explained, continuing:
"The measure will also help to improve the effectiveness of the ATO's income matching system as a means of ensuring that closely held trusts and their beneficiaries comply with the taxation law."
"The measure applies from July 1, 2010 and it is estimated to raise AUD150m (USD140m) over the forward estimates," he added.
Submissions to the Treasury on the new rules are due by November 20, 2009.
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