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Closely-Held Trusts Brought Into Australian Tax Administration Net

Wednesday, February 10, 2010

Australia’s Assistant Treasurer, Nick Sherry, has released for public consultation the government's draft legislation extending the Australian Taxation Office (ATO) tax file number (TFN) withholding arrangements to closely held trusts, including family trusts.

"This important measure will improve the fairness and integrity of the tax law by shedding light on income derived from certain types of trusts," Nick Sherry said. "Income streams from closely held trusts, by their very nature, can be problematic for the ATO to assess.”

In the late 1990’s, it became apparent that complex chains of trusts were being used in Australia to avoid or indefinitely defer tax. In order to address this issue, legislation was passed to require a trustee of a closely held trust to advise the ATO of certain details about a trust’s ultimate beneficiaries and tax-preferred distributions to beneficiaries.

It was found, however, that that measure proved to be very difficult to comply with for some trustees of closely held trusts. Consequently, from 2008-09, new rules applied requiring that the trustee of a closely held trust report information to the ATO 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.

These new reporting requirements do not apply in respect of individuals or companies, or to family trusts that have made a family trust election under the trust loss provisions. Consequently, as part of the 2009-10 budget, the government announced that, with effect from July 1, 2010, it would extend the current TFN withholding arrangements to closely held trusts, including family trusts.

The effect of this change will be to allow the ATO to better align the information obtained from trustees with the amounts reported by the trust’s beneficiaries. Additionally, this measure will allow the ATO to check whether the assessable income of beneficiaries of these trusts correctly includes their share of the net income of the trust.

"This budget measure,” the Assistant Treasurer continued, “targets high-wealth individuals utilising these types of trusts and is expected to result in a AUD150m (USD130m) boost to revenue over four years."

He said that the draft legislation follows an extensive community and sector consultation held over recent months and incorporates feedback arising from a range of submissions. Sherry emphasized that, “as a result of these consultations, trustee beneficiaries where the parent trust is subject to the trustee beneficiary reporting rules will be excluded from the measure."

An additional change prompted by the consultation process is also that “the quarterly requirements for trustees to report and remit amounts withheld will be removed and will be replaced with a simpler annual reporting and remittance framework – an important red-tape reduction."

"These changes will make it easier for trustees to meet their tax obligations while ensuring the measure retains its integrity and targets those who under-report or fail to report their distributions," he added.

The government has called for submissions on the draft legislation by February 19, 2010.