As announced in A New Tax System, trustees of closely held trusts (including all discretionary trusts) will be required to disclose, in the trusts tax return, the identity of the individual or company beneficiary who will ultimately be entitled to any distributions (either taxable or tax-preferred) made by the trust after today. This applies where the immediate distribution is made by a trust to another trust.
This will apply regardless of the number of trusts, including non-resident trusts, the distribution may pass through before reaching the ultimate beneficiary.
Where the trustee does not identify the ultimate beneficiary, including the tax file number (TFN) in the case of residents, the trustee must withhold tax from the distribution, and the net distribution becomes correspondingly exempt.
The disclosure and withholding requirements are an anti-avoidance measure which is intended to apply until superseded by the new entity taxation system outlined in A New Tax System.
The Australian Taxation Office (ATO) has identified cases in which distributions from a trusts net income have been passed through a series of trusts and there have been no apparent ultimate individual or company beneficiaries who have returned the amounts as income. In such cases there is usually a valid distribution to the next trust in the chain.
Details of the measure
A widely held trust is any trust that is listed for quotation in the official list of an approved Australian stock exchange or a trust where more than 20 individuals hold 75 per cent or more of the interests in income or capital of the trust. A closely held trust is any trust that is not a widely held trust. Discretionary trusts will also be treated as closely held trusts.
Where the trustee fails, or is unable, to disclose the required identity of the individual or company, and the distribution is made out of the trusts net income, the trustee will generally be taxed at the highest marginal rate plus the Medicare levy in respect of any distribution out of net income for tax purposes. This will build upon the existing section 99A of the Income Tax Assessment Act 1936 (the 1936 Act) dealing with the net income of trusts to which no beneficiary is presently entitled.
Consistent with the design of Division 6 of the 1936 Act, trust distributions subject to tax under this measure will not be taxed again in the hands of beneficiaries.
In situations in which the trustee has failed to identify and disclose correctly the ultimate beneficiary, or fails to withhold a required amount of tax from a distribution, the trustee will be liable to pay the amount that should have been withheld. Special rules will apply to prevent double taxation where the ultimate beneficiary is later identified.