Trust streaming of capital gains and franked distributions
Tax Laws Amendment (2011 Measures No. 5) Bill 2011 (the Bill) was introduced in the House of Representatives on Thursday 2 June 2011. The Bill contains the trust streaming measures and anti-avoidance rules that will apply (if it receives Royal Assent) to income years commencing on and after 1 July 2010.
The Australian Taxation Office (ATO) released the details of the administrative treatment concerning the proposed trust streaming measures on 3 June 2011.
A. To stream franked dividends effectively for the 2011 income year, the trustee will need to make a resolution by 30 June 2011.
B. To stream a capital gain effectively for the 2011 income year, the trustee will need to make a resolution by 31 August 2011.
C. If the trust deed stipulates an earlier date, then that earlier date applies.
D. The terms of the trust deed must allow streaming of different types of income – if not then no streaming.
E. TFN withholding now applies to closely held trusts, including family discretionary trusts. No recorded TFN – 46.5% of the trust distribution must be paid to the Tax Office.
What this means for you
- A trust with positive net income may stream capital gains and franked distributions (including franking credits) to beneficiaries in accordance with the Trust Deed. If distributions are not streamed they will flow proportionately to the beneficiaries in accordance with the Trust income distributions.
- A trustee has up to 2 months from 30 June to stream capital gains to a beneficiary. Franked distributions will need to be streamed by the end of the income year. Where the Trust Deed allows for less time, the Trust Deed takes precedence.
- Other forms of streaming (including foreign income, foreign tax credits and unfranked distributions) are still to be addressed. For the moment the Commissioner of Taxation is of the opinion that it is not possible to stream income that has not been legislated for.
- Two anti-avoidance provisions limiting the amount and timing of streaming capital gains and franked distributions to exempt entities have been implemented.
- Managed investment trusts (MITs), and certain trusts treated as MITs, have been carved out of the streaming legislation – the new MIT regime will apply from 1 July 2012.
- Where a trust does not have any trust income for which any beneficiary is presently entitled in an income year, the trust may still use the primary production averaging and farm management deposits provisions.
Trust Streaming Measures
The Bill allows trustees who have the power to stream capital gains and franked distributions (as per the relevant Trust Deed) to continue to stream these distributions subject to certain requirements. The provisions do not give a trustee the power to stream where the trust deed does not give this power to the trustee.
A trustee will need to record beneficiaries’ specific entitlement no later than two months after the end of the income year. For franked distributions, a beneficiary’s entitlement must be recorded by the end of the income year.
In accordance with the amendments, a beneficiary must be specifically entitled to a capital gain or franked distribution for the streaming to be effective. A beneficiary will be specifically entitled to a distribution where it has received or is reasonably expected to receive the distribution and the entitlement (and its character) is recorded in the trust accounts or records of the trust.
Practically a trustee will need to record the streamed distributions in any of the following ways:
- Trust Deed;
- Statement of resolution; and
Distribution statements (including schedules or notes attached to or intended to be read with the statements).
Allocating an amount by way of the trust’s tax records is not sufficient, something more is required. A record merely for tax purposes will not be sufficient.
A beneficiary will not be specifically entitled to unspecified amounts, for example; “the balance of trust income”, or “half of the trust income”. This type of streaming is not sufficient to create a specific entitlement. The character of the entitlement needs to be recorded for the distribution to be a specific entitlement (i.e. distribution of capital gain or franked distribution).
If the capital gain or franked distribution is not streamed, then the amounts will flow proportionately to the beneficiaries in accordance with distributions made or will be taxed to the trustee.
The following anti-avoidance rules have also been introduced as part of the streaming provisions:
- An exempt entity (except for an exempt Australian government agency) that has not been notified of their present entitlement to trust income within two months of the end of the income year will not be presently entitled to that amount.
- Where the exempt entity’s share of the trust income exceeds a prescribed benchmark amount, the exempt entity will not be treated as being presently entitled to the excess. This measure is designed to ensure exempt entities do not receive a disproportionate share of the trust’s taxable income relative to their entitlement.
ATO’s Administrative Treatment
As the Bill has not received Royal Assent, the ATO has indicated where a taxpayer lodges their return on time, in accordance with existing law (at the time of lodgement), if their tax liability is increased once the Bill receives Royal Assent:
- No shortfall penalties will apply; and
- Any interest attributable to a shortfall will be remitted to nil up to the date that the laws are enacted.
- Taxpayers that seek an appropriate amendment within a reasonable time should have their interest remitted.
The ATO has indicated it will pay interest in the case that an amendment results in a reduction in tax liabilities to the taxpayer.
Primary producers’ income averaging and farm management deposits
The ATO (prior to Bamford’s Case) allowed a beneficiary to be presently entitled to income where they had a vested and indefeasible interest in the trust income (despite there being no trust income). As a result of Bamford where a trust had no trust income to which any beneficiary was presently entitled, the primary producers’ income averaging and farm management deposits measures no longer applied.
The Bill amends the income averaging rules and farm management deposit provisions so that beneficiaries of a trust (carrying on a primary production business) can still be eligible for these provisions in an income year where the trust has no trust income to which a beneficiary is presently entitled.
The trustee of a closely held trust will have a number of requirements for income years commencing on or after 1 July 2010.
Where a beneficiary of the closely held trust has quoted their tax file number (TFN) to the trustee, the trustee must:
- Store and use beneficiaries TFNs according to privacy requirements;
- Lodge a TFN report with the ATO by the last day of the month following the end of the quarter in which the TFNs were quoted to it (the trustee is only required to lodge a report where new TFNs have been provided to it).
- Lodge an Annual trustee payment report with the ATO containing the details of total payments made to each beneficiary in the income year – this can be made when lodging the trust income tax return by completing the required information in the statement of distribution.
Where beneficiaries have not quoted their TFN to the trustee before the payment is made (or the ATO advises that they are considered not to have quoted their TFN), the trustee must:
- Withhold from any payments made at the top marginal tax rate (plus the Medicare levy);
- Register for PAYG withholding for closely held trusts;
- Lodge an Annual TFN withholding report with the ATO containing the details of amounts withheld from the payments;
- Lodge an annual activity statement with the ATO and pay any amounts withheld (amounts must be paid to the ATO by the 28th day of the month following the month in which the Annual TFN withholding report is due to be lodged); and
- Provide a payment summary to each beneficiary that had amounts withheld from payments (this does not need to be provided to the ATO).
If a trustee fails to withhold where required, they may receive a failure to withhold penalty.
Transitional TFN reporting measures apply for the income year ending 30 June 2011. For the income year ending 30 June 2011 only, a trustee may lodge the TFN Report when lodging the Trust tax return for the 2010 income year.
For any queries regarding this Taxation Alert, please contact Steve Fitzsimons here.