If a trustee resolved at 30 June 2012 to distribute income to a beneficiary for the first time the TFN Reporting requirements will need to be satisfied by 31 July 2012. This is a two-minute summary of the key things you need to know to comply.
In 2010, provisions were introduced placing a tax withholding obligation on trustees of 'closely held trusts' distributing trust income to a beneficiary who has not provided their TFN to the trustee (TFN Withholding). The TFN Withholding is at the top marginal tax rate and gets attributed to the beneficiary, so some of it might be able to be clawed back when the beneficiary lodges their income tax return and knows what their actual tax rate is.
Importantly, the trustee does not need to make a TFN Withholding if:
- The beneficiary notified the trustee of their TFN before the trustee resolved to make a distribution of trust income to the beneficiary (note – 'resolved' to do it not 'paid' the distribution over); and
- The trustee has lodged a TFN Report with the Australian Taxation Office reporting the beneficiary's TFN.
The TFN report must be lodged by the last day of the month following the quarter in which a TFN has been received by the trustee. So, if for example the beneficiary provided their TFN in the quarter ended 30 June 2012, the due date for lodgement of the TFN Report is 31 July 2012. The beneficiaries TFN is only required to be reported in a TFN Report once.
The ATO has released a prescribed form for the TFN Report, which can be accessed on the ATO website.
What is a 'closely held trust'?
The term 'closely held trust' for the purposes of these provisions broadly covers discretionary trusts and unit trusts with concentrated ownership. Some trusts are excluded from the provisions, most relevantly:
- complying superannuation funds;
- deceased estates (but only until the end of the year of income in which the fifth anniversary of the individual's death occurred).
Importantly, a trust is not excluded from the provisions simply because it has made a family trust election.
What are the potential pitfalls?
In our view, the key thing to watch out for is distributions that were made to companies or trusts established close to year end of the financial year. If they did not have a TFN at the time the distribution was made, the trustee is required to report the withholding in its September BAS.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.