EXPLANATORY STATEMENT

Select Legislative Instrument 2010 No. 189

Issued by authority of the Assistant Treasurer

Taxation Administration Act 1953

Taxation Administration Amendment Regulations 2010 (No. 3)

 

Section 18 of the Taxation Administration Act 1953 (TAA 1953) provides, in part, that the Governor-General may make regulations prescribing all matters required or permitted to be prescribed, or which are necessary or convenient to be prescribed for giving effect to the TAA 1953.

Subsection 15-10(2) in Schedule 1 to the TAA 1953 provides that regulations may be made in order to work out the amount to be withheld under Subdivision 12-E in Schedule 1 to the TAA 1953.

Section 12-185 in Schedule 1 to the TAA 1953 provides that regulations may set an amount that will be the threshold for payments to be subject to withholding.

Subparagraph 12-175(1)(c)(iii) in Schedule 1 to the TAA 1953 provides that regulations may prescribe a trust for the purpose of that subparagraph (that is, trusts that are not required to withhold).

The Taxation Administration Regulations 1976 (the Principal Regulations) prescribe information necessary for the operation of the TAA 1953.

These Regulations amend the Principal Regulations to prescribe the information necessary for the operation of amendments made to Subdivision 12-E in Schedule 1 to the TAA 1953 by Schedule 2 to the Tax Laws Amendment (2010 Measures No. 2) Act 2010.

The amendments to the TAA 1953 extend tax file number (TFN) withholding to closely held trusts, including family trusts, to encourage beneficiaries to quote their TFN to the trustee of the trust. This TFN information will enable the Australian Taxation Office (ATO) to data match between the amounts received by beneficiaries from these trusts and the amounts reported on the beneficiaries’ income tax return.

The Regulations prescribe the:

·      TFN withholding rate to be used for working out how much of a distribution or present entitlement amount is to be withheld;

·      threshold for determining whether a distribution or present entitlement amount will be subject to a withholding obligation; and

·      classes of trusts to be excluded from the operation of TFN withholding.

Further details of the Regulations are set out in the Attachment.

The details of Schedule 2 to the Tax Laws Amendment (2010 Measures No. 2) Act 2010 and the Regulations were developed through a consultation process commencing in 2009. Public consultation took place on a discussion paper over a four-week period in late-2009. A draft Bill and explanatory memorandum was available for public consultation for two weeks in February 2010. Public consultation took place on draft Regulations during June 2010.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003.

The Regulations commenced at the same time as Part 1 of Schedule 2 to the Tax Laws Amendment (2010 Measures No. 2) Act 2010.

 

 

 

ATTACHMENT

Details of the Taxation Administration Amendment Regulations 2010 (No. 3)

Regulation 1 – Name of Regulations

Regulation 1 provides that the title of the Regulations is the Taxation Administration Amendment Regulations 2010 (No. 3).

Regulation 2 – Commencement

Regulation 2 provides for the Regulations to commence on the commencement of Part 1 of Schedule 2 of the Tax Laws Amendment (2010 Measures No. 2) Act 2010.

Regulation 3 – Amendment of Taxation Administration Regulations 1976

Regulation 3 provides that Schedule 1 to the Regulations amends the Taxation Administration Regulations 1976 (the Principal Regulations).

SCHEDULE 1 – AMENDMENTS

Item [1] Regulation 2, definition of top rate

Regulation 2 of the Principal Regulations provides for definitions under the Principal Regulations. Item [1] inserts a definition of top rate into regulation 2 to apply consistently across the Principal Regulations.

The ‘top rate’ continues to mean the sum of the highest rate specified in the table in Part 1 of Schedule 7 to the Income Tax Rates Act 1986 and the rate of levy specified in subsection 6(1) of the Medicare Levy Act 1986.

Items [2] to [7], amendments to references or use of top rate in existing regulations

Items [2] to [7] amend the existing regulations of the Principal Regulations that refer to, or provide a definition of ‘top rate’. These amendments omit individual definitions of ‘top rate’ and insert a note referring readers to the definition of top rate in regulation 2 of the Principal Regulations where appropriate.

Item [8] – Division 3A – Withholding arrangements – closely held trusts

Item [8] inserts the new Division 3A into the Principal Regulations, including new regulations 38A to 38D. Division 3A provides for regulations in respect of TFN withholding arrangements for closely held trusts.

Regulation 38A – Prescribed trusts

Regulation 38A prescribes, and in some cases defines, certain classes of trusts. These prescribed trusts are excluded from the operation of TFN withholding in respect of closely held trusts, including family trusts, by virtue of subparagraph 12‑175(1)(c)(iii) in Schedule 1 to the TAA 1953.

 

Discretionary mutual fund

Paragraph 38A(1)(a) prescribes a trust that is a discretionary mutual fund for the purpose of subparagraph 12-175(1)(c)(iii) in Schedule 1 to the TAA 1953. Subregulation 38A(2) defines a ‘discretionary mutual fund’ according to the meaning given by subsections 5(5) and 5(6) of the Financial Sector (Collection of Data) Act 2001 (Financial Sector Act), or as a discretionary mutual fund established under legislation or by the law society of a state or territory (state).

Discretionary mutual funds (DMFs) operate to provide an insurance-like product to a niche market as an alternative means of risk management. One of the distinguishing features of DMFs is that a fund has no contractual obligation to make payments in respect of eligible claims. Payment is at the discretion of the fund operator. Contributors to the fund only have a right to have their claim properly considered.

A DMF may be structured as an unincorporated association that holds its financial pool in a discretionary trust. Where a DMF is structured in this way, it will fall within the scope of the TFN withholding for closely held trusts provisions. Regulation 38A operates to exclude such structures.

DMFs formed under legislation or by a state law society are not within the meaning of a DMF under subsections 5(5) and 5(6) of the Financial Sector Act. However, where these DMFs are closely held trusts, they are prescribed trusts under regulation 38A. These state DMFs are established to provide legal practitioners with professional indemnity insurance or like cover.

To the extent that they are structured as closely held trusts, DMFs are within the scope of the TFN withholding provisions. However, there is no intention to capture these types of trusts given their unique nature and the potentially large number of beneficiaries.

Employee share trust

Paragraph 38A(1)(b) prescribes an ‘employee share trust’ for an employee share scheme for the purpose of subparagraph 12-175(1)(c)(iii) in Schedule 1 to the TAA 1953. Subregulation 38A(2) provides that employee share trust has the same meaning as it does under subsection 130-85(4) of the Income Tax Assessment Act 1997.

An employee share trust (EST) has the sole purpose of obtaining shares or rights in a company and ensuring that employee share scheme (ESS) interests in the company that are beneficial interests in those shares or rights, are provided under the employee share scheme to employees, or to associates of employees.

ESTs can be structured as either fixed or discretionary trusts. Where they hold the employee shares for the benefit of the employees, the income of these trusts consists of the dividends streaming from the company. As an EST may be structured as a discretionary trust, they have the potential to constitute a closely held trust for the purposes of the TFN withholding for closely held trusts provisions.

Under the ESS rules, the Commissioner already receives information on the share holdings of EST beneficiaries. The ESS rules and the employee share trust’s role in the employer/employee relationship jointly provide sufficient tax integrity in relation to ESTs.

Law practice trust

Paragraph 38A(1)(c) also prescribes a law practice trust for the purpose of subparagraph 12-175(1)(c)(iii). Subregulation 38A(2) defines ‘law practice trusts’ in respect of their purpose and the regulatory framework to which they are connected. Accordingly, to be a prescribed trust, a law practice trust needs to be a trust regulated by a state law for the regulation of legal practices or legal services.

Under the regulation, law practice trusts are prescribed trusts where they are created and maintained for the purpose of, or in connection with the provision of legal services by a legal practitioner; or the deposit of money of a kind described in column 1 of item 4 of the table in subsection 202D(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

This definition is intended to cover purely formal trusts formed between a legal practitioner (or a person authorised to hold money in the case of barristers) and a client or another person or party. The important context of these trusts is that the purpose for their creation must satisfy one of the limbs of the prescribed trust exemption and further, the creation and maintenance of the trust must be regulated by a state law for the regulation of the legal profession.

A deposit of money as described under column 1 of item 4 of the table in subsection 202D(1) of the ITAA 1936 is a deposit of money for the purpose of being invested or being lent under an agreement to be arranged by or on behalf of the solicitor.

Despite exclusion from TFN withholding for closely held trusts, those law practice trusts which are ‘investment bodies’ under the existing framework in Division 4 of Part VA of the ITAA 1936 are still subject to the TFN withholding arrangements in respect of investments under sections 12-140 and 12-145 in Schedule 1 to the TAA 1953.

Regulation 38B – Threshold amounts for exceptions

Regulation 38B provides the threshold amount for which withholding is required. The threshold is $120, or part thereof, depending on the period to which the payment relates. Where a payment is less than this threshold, a trustee is not required to withhold an amount from that distribution or share.

In accordance with the operation of subsections 12-175(3) and 12-180(3) in Schedule 1 to the TAA 1953, a ‘payment’ includes a distribution of income, or a share of the net income of the trust to which a beneficiary is presently entitled, regardless of whether the distribution or the share of the net income is actually paid. Where a payment is made for part of the financial year, the regulation applies a formula to determine a proportion of the threshold amount to be calculated. This would rarely arise except in the situation where a trust makes a determination part of the way through the year, this would occur for example, where a trust is wound up during the income year.

The threshold is largely consistent with the existing threshold for TFN withholding in respect of investments under Division 3 of the Principal Regulations. Whilst the existing framework for investments provides separate thresholds for persons aged under 16 years and all other persons, separate treatment is not necessary under this regulation. This is because the legislative amendments already exclude beneficiaries who are under a legal disability for the purpose of section 98 of the ITAA 1936, which includes persons under 18 years of age.

Regulation 38C – Amount to be withheld from distribution of income of closely held trust

Regulation 38C establishes the withholding rate for a distribution of an amount, some or all of which is ordinary or statutory income of a closely held trust. This withholding rate applies where a trustee is liable to withhold under subsection 12‑175(2) in Schedule 1 to the TAA 1953. The operation of subsection 12‑175(4) in Schedule 1 to the TAA 1953 means that the withholding rate applies to a distribution only to the extent that the income has not been subject to a previous withholding obligation.

The withholding rate for distributions of income of a closely held trust is the ‘top rate’, as defined in regulation 2 of the Principal Regulations (as amended). This concept of ‘top rate’ is commonly used in the existing TFN withholding framework. The withholding rate is designed to encourage beneficiaries to quote their TFNs by providing an incentive to avoid a withholding event.

Regulation 38D – Amount to be withheld if beneficiary is presently entitled to income of closely held trust

Regulation 38D establishes the withholding rate where a beneficiary is presently entitled to income of a closely held trust. This withholding rate applies where a trustee is liable to withhold under subsection 12-180(2) in Schedule 1 to the TAA 1953. The operation of subsection 12-180(4) in Schedule 1 to the TAA 1953 means that the withholding rate applies to a share of the net income of the trust only to the extent that the income has not been subject to a previous withholding obligation.

The withholding rate where a beneficiary is presently entitled to income of a closely held trust is also the ‘top rate’, as applies in regulation 38C.