The government has extended the Tax File Number (TFN) Withholding Rules to ‘closely held trusts’, which includes family trusts.
When do these changes apply?
The rules apply from the first income year starting on or after 1 July 2010. For most of us, that was the tax year ended on 30 June 2011.
Who is affected?
A ‘closely held trust’ for the purposes of the TFN Withholding Rules is:
a discretionary trust (your typical ‘family trust’) or
a trust where an individual or up to 20 individuals have between them – directly or indirectly, and for their own benefit – fixed entitlements to a 75% or greater share of the income or a 75% or greater share of the capital of the trust (‘the 20/75 test’).
What are the New Rules?
If a beneficiary does not quote their TFN to the trustee before a payment is made to them, the trustee must:
withhold tax from that payment (and any future payments unless a TFN is quoted) at the top marginal rate plus the Medicare levy,
lodge an Annual TFN withholding report containing details of all payments that were subject to withholding and any withheld amounts,
provide a Payment Summary to the beneficiary,
register for Pay As You Go (PAYG) Withholding for closely held trusts, and
pay any withheld amounts to the ATO.
A beneficiary may quote their TFN to the trustee to avoid having tax withheld from payments made by trustees.
Are any beneficiaries excluded?
The TFN withholding rules do not apply to beneficiaries:
that are non-residents for tax purposes,
that are exempt entities as defined in the tax laws, such as tax concession charities, deductible gift recipients and other entities that self-assess their status as income tax-exempt,
under a legal disability (for example, minors).
What do trustees need to do?
You should advise beneficiaries that if they have not quoted their TFN to you in the approved manner before receiving a payment from the trust, you will be required to withhold tax from that payment.
Where beneficiaries have quoted their TFN, you must 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 you.
an ‘Annual Trustee Payment Report’ with the ATO containing details of total payments made to each beneficiary in the income year. The report can be made when lodging the trust’s tax return.
What do beneficiaries need to do?
You must decide whether to quote your TFN to the trustee. You are not required to quote your TFN, but if you do not, the trustee must withhold tax at the top marginal rate plus the Medicare levy.
You must apply for a TFN if you do not have one.
You must include your share of the net income from a trust in your income tax return.
Beneficiaries should receive a payment summary from the trustee providing the totals of payments and any amounts withheld.
Beneficiaries can claim a credit in their income tax return for any amounts withheld.
How do I quote my TFN to a trustee?
To quote your TFN to the trustee, you need to provide your:
date of birth (individuals only)
business or residential address
ABN if you have one (only non-individual beneficiaries).
There is no prescribed format when providing this information. You may provide this either verbally or in writing (including an electronic format) to the trustee to meet the requirements. Attached is atemplatedrafted by May Klye & Associates which will capture the information required.
Unless your details have changed, the details you provide to the trustee should be the same as what you provided to the ATO in your most recent tax return.
Where do I get some help?
The staff at May Klye & Associates can help you with the new rules. Ring the office and ask for Noel or Amanda orcontact usby email and we’ll be happy to help.