ATO ID 2010/42: Amendment of assessments: exception to two year period of review if an individual is a beneficiary of trust estate
Date of decision: 12 February 2010
Year of income: Year ended 2004-05 and later income years
Business line: Administration, Business and Personal Taxes Centre of Expertise

Issue
Does the two year time limit in item 1 in the table in subsection 170(1) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to prevent the Commissioner from amending an individual's assessment where:

Decision
No. The two year time limit in item 1 in the table in subsection 170(1) of the ITAA 1936 does not apply in this case because one of the exceptions in paragraph (d) applies.

Facts
A resident individual was a beneficiary of a resident family discretionary trust. The trustee of the trust was a private company. The trust was not a small business entity within the meaning of the term in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The Commissioner gave the individual a notice of assessment for the 2005-06 income year on 22 November 2006. More than two years (but less than four years) after the notice of assessment was given to the taxpayer, the Commissioner identified that the taxpayer made an error in their return for the 2005-06 income year and amended the return. The taxpayer considered that the Commissioner could not amend the return as the two year time limit in item 1 in the table in subsection 170(1) of the ITAA 1936 had expired.

Reasons for decision
Summary: The general rule is that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual (two year period to amend): item 1 in the table in subsection 170(1) of the ITAA 1936. However, there are a number of qualifications to the general rule. One such qualification is where the individual is a beneficiary of a trust at any time during the income year concerned: paragraph (d) in item 1 in the table in subsection 170(1) of the ITAA 1936. This means that generally the Commissioner may amend an assessment of an individual who is a beneficiary of a trust within four years after the day on which the Commissioner gives notice of the assessment to the beneficiary (four year period to amend). However, there are two exceptions to that qualification where the individual is a beneficiary of a trust at any time in the year and: This means that the Commissioner will have a two year period to amend in this case if one of these two qualifications applies. The first exception does not apply in this case. This is because, on the facts, the trust did not meet the definition of small business entity. With respect to the second exception, 'full self-assessment taxpayer' is defined in subsection 6(1) of the ITAA 1936 and includes: The resolution of this issue turns upon the words 'in that capacity'. A company is a full self-assessment taxpayer within the definition in subsection 6(1) of the ITAA 1936. However, a company, when acting in its 'capacity' as trustee of the trust (other than those listed in categories (b) to (g) above), is not a full self-assessment taxpayer. In that capacity, the company would lodge a trust income tax return and an assessment can be raised under section 169 of the ITAA 1936. As the qualification in paragraph (d) of item 1 in the table in subsection 170(1) of the ITAA 1936 is met, the Commissioner has a four year period to amend any relevant assessments of the individual beneficiary. This can be contrasted with the situation where, for example, the trustee is the trustee of a corporate unit trust. In this situation, the trustee would be required to lodge a company income tax return and the special rules in subsection 166A(3) of the ITAA 1936 for the assessment of full-self assessment taxpayers apply. This means that, provided no other qualification in item 1 of the table in subsection 170(1) of the ITAA 1936 is met, the Commissioner would have a two year period to amend any relevant assessments of an individual beneficiary.

Legislative references: Income Tax Assessment Act 1936 subsection 6(1) section 166 subsection 166A(3) section 169 subsection 170(1)
Other references: Explanatory Memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005.
Subject references: Amendment of assessments Self assessment Trustees Trusts