Private ruling: TFN withholding for closely held trusts
Published: July 2013
Ruling period: Year ending 30 June 2013; | Year ending 30 June 2014; | Year ending 30 June 2015; | Year ending 30 June 2016; | Year ending 30 June 2017.
Date scheme commenced: 1 July 2012.

Ruling: Q1: Is the Estate a closely held trust? | A1: Yes. | Q2: Is the Trustee for the Estate required to withhold tax on the beneficiary's interest if the beneficiary has not provided a tax file number (TFN)? | A2: Yes.

Relevant facts and circumstances: A Testamentary Life Interest Trust operates within the deceased Estate. Clause 2 of the will details the terms of the will and the beneficiary's entitlements. The fifth anniversary of the death occurred in the year ending 30 June 20XX. The beneficiary has not provided a Tax File Number (TFN) to the Trustee.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 102UC; | Income Tax Assessment Act 1936 Schedule 2F section 270-100; | Income Tax Assessment Act 1936 Pt VA Division 4B; | Taxation Administration Act 1953 Schedule 1; | Taxation Administration Act 1953 section 12-175; | Taxation Administration Act 1953 section 12-180; | Tax Laws Amendment (2010 Measures No. 2) Act 2010 Schedule 2.

Reasons for decision: Summary: The Estate is a closely held trust. | Detailed Reasoning - Detailed reasoning: Income Tax Assessment Act 1936 (ITAA 1936) subsection 102UC (1) provides the following definition of closely held trust : A closely held trust is: (a) a trust where an individual has, 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; or (b) a discretionary trust; except where the trust is an excluded trust. ITAA 1936 Schedule 2F section 270-100 provides the following: A trust is an excepted trust at a particular time if: (a) it is a family trust at the particular time; or (b) it is a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the income year in which the particular time occurs; or (c) it is the trust of a deceased estate, where the particular time occurs during the period from the death of the individual until the end of the year of income in which the 5th anniversary of the death occurs; or (d) at the particular time it is a fixed trust that is a unit trust, and exempt entities have fixed entitlements, directly or indirectly, and for their own benefit, to all of the income and capital of the trust; or (e) it is an FHSA at the particular time. The Estate is a trust established as a result of a deceased estate and is excluded to end of the year of income in which the fifth anniversary of the individual's death occurred. After this date the Estate which has a fixed entitlement greater than 75% share of the income, will be considered a closely held trust as per the definition. | Detailed Reasoning - Question 2: Is the Trustee for the Estate required to withhold tax on the beneficiary's interest if the beneficiary has not provided a tax file number (TFN)? | Summary: The Trustee will be required to withhold tax on the beneficiary's interest if the beneficiary has not provided a TFN after the end of the year of income in which the fifth anniversary of the individual's death occurred. | Detailed Reasoning - Detailed reasoning: Schedule 2 of the Tax Laws Amendment (2010 Measures No. 2) Act 2010, which has effect from 1 July 2010, inserts a new Div 4B immediately after Pt VA Div 4A of ITAA 1936 and amends Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) to impose new obligations in relation to the quotation of tax file numbers in respect of certain closely held trusts. The new sections 12-175 and 12-180 in Schedule 1 of the TAA 1953 require the trustee of a closely held trust to withhold an amount from payments made to beneficiaries where the relevant beneficiary has not provided their TFN to the trustee. The amount withheld will equal the top tax rate plus Medicare levy. If an amount has been withheld, an annual TFN withholding report must be lodged with the ATO at the end of the income year. The new Pt VA Div 4B of the ITAA 1936 imposes new obligations on trustees in relation to the reporting of the tax file numbers of beneficiaries. Trustees will be required to lodge with the Commissioner, in the approved form, and within one month after the end of the quarter to which the report relates, or such further time as the Commissioner allows, the tax file number of beneficiaries where: - the beneficiary has quoted their tax file number to the trustee during the quarter (s 202DP (1) (a)); and - the beneficiary has not quoted the tax file number to the trustee in connection with an investment to which Pt VA applies (s 202DP (1) (b)); and - the trustee has not reported and is not required to report the beneficiary's tax file number to the Commissioner pursuant to Pt III Div 6D ITAA36 (s 202DP(1)(c)). The explanatory memorandum to the Tax Laws Amendment (2010 Measures No. 2) Bill 2010 at paragraph 2.12 indicates that the trustee is only required to report the quoted tax file number once. The TFN report must include the beneficiary's TFN, full name, date of birth (for individuals only), postal address, business or residential address, entity type, and Australian Business Number (ABN) if a non-individual beneficiary. The TFN withholding rules apply to most beneficiaries of closely held trusts, regardless of whether they are an individual, company, partnership, trust or super fund. Beneficiaries receiving various pensions and benefits, including the age pension and disability support pension, are not exempt from these rules. The Estate is a trust established as a result of a deceased estate and is excluded to end of the year of income in which the fifth anniversary of the individual's death occurred. After this date the Estate which has a fixed entitlement greater than 75% share of the income, is considered a closely held trust. Beneficiaries of closely held trusts must quote their TFN to the trustee to avoid having amounts withheld from payments made by the trustee.