Distributions Made Through Chains of Trusts

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Productivity Commission Research Report on the Impact of Commonwealth Indirect Taxes on Exporters
August 11, 1998
Tax Reform Package
August 14, 1998
Productivity Commission Research Report on the Impact of Commonwealth Indirect Taxes on Exporters
August 11, 1998
Tax Reform Package
August 14, 1998

Distributions Made Through Chains of Trusts

NO. 077


As announced in A New Tax System, trustees of ‘closely held trusts’

(including all discretionary trusts) will be required to disclose, in the trust’s tax

return, the identity of the individual or company beneficiary who will ultimately be

entitled to any distributions (either taxable or tax-preferred) made by the trust after

today. This applies where the immediate distribution is made by a trust to another trust.

This will apply regardless of the number of trusts, including non-resident trusts, the

distribution may pass through before reaching the ultimate beneficiary.

Where the trustee does not identify the ultimate beneficiary, including the tax file

number (TFN) in the case of residents, the trustee must withhold tax from the

distribution, and the net distribution becomes correspondingly exempt.

The disclosure and withholding requirements are an anti-avoidance measure which is

intended to apply until superseded by the new entity taxation system outlined in A New

Tax System.

The Australian Taxation Office (ATO) has identified cases in which distributions from a

trust’s net income have been passed through a series of trusts and there have been no

apparent ultimate individual or company beneficiaries who have returned the amounts as

income. In such cases there is usually a valid distribution to the next trust in the


Details of the measure

A widely held trust is any trust that is listed for quotation in the official list of

an approved Australian stock exchange or a trust where more than 20 individuals hold 75

per cent or more of the interests in income or capital of the trust. A ‘closely held

trust’ is any trust that is not a widely held trust. Discretionary trusts will also

be treated as closely held trusts.

Where the trustee fails, or is unable, to disclose the required identity of the

individual or company, and the distribution is made out of the trust’s net income,

the trustee will generally be taxed at the highest marginal rate plus the Medicare levy in

respect of any distribution out of net income for tax purposes. This will build upon the

existing section 99A of the Income Tax Assessment Act 1936 (the 1936 Act) dealing

with the net income of trusts to which no beneficiary is presently entitled.

Consistent with the design of Division 6 of the 1936 Act, trust distributions subject

to tax under this measure will not be taxed again in the hands of beneficiaries.

In situations in which the trustee has failed to identify and disclose correctly the

ultimate beneficiary, or fails to withhold a required amount of tax from a distribution,

the trustee will be liable to pay the amount that should have been withheld. Special rules

will apply to prevent double taxation where the ultimate beneficiary is later identified.


13 August 1998

Contact Officer:

Chris Hood

Australian Taxation Office

( (02) 6216 19211

(0419) 248 510