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TFN Reporting for Closely Held Trusts: What You Need to Know

Many people use trusts as a good way to protect their assets or investments – they’re quite common for families’ investments as well as business structures. A ‘trustee’ holds assets on behalf of at least one beneficiary (who cannot be the trustee) and the trustee is responsible for looking after the legal and tax obligations of the trust. This includes setting up the trust’s tax file number (TFN), lodging tax returns and TFN reporting for closely held trusts.

TFN reports are due at the end of July, so now is the time to complete reporting for closely held trusts – particularly if you’ve set up new trusts within the FY 2018 financial year.

What’s a closely held trust?

Under the tax law, a closely held trust is one that is resident in Australia and is either:

  • A family trust (i.e. a trust that has made a ‘family trust election’ under the trust loss rules).
  • Has up to 20 people who are entitled to at least 75% of the income or capital of the trust, either directly or indirectly. There are complicated rules to determine who counts as one individual. For example, if two or more individuals are related then they will count as one person or if the trustee is also a beneficiary then they will also count as an individual. As an individual may have some entitlements over the trust assets or income indirectly, it’s also important to look through any beneficiaries that are corporations or trusts to see if the trust is a closely held trust.
  • Is a discretionary trust. This means that the trustee has discretion over how they distribute the income and capital to the beneficiaries. It’s quite common for family trusts to be discretionary trusts.

Under the tax laws, a trust will not be a closely held trust if it’s an excluded trust. An excluded trust includes:

  • A complying super fund, approved deposit fund or a pooled super trust
  • A deceased estate’s trust (at least for the first 5 years)
  • A unit trust with beneficiaries who are all exempt from income tax
  • A unit trust with units listed on the Australian Stock Exchange
  • A discretionary mutual fund
  • An employee share trust for an employee share scheme
  • The trust of a law practice.

What TFN reporting for closely held trusts is required?

Trustees of closely held trusts are required to report the TFNs and other personal details of the beneficiaries of the trust to the Australian Taxation Office (ATO). This must be lodged with the ATO as a TFN report in the month following the end of the quarter. The lodgment dates for the TFN report are:

  • April to June quarter – 31 July
  • July to September quarter – 31 October
  • October to December quarter – 31 January
  • January to March – 30 April

It’s not necessary to lodge the TFN report every quarter though. It only needs to be lodged for any quarter where a beneficiary quotes or changes their TFN with the trustee. This often happens when a new trust is established. So, if you’ve been involved in setting up a new trust this year, it’s best to check if the trustee has to complete any TFN reporting for the closely held trust.

The trustee will need the following information from each beneficiary to complete the TFN reporting:

  • The beneficiary’s TFN.
  • The beneficiary’s full name. This should be identical to the name they use on all ATO correspondence, so beware of spaces and even punctuation.
  • If they are an individual, the beneficiary’s date of birth.
  • For an individual, the beneficiary’s residential address or their business address if they’re not an individual. A PO Box or private mailbag is not acceptable.

It doesn’t matter how the beneficiary gives the trustee this information. Some may email it, while others may choose to call the trustee and give them the information over the phone.

The TFN report for closely held trusts can be completed online and then saved, or printed out and handwritten. The form only has space for six beneficiaries, so if the trust has more than six beneficiaries it will be necessary to complete more than one form.

Why is TFN reporting required for closely held trusts?

The reason that a beneficiary’s TFN must be reported to the ATO is that most beneficiaries will be subject to the TFN withholding rules regardless of whether they’re an individual, company, partnership or even a self-managed super fund. The TFN withholding rules require the trustee to withhold tax at the top rate from any payments or distributions beneficiaries receive if the beneficiaries have not quoted their TFN.

The only beneficiaries who are not subject to the TFN withholding rules are:

  • Unit trusts
  • Non-residents for tax purposes
  • Exempt organisations like tax concession charities or deductible gift recipients
  • Beneficiaries who have a legal disability (like children)

If the trustee has had to withhold tax from payments made to beneficiaries during the financial year, they will also need to lodge an Annual TFN withholding report. This form must be lodged with the ATO by 30 September.

The trustee is also required to lodge an annual activity statement for the closely held trust which includes any amount that has been withheld from beneficiary payments. This must be lodged and paid by 28 October.

What happens once the ATO receives the TFN report?

Once the ATO gets the TFN report it matches the information against its records. If it finds an anomaly, for example, the TFN doesn’t match their records, then the ATO will send the trustee a letter asking them to check their records. The trustee may then need to get in touch with the beneficiary to make sure they have the correct details.

Once the beneficiary updates their details, the trustee will need to complete another TFN report in the next quarter and send it to the ATO. If there is a mistake in the report, the trustee can also correct this in the next quarter by lodging another TFN report. Until the TFN report is updated, the ATO may treat the beneficiary as if they haven’t provided their TFN details, which means the trustee may have to withhold tax at the highest rate from any payments or distributions they make.

Of course, every trust and company is different. We recommend that you seek legal and/or accounting clarification to make sure you make the best decisions for your circumstances. The TFN report is a legal document and there are significant penalties if the information contained in it is false or misleading so it’s important to take the time to get it right.

If you need help with your TFN reporting or with any of your trust or company compliance needs, get in touch with CCASA. We have company compliance offices in Melbourne and Perth but help businesses with their company compliance Australia-wide.