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.
Under the tax law, a closely held trust is one that is resident in Australia and is either:
Under the tax laws, a trust will not be a closely held trust if it’s an excluded trust. An excluded trust includes:
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:
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:
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.
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:
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.
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.