Application of the anti-avoidance provision
A further circumstance in which a trustee of a closely held trust may become liable for TBNT is where the anti-avoidance provision (in S.102UM) applies. The relevant application rule (of the anti- avoidance provision) is contained in S.102UM (1), which is triggered when all of the following conditions are met:
- the trustee of a closely held trust makes a distribution to a trustee beneficiary, such that the trustee beneficiary includes a share of the closely held trust’s net income in its assessable income under S.97;
- the trustee beneficiary makes a distribution to the closely held trust, such that the closely held trust is presently entitled to an amount that is reasonably attributable to an untaxed part the trustee beneficiary received from the closely held trust (i.e., the ‘circular distribution’); and
- TBNT is not payable by the closely held trust on the untaxed part (i.e., as a correct TB statement has been lodged on time).
The anti-avoidance provision is broadly designed to prevent a trustee of a closely held trust from engaging in a circular trust distribution with a trustee beneficiary, with the result being that the net (taxable) income of the closely held trust is not taxed to any entity.
Where a circular trust distribution is subject to the anti-avoidance provision, a trustee of a closely held trust is liable for TBNT at a rate of 47% (for the 2020 income year) on the untaxed amount included in the distribution. Refer to S.102UM(2)(a) and S.4 of the Taxation (Trustee Beneficiary Non-Disclosure Tax) Act (No. 2) 2007.
The TBNT rules under this anti-avoidance provision broadly mirror those applying to a closely held trust that has not reported an untaxed amount in a correct TB statement. Accordingly:
- An untaxed amount included in a circular trust distribution (to which TBNT applies) is not assessable income of a trustee beneficiary. Refer to S.102UM(2)(b).
- A trustee of a closely held trust should complete a ‘Trustee beneficiary non-disclosure tax payment advice’ form (NAT 72967), which advises the ATO of the amount of TBNT payable and allows the trustee to make payment.
- Payment of TBNT should be made within 21 days of the due date of lodgment of the closely held trust’s tax return, unless the ATO grants a payment deferral. Refer to S.102UO (1).
- If the trustee is a company, directors are jointly and severally liable (together with the corporate trustee) for the TBNT amount. Refer to S.102UM(2)(a) and (3).