and the trust, partnership or company distributes income or capital other than to the test individual or members of the test individual's family group [section 271-5] . The terms 'family trust election', 'interposed entity election', 'test individual' and 'family group' are explained in Chapter 5.
11.2 This tax need not ever be paid by any trust or interposed entity and in that sense is optional. The tax only becomes payable if a trust or interposed entity makes a distribution or confers a present entitlement that is inconsistent with its election to be treated as a family trust or member of the family group of a family trust.
When will the family trust distribution tax be payable?
11.5 The term 'distribution of income or capital' has been defined broadly - see definitions in Subdivision 272-B discussed in paragraphs 13.51 to 13.61.
When is a person presently entitled to income or capital?
11.6 The term present entitlement has its ordinary meaning. A person is presently entitled to a distribution when the person has a present legal right to demand and receive the distribution. For example, in the case of a partnership, a partner would be presently entitled to a distribution of income or capital when the profits of the partnership are divided among the partners or when the partner becomes entitled to withdraw capital from the partnership. Also, an electing entity can confer a present entitlement without there necessarily being a decision to that effect. For example, where a person becomes presently entitled to a distribution under the terms of a trust deed, the trust confers a present entitlement on that person even though the trustee has not made any decision.
What if a distribution is made in satisfaction of a present entitlement?
11.8 A conferral or distribution to the specified individual or a member of the family group could attract the tax if the distribution is made to the individual or member in their capacity as a trustee or where the member is a trust. However, the liability for the tax will not arise where the individual or member of the individual's family group gets the conferral or distribution in a capacity as trustee or as a trust that is a member of the test individual's family group. This would be the case, for example, where the individual or member, as trustee, has made an interposed entity election under section 272-85 or is trustee of a fund that is in the family group under subsection 272-90(6) because it is listed in the gift deductibility provisions of the income tax law.
Who is liable to pay the family trust distribution tax?
11.9 The liability for tax falls on the persons set out in Table 11.1.
Who has the liability for the tax?
11.12 This provision ensures that a director will not be liable for the tax where the director was unaware of a decision to make the conferral or distribution. If the director had no knowledge of the proposed resolution or had no reason to suspect that a resolution would be passed that would authorise the distribution then this section would apply to excuse the director from the liability for the tax. Note that the provision will not apply where there was no decision , e.g. where a present entitlement is conferred by the terms of a trust deed.
11.16 A discretionary trust receives a distribution from a trust that has made a family trust election under section 272-80. The trustee of the discretionary trust lodges an interposed entity election under section 272-85 in order to become a member of the family group in relation to the family trust. The election is lodged with its return of income for the 1997-98 year of income on 31 October 1998. The election specifies that it is to take effect from 1 January 1998. The discretionary trust distributes income outside the family group on 31 July 1998. The trustee of the discretionary trust will be liable for the family trust distribution tax on the amount of the distribution at the end of 21 days after lodging its return of income (the day the election is made), i.e. the end of 21 November 1998. If the discretionary trust makes any further distributions outside the family group after 31 October 1998 the tax is to be paid at the end of 21 days after the making of the distribution.
11.19 The effect of subsection 271-80(6) is to ensure that additional tax continues to accrue in respect of the unpaid tax notwithstanding that judgment for payment of the unpaid tax has been given by, or entered in, a court. Where, in such a case, the judgment debt itself carries interest, the additional tax otherwise payable is to be reduced by the amount of interest that relates to the unpaid family trust distribution tax.
11.26 The notice system provides a mechanism through which a taxpayer may object or appeal against a decision of the Commissioner that family trust distribution tax is payable [subsection 271-90(6)] . For example, a trustee could think that the tax may be payable on a distribution but may seek the Commissioner's opinion on that matter by asking the Commissioner to issue a notice. If the trustee does not agree with the Commissioner's opinion, they could object against it in the normal manner for objecting against taxation decisions.
11.30 A consequence of this approach is that any losses or outgoings incurred in deriving the distribution that will be exempted from tax will not be deductible to the person to whom the distribution is made.
How is the exempt amount calculated?
The tax payable is the amount of family trust distribution tax payable under the Family Trust Distribution Tax (Primary Liability) Act 1997 .
The original assessable amount is the amount of the distribution that is included in assessable income.
11.32 The trustee of a trust becomes liable to $487 family trust distribution tax when a person (Jill), who is not a member of the family group, becomes presently entitled to $1,000 net income of the trust. Under section 97, the $1,000 is included in Jill's assessable income. The trustee pays the tax in two instalments, $200 on day 1 and $287 on day 2.
11.33 On day 1, the amount that needs to be included in Jill's assessable income is reduced by $410.68 (i.e. ($200 (tax payment amount) divided by $487 (tax payable)) multiplied by $1,000 (original assessable amount)). On day 2, when the second instalment is paid, the amount that needs to be included in Jill's assessable income is reduced by a further $589.32 (i.e. ($287 (tax payment amount) divided by $487 (tax payable)) multiplied by $1,000 (original assessable amount)).
What if an exempt distribution is a dividend?
11.34 If the distribution not included in assessable income is a dividend from a company, the grossed-up amount of the dividend is not included in the assessable income of the person to whom the distribution was made and any franking credits associated with the dividend do not, therefore, flow to the recipient of the dividend.
11.35 A number of consequential amendments are made to other provisions in the income tax law and other Acts to deal with the effect of family trust distribution tax. These are discussed in Chapter 14.
What is the Family Trust Distribution Tax (Primary Liability) Act 1997?
11.36 The Family Trust Distribution Tax (Primary Liability) Act 1997 mentioned in this Chapter and Chapter 12 will be the imposition Act that imposes family trust distribution tax [clause 3 of the Family Trust Distribution Tax (Primary Liability) Bill 1997] . The tax will be imposed at the highest marginal rate applying to individuals plus Medicare levy, on an amount or value of income or capital (currently 48.5%) [clause 4 of the Family Trust Distribution Tax (Primary Liability) Bill 1997] . The circumstances in which this tax would be imposed are discussed in the preceding paragraphs of this Chapter and in Chapter 12.