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News Archive
Small Business Tax Breaks
June 2009
Cash Bonus for Taxpayers
Autumn 2009
Federal Budget 2008-09
December 2008
Christmas Cheer and
the ATO
November 2008
Distributions by Trusts to Corporate Beneficiaries
Over the past year or so, there has been a lot of attention on the ATO intending to crackdown on tax planning using trusts.
The latest target has been discretionary trusts that make distributions of their income to private companies ('corporate beneficiaries'). In particular, the ATO has concerns with trusts declaring distributions to such corporate beneficiaries, but not actually paying the amount to that beneficiary – that is, leaving it in the financial records of the trust as an unpaid present entitlement. By doing this, the funds are left in the trust to be reinvested and a liability is recorded to show the amount that is payable to the corporate beneficiary.
The ATO has now released a new ruling (TR2010/3) and a draft practice statement (PSLA3362) outlining their current views on such arrangements. These documents are a significant shift in the ATO views of unpaid present entitlements to corporate beneficiaries from the views and practices they have permitted for many years.
Essentially, the ATO is now taking the view that in certain situations, such unpaid present entitlements may be treated as 'loans' by the corporate beneficiary to the trust. This means that Division 7A of the Income Tax Assessment Act may apply to treat such “loans” as deemed dividends and taxable to the shareholders of the company.
The ruling was released in December 2009, but certain sections apply both before and after the date of its release.
The ruling broadly applies in the following situations:
- a private company has a present entitlement to an amount from a related trust (i.e. it can call for immediate payment of the amount by the trust);
- the amount remains in the trust rather then being distributed to the private company (i.e. there is an unpaid present entitlement); and
- the amount is used by the trust for its own purposes or intermingled with other trust funds (as opposed to being held by the trust on a sub-trust for the company).
The ruling concludes that a Division 7A loan will arise where:
- a private company beneficiary lends (by agreement, authorisation or ratification) money in satisfaction of an unpaid present entitlement;
- the trustee creates a loan for the benefit of the private company beneficiary pursuant to the trust deed instead of creating an unpaid present entitlement;
- there is a subsisting unpaid present entitlement and the private company has in substance effected a loan or provided financial accommodation in respect of that unpaid present entitlement; or
- an unpaid present entitlement has been allowed to remain outstanding for use by the trust generally (as opposed to being used or invested or lent for the absolute benefit of the corporate beneficiary).
The draft practice statement sets out practical guidance to assist in the application of the Commissioner‟s position, including guidance in relation to:
- when a loan agreement may be considered 'express' or 'implied'
- when a 'loan' may be taken to have been made
- the resulting tax consequences if a loan is taken to have been made
- the review period that will apply in relation to such loans (generally the ATO will not review the tax consequences of such loans outside the standard amendment period applicable)
- how to determine whether funds representing the unpaid present entitlement are being used for the company‟s sole benefit (as opposed to trust purposes) and the evidence that may be used to substantiate the position taken
- how to determine if there is a sub-trust in place
- application of the Commissioner‟s discretion under Division 7A to deemed loans as per the ruling.
NOTE
As these issues are complex, taxpayers should consider the impact of the ruling and the practice statement on their affairs very carefully.
We will be working through these situations with each of our clients who are affected, with a view to minimising any adverse tax consequences that may arise.
Disclaimer
We believe the advice and information contained in this newsletter to be accurate and reliable but no warranty of accuracy or reliability arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by the company or its officers.
