Trust distributions involving corporate beneficiaries

For many years now the Australian Tax Office has accepted that trusts could make distributions to private companies but not actually have to pay the amount. These were called "unpaid present entitlements". These amounts were taxed in the hands of the company and the trustee was able to continue to use the funds for the benefit of all the beneficiaries.

The ATO has now reversed that longstanding view and issued a draft ruling that many see, at the very least, as contentious.

New draft ruling

Generally speaking, the new draft ruling means that where a trust does not physically pay out a distribution to a private company, the ATO will deem that a loan has been provided by the private company to the trust. Where that occurs, the amount owing under the 'newly created loan' may be treated as a dividend to the shareholders of the company.

However, distributions made before 16 December 2009 are not affected by the ATO's new interpretation, and will therefore not generally be
treated as loans (or dividends).

This is a complicated issue. However, we recommend that any clients who feel that they might be affected by this issue should contact Saward Dawson.

Published : 25 January 2010