Brave new world for trusts & corporate beneficiaries

Trust distributions to companies in 2010 and later financial years will require very careful management.  This is due to the following recent and significant developments in tax law: 

• The ATO has released a public ruling which effectively reverses the ATO’s long-held views on the tax treatment of trust distributions to companies.   If trustees and their advisors do not take appropriate steps, the ATO can basically treat unpaid trust distributions as loans from the company which may result in an unfranked dividend (see below);

• The Government has introduced new legislation to extend the general operation of the deemed dividend rules (Division 7A).  This includes ‘looking through’ transactions between multiple trusts and companies;

• The ATO has formerly responded to the High Court decision in the Bamford case by withdrawing a number of rulings and ATO practice statements which previously favoured taxpayers.  The ATO’s  “dummy spit” will increase the complexity of tax law dealing with trust distributions and is ultimately intended to encourage Treasury to amend the existing legislation. 

The CFMC tax division has been actively involved in consultation with both Treasury and the ATO, due to the importance of these issues for our clients.  Copies of our submissions are available on request.  While the consultation process could not prevent these changes, some significant concessions and improvements have been achieved.