Australian Tax - Controversial Draft Tax Ruling Concerning Trusts and Private Companies
On 16 December 2009, the Commissioner of Taxation released a controversial draft tax ruling, TR 2009/D8.
This draft ruling deals with the issues surrounding unpaid present entitlements from a trust that are due to a corporate beneficiary.
This occurs when the trustee of a trust distributes, but does not pay, some of the net income of the trust to a beneficiary of the trust that is a private company.
The draft ruling considers when such an unpaid present entitlement will be a loan for the purposes of Division 7A of Part III of the Income Tax Assessment Act 1936 ("Division 7A").
The draft ruling proceeds on the basis that the "controlling minds" of both the trustee and the private company are the same.
This means, in the view of the Commissioner, that the directors of the private company will have full knowledge of any actions of the trustee of the trust.
Unpaid present entitlements are not loans.
The Commissioner understands this.
However, for the purposes of Division 7A, he considers that they can be turned into loans given certain actions occurring.
Some things that are said by the Commissioner in the draft ruling are not controversial.
For example, if a private company that is a beneficiary of a trust agrees with the trustee of the trust to lend the trust an amount of money and then this amount is set off against an unpaid present entitlement, the unpaid present entitlement has been converted into a loan.
That is correct.
Where the draft ruling becomes controversial is when, in effect, inaction is considered to be action.
Because it is assumed that the directors of the private company know and agree with the actions of the trustee, the manner of the treatment by the trustee of an unpaid present entitlement is considered to be also the actions of the directors of the private company even though the directors of the private company have not taken any positive action to form an agreement with the trustee.
This will be the position of the Commissioner unless there is evidence to the contrary.
Example 2 of the draft ruling sets out a situation where a trustee distributes $10,000 to a private company beneficiary but does not pay the amount to the company.
The trustee, in its own books, credits the amount to a loan account in the name of the private company.
The Commissioner says that this is the trustee making a loan to itself using the funds of the unpaid present entitlement, there being no evidence to the contrary.
Until the release of this draft ruling, accountants would not have considered such events to create a Division 7A loan between the private company and the trustee without a specific agreement being created between the two parties.
Now, the Commissioner says, in his draft views, that the acquiescing of the private company with the trustee's treatment of the unpaid present entitlement is the same as taking positive action to create a loan agreement between the parties.
There are other concerning statements made in the draft ruling.
If it is finalised in its current form, the implications for hundreds of thousands of taxpayers will need to be assessed as the previous views held by the Commissioner, and the Government's policy on this topic, were thought to be settled.
The Commissioner should be allowed to change his view.
However, I do not think he should be able to change his view in a situation where there has already been significant debate and legislation enacted to deal with the topic under consideration.
This goes close to the administration, and not the legislature, making law.
Wishing you easier business.
John M.
Jeffreys
This draft ruling deals with the issues surrounding unpaid present entitlements from a trust that are due to a corporate beneficiary.
This occurs when the trustee of a trust distributes, but does not pay, some of the net income of the trust to a beneficiary of the trust that is a private company.
The draft ruling considers when such an unpaid present entitlement will be a loan for the purposes of Division 7A of Part III of the Income Tax Assessment Act 1936 ("Division 7A").
The draft ruling proceeds on the basis that the "controlling minds" of both the trustee and the private company are the same.
This means, in the view of the Commissioner, that the directors of the private company will have full knowledge of any actions of the trustee of the trust.
Unpaid present entitlements are not loans.
The Commissioner understands this.
However, for the purposes of Division 7A, he considers that they can be turned into loans given certain actions occurring.
Some things that are said by the Commissioner in the draft ruling are not controversial.
For example, if a private company that is a beneficiary of a trust agrees with the trustee of the trust to lend the trust an amount of money and then this amount is set off against an unpaid present entitlement, the unpaid present entitlement has been converted into a loan.
That is correct.
Where the draft ruling becomes controversial is when, in effect, inaction is considered to be action.
Because it is assumed that the directors of the private company know and agree with the actions of the trustee, the manner of the treatment by the trustee of an unpaid present entitlement is considered to be also the actions of the directors of the private company even though the directors of the private company have not taken any positive action to form an agreement with the trustee.
This will be the position of the Commissioner unless there is evidence to the contrary.
Example 2 of the draft ruling sets out a situation where a trustee distributes $10,000 to a private company beneficiary but does not pay the amount to the company.
The trustee, in its own books, credits the amount to a loan account in the name of the private company.
The Commissioner says that this is the trustee making a loan to itself using the funds of the unpaid present entitlement, there being no evidence to the contrary.
Until the release of this draft ruling, accountants would not have considered such events to create a Division 7A loan between the private company and the trustee without a specific agreement being created between the two parties.
Now, the Commissioner says, in his draft views, that the acquiescing of the private company with the trustee's treatment of the unpaid present entitlement is the same as taking positive action to create a loan agreement between the parties.
There are other concerning statements made in the draft ruling.
If it is finalised in its current form, the implications for hundreds of thousands of taxpayers will need to be assessed as the previous views held by the Commissioner, and the Government's policy on this topic, were thought to be settled.
The Commissioner should be allowed to change his view.
However, I do not think he should be able to change his view in a situation where there has already been significant debate and legislation enacted to deal with the topic under consideration.
This goes close to the administration, and not the legislature, making law.
Wishing you easier business.
John M.
Jeffreys
