Distributions to Corporate Beneficiaries under attack
- Thread starter coastymike
- Start date
I was up on The Gold Coast Wednesday night for a seminar and I was driving around trying to find the venue. There was a talkback radio program on and the talk was all about this. There was a tax expert in the studio and there were lots of calls from people about how badly it was going to affect them. I thought to myself, 'I bet Somersoft is going into meltdown over this.' The next day when I was online I checked and there was nothing - until this.
Scott
Scott
There is also this recent ruling,
TR 2010/3 Income tax: Division 7A loans: trust entitlements
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20103/NAT/ATO/00001
TR 2010/3 Income tax: Division 7A loans: trust entitlements
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20103/NAT/ATO/00001
....or simply pay the distributions to the beneficiaries and viola, no more problem....
Surley it's not that simple. There were loads of fish and chip shop owners and the like calling up saying, 'We'll be rooned.'
The guy on the radio was whipping them into a frenzy of fear and indignation.
The guy on the radio was whipping them into a frenzy of fear and indignation.
The issue is that some trusts do not have the funds to pay out the unpaid present entitlement.
For example let's says a small business owner purchased a business for $500k and used a bank loan to fund the acquisition. Each year they repay $100k to the bank as principal. This leaves a profit of $100k to the trust to distribute.
A lot of business have distributed this profit to a corporate beneficiary to cap the tax rate at 30% which would have been the same as if the business operated in a pty ltd structure.
However this ruling means that these unpaid entitlements are now subject to Division 7a and unless the business has the funds to repay the entitlement then Division 7a will be an issue.
So not quite as easy as you say Dazz. Yes many businesses will be affected by this but i'm sure it keep us busy with restructuring now for the next year.
For example let's says a small business owner purchased a business for $500k and used a bank loan to fund the acquisition. Each year they repay $100k to the bank as principal. This leaves a profit of $100k to the trust to distribute.
A lot of business have distributed this profit to a corporate beneficiary to cap the tax rate at 30% which would have been the same as if the business operated in a pty ltd structure.
However this ruling means that these unpaid entitlements are now subject to Division 7a and unless the business has the funds to repay the entitlement then Division 7a will be an issue.
So not quite as easy as you say Dazz. Yes many businesses will be affected by this but i'm sure it keep us busy with restructuring now for the next year.
The tax guy - who was from a Brisbane practice - said the same thing. I don't think he was looking forward to all the restructuring. It sounded like he had too much on his plate as it was.
Heavens to betsy Mikey....looks very technical indeed....well over my head. Mind you, most intelligent people could drive a truck through your chosen example as to why that "issue" shouldn't be a problem at all.
Geez, it must be heart wrenching for both your company and Mry's to have to save all of your clueless clients from this very complicated and detailed situation. Your clients are extremely fortunate to have you onboard at the front of their ship guiding them through this morass. You should rightly up your rate. $ 500 / hr is definitely not enough.
I reckon you'll both be absolutely snowed under just keeping up with the extra demand this will create.
Kaching kaching. You might want to just flick this onto cu for him to check over as well, because of course you couldn't possibly venture a legal opinion on the matter....or do you have your own friendly in-house legal guy.
The situation is very simple: Pay the distribution.
If a trust makes a distribution to anyone, then it should actually be paid.
The beneficiary makes no difference.
Any decent accountant would've given this advice.
If a trust makes a distribution to anyone, then it should actually be paid.
The beneficiary makes no difference.
Any decent accountant would've given this advice.
Piston Broke
I agree the simplest solution is to pay out the unpaid present entitlement but how can you pay out the unpaid present entitlement when the funds have been used to repay say for example a bank loan ?
It's the same situation as a company yet instead of the profit sitting in retained earnings and the amount being paid at 30% the profit is distributed to a corporate beneficiary and tax paid at 30%. Once funds are available then the unpaid present entitlement is paid. But until such funds are available then sometimes this is not possible.
The unfortunate thing is that people have been relying on advice from the ATO for years that held the view that an unpaid present entitlement is not a loan. The courts have held the view also that an unpaid present entitlement is not a loan . So the reality is that once one of these cases go to the court then the court will probably overturn the decision from the ATO. A lot like a few cases that the ATO have recently lost and their decisions have had to change.
Anyway interesting times as always.
I agree the simplest solution is to pay out the unpaid present entitlement but how can you pay out the unpaid present entitlement when the funds have been used to repay say for example a bank loan ?
It's the same situation as a company yet instead of the profit sitting in retained earnings and the amount being paid at 30% the profit is distributed to a corporate beneficiary and tax paid at 30%. Once funds are available then the unpaid present entitlement is paid. But until such funds are available then sometimes this is not possible.
The unfortunate thing is that people have been relying on advice from the ATO for years that held the view that an unpaid present entitlement is not a loan. The courts have held the view also that an unpaid present entitlement is not a loan . So the reality is that once one of these cases go to the court then the court will probably overturn the decision from the ATO. A lot like a few cases that the ATO have recently lost and their decisions have had to change.
Anyway interesting times as always.
Then if the funds are not available you cannot pay a distribution.
An unpaid distribution is an IOU which can be considered a Loan.
If I owe you money and don't pay you, it is not unreasonable to consider it a loan from you to me until it's paid.
My accountant way out in the SW burbs told me many years ago:
"Distributions must actually be paid and there must be a clear trail otherwise they will be questioned by the ATO."
Just like your article rightly states.
Obviously he's always known more than those other slick accountants in new suits speaking at seminars who claim they do structures for the rich and so many other unnamed rich folk and charge $400 hr.
I may not be a CPA and not a "fellow" of anything (not even a jolly good one), but i do have a basic understanding of ownership, legal entity and how most trustees want it both ways on every side, on the advice of flash accountants selling trust deeds.
You either own it our you don't.
You can't own it when it suits you, and not own it when it does'nt. Them days have gone.
And of course trusts are legal arrangements and not the domain of accountants, with all due respect.
Yet people seem convinced that accountants are those to ask for legal advice about trusts and ownership.
Of more course I'm happy to be corrected anywhere I'm wrong.
My understanding is that this is only a Draft ruling and has not passed yet, is this correct?
My accountant tried to explain the possible actions we could take, but it was as clear as mud. I understand if you cant pay the distributions from 16th Dec 2009, (which we can not as the payments were used for loan repayments) our options are enter a division 7A agreement, create a sub trust account (which had some very un appealing features and we decided would not go with this option) or distribute to individuals and pay a higher tax rate. Is that basically it?
Many thanks
My accountant tried to explain the possible actions we could take, but it was as clear as mud. I understand if you cant pay the distributions from 16th Dec 2009, (which we can not as the payments were used for loan repayments) our options are enter a division 7A agreement, create a sub trust account (which had some very un appealing features and we decided would not go with this option) or distribute to individuals and pay a higher tax rate. Is that basically it?
Many thanks
Not a draft anymore. Terry linked the ruling above.
Well from 2010 on, this is the way it will be if distributing to a private company.
It is good to see that the ruling is not retrospective.
I'm afraid this represents a fundamental misunderstanding of the difference between taxable profit and available cash. To paraphrase an earlier example, if a business operating in a trust makes a normal $100k profit in the year, but repays a bank loan of $100k, it'll have no cash available to distribute, yet it still has to distribute $100k, or else it'll get taxed at 46.5%.
However, the ATO's reasoning for the change, the supposed misuse of trust funds to buy yachts, cars, etc which are being used by beneficiaries, really doesn't stack up when UPEs to individuals continue to be treated as normal distributions!
The sooner someone challenges this in court the better. Try to find a judge who doesn't have a corporate beneficiary for his family discretionary trust!!!
The sooner someone challenges this in court the better. Try to find a judge who doesn't have a corporate beneficiary for his family discretionary trust!!!
The ATO should fund a test case!
