ATO refuses to back down on plan to target trust distributions

The Australian Taxation Office will not back down on its controversial plan to change the way trusts with corporate beneficiaries are taxed in a reform that could hit about 200,000 people with these trust arrangements.

The ATO announced last year that it would crack down on trusts with corporate beneficiaries, arguing taxpayers were using the arrangements to avoid paying tax on what it believes are essentially dividends.

Under the arrangement the ATO wants to target, distributions from a trust are allocated to a corporate beneficiary, but not actually paid (this is known as an “unpaid present entailment”). The funds inside the trust are then often reinvested in the business.

But under a draft ruling released by the ATO last year, the Tax Office said the unpaid present entitlements should be treated as loans and taxed as dividends.

The draft ruling met with anger, as it was in direct opposition to an earlier ATO ruling effectively sanctioning the structures.

With a final ruling from the ATO due before June 30, tax experts have been campaigning to get the ATO to reverse its draft ruling position.

However, it appears the backflip is going to become final, according to experts such as Karen Crawford, tax partner at PricewaterhouseCoopers, and Yasser El-Ansary from the Institute of Chartered Accountants.

“The ATO has confirmed in a consultative group that we were involved in last week that the draft ruling will be issued unchanged and they will issue some sort of practice statement to help deal with the confusion,” Crawford says.

In another blow, El-Ansary also says is appears the change could apply retrospectively to unpaid present entitlements that have already built up within a trust structure, although he says taxpayers are likely to be provided with an opportunity to adjust their trust structure to comply with the ATO’s new position without the threat of huge penalties.

But with the confusion unlikely to be sorted out before tax season, Crawford says any entrepreneur with trust arrangements should be making a call to their adviser.

“I would strongly recommend you seek advice about how you will distribute this year.”

For El-Ansary, the problem with the ATO ruling highlights the need for a rewrite of the controversial Division 7A laws around shareholder loans, and a wider review of Australia’s complex trust laws.

Crawford says the Government may need to step in to put any confusion over the ATO’s position-shift to rest.

“We will continue to have controversy and confusion until we have some sort of legislative change.”


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