Two Major tax positions have developed over the past month. One in respect to Division 7a and unpaid trust distributions to bucket companies. The other was a major tax cases called Bamford involving how and in what proportion should income be distributed from trusts.
In relation to the Division 7a issue, the ATO finalized a draft ruling which basically states that the ATO will deem unpaid monies to bucket companies as financial assistance and therefore be caught by the Division 7a rules which deem a dividend to be paid in these cases. This is a major back flip by the ATO from about 10-12 years ago and flies in the face of legal rulings. At some point in time a court case will be held in relation to this but in the meantime certain loan agreements and other documents will need to be put into place to ensure deem dividends are not caused by this tax ruling.
The second issue relates to a recent High Court ruling which confirms that trust distributions are paid out in accordance with specific proportions. This is a major impact especially where there are ATO driven amended assessments. The further issue in relation to this is whether certain income can be streamed to certain taxpayers (assuming the trust deed allows for it). We usually do this for tax reasons, eg capital gains to individuals, franking credits to individuals and trading income to bucket companies etc. However, there is some doubt now following this court case that, even if the trust deed allows for streaming, streaming may not be allowed by the ATO. Again, further clarification is required from the ATO to ascertain their position in this matter. In the meantime, we may need to take the conservative approach and cease streaming of certain types of income.
In relation to the Division 7a issue, the ATO finalized a draft ruling which basically states that the ATO will deem unpaid monies to bucket companies as financial assistance and therefore be caught by the Division 7a rules which deem a dividend to be paid in these cases. This is a major back flip by the ATO from about 10-12 years ago and flies in the face of legal rulings. At some point in time a court case will be held in relation to this but in the meantime certain loan agreements and other documents will need to be put into place to ensure deem dividends are not caused by this tax ruling.
The second issue relates to a recent High Court ruling which confirms that trust distributions are paid out in accordance with specific proportions. This is a major impact especially where there are ATO driven amended assessments. The further issue in relation to this is whether certain income can be streamed to certain taxpayers (assuming the trust deed allows for it). We usually do this for tax reasons, eg capital gains to individuals, franking credits to individuals and trading income to bucket companies etc. However, there is some doubt now following this court case that, even if the trust deed allows for streaming, streaming may not be allowed by the ATO. Again, further clarification is required from the ATO to ascertain their position in this matter. In the meantime, we may need to take the conservative approach and cease streaming of certain types of income.
