The Australian Taxation Office yesterday released a controversial draft Taxation Ruling, TR 2009/D8, in relation to the application of Division 7A to unpaid present entitlements. That is, distributions declared, but not paid, between a trust and a private company. Such unpaid entitlements will exist in almost every situation where a corporate beneficiary is utilised.
To date, most advisors have acted on the understanding that unpaid present entitlements were not considered to be a “loan” for the purposes of Division 7A. This was on the basis that there was no debtor/creditor relationship and instead the value of the distribution represented a new trust relationship.
However, in TR 2009/D8 the Commissioner has taken the view that, where there is a private company with an unpaid present entitlement to a trust, there will only be rare situations where this will be excluded from the operation of Division 7A. This is on the basis that most of these unpaid present entitlements will be considered loans.
We note that this draft ruling suggests it is providing an interpretation of the law as it has applied since 1997, and as such, the Australian Taxation Office considers the ruling would apply retrospectively.
Given this view is significantly different to the common view, what should your clients do now?
The ruling has only been issued in draft form at this stage. The final ruling may vary significantly from this draft. Further, it may be a long period from its release in draft format to its finalisation given the controversial nature of the ruling and the industry opinion (common in both the accounting and the legal professions) that it is overly stringent.
Our current advice is to be aware that this may be an issue to contend with in the future and be careful in structuring current transactions and with how trust distributions are dealt with in each future year. At this stage, we do not suggest that you amend prior returns to declare any historical unpaid present entitlements which you believe may be caught by the newly published opinion of the Australian Taxation Office. These issues may be a concern to be dealt with once the finalised opinion of the Australia Taxation Office has been released, together with any guidance on how to address currently existing issues.
Should you have any questions in relation to the above or other taxation matters, please speak to your financial advisor or solicitor.
