ATO comes down hard on monies owed to 'bucket' companies

By way of background, for many years now the Tax Office has accepted that trusts could make distributions to private companies but not actually have to pay the amount. These were called unpaid present entitlements.
These amounts were taxed in the hands of the company and the trustee was able to continue to use the funds for the benefit of all the beneficiaries.
The Tax Office has now reversed that longstanding view and issued a draft ruling that many see, at the very least, as contentious.
New draft rulingThe new draft ruling means that, generally speaking, where a trust does not physically pay out a distribution to a private company, the Tax Office will deem that a loan has been provided by the private company to the trust.Where that occurs, the amount owing under the 'newly created loan' may be treated as a dividend to the shareholders of the company.
"Carve-out" for existing unpaid distributionsHowever, distributions made before 16 December 2009 are not affected by the ATO's new interpretation, and will therefore not generally be treated as loans (or dividends).
Editor: We have not gone into the technical side of this issue which is quite complicated to the uninitiated. However, while we will be in contact with clients over the next short while, we recommend that any clients who may be concerned with how this draft ruling could affect them should contact our office.For what it's worth, this is a draft ruling and it is possible, but not likely, that the ATO will change its view. In addition, the Tax Office's position has yet to be tested in Court.

Source: AFA
www.activefa.com