In a decision with far reaching implications to many clients with trusts, the ATO have confirmed their tough stance on trust distributions in their final ruling on unpaid distributions to corporate beneficiaries.

Along with the final ruling the ATO have also released a draft practice statement and a compendium of issues that were raised during the consultation process.

In summary, the ATO have not backed down from the stance they took in the draft ruling that was issued in December 2009. That is, the ATO are sticking by their view that an unpaid distribution from a trust to a private company can be treated as a loan for Division 7A purposes, potentially triggering a taxable deemed dividend back to the trust which is equal to the unpaid distribution. The ATO's new interpretation on this point will not apply to income appointed before 16 December 2009.

While the final ruling and draft practice statement appears to clarify many of the practical uncertainties that were raised in response to the draft ruling, practitioners and clients may need to re-think the way they approach distributions to corporate beneficiaries from the 2010 income year onwards.

The ruling essentially leaves clients with 3 main options:

Ensure that distributions to corporate beneficiaries are actually paid in full before the company’s lodgement day for the year in which the income is appointed;
Put a complying Division 7A loan agreement in place between the company and trust before the company’s lodgement day for the year in which the income is appointed; or
Enter into a potentially complex set of arrangements to ensure that the corporate beneficiary is solely entitled to the full benefit of the use of the funds that remain unpaid.

More information
Taxation Ruling TR 2010/3 – Income tax: Division 7A loans: trust entitlements
Practice Statement PS LA 3362 (draft)
Ruling Compendium TR 2010/3EC