Tax Ruling could mean disaster for small and medium sized businesses

On 2 June 2010, the Australian Taxation Office (ATO) released Taxation Ruling TR 2010/3, the finalised version of the controversial draft ruling on the tax treatment of Unpaid Present Entitlements (UPEs), issued on 16 December 2009. The ruling puts to question the handling of trusts and forces trustees, beneficiaries and their advisers to act promptly or face extremely complex tax issues and possibly disastrous outcomes.

The ruling will require action from most business owners and investors and we encourage you to seek advice from your tax professional. Baker Affleck’s team of tax experts have been following these changes and are ready to consider how they affect your situation.

Put simply, where a company beneficiary becomes presently entitled to a share of trust income, that entitlement will typically be considered to be a loan unless the distribution of income is physically paid to the company beneficiary. If the entitlement is not paid, it becomes a UPE which will be treated as a deemed dividend to the trust unless it is covered by a prescribed written loan agreement.

Despite objections from the tax profession about the ATO’s “u-turn” on the tax treatment of UPEs, the final ruling has not changed significantly from the draft ruling. However, a positive is that UPEs which were in place prior to 16 December 2009 and which have not been inadvertently converted to loans, are now grandfathered.

It is also positive that a ruling has finally been issued and the ruling itself is not detrimental; however corporate beneficiaries and their advisers must consider their current structures and the effect of the ATO’s changed view on the financing of trusts with extreme caution, as the ruling is both retrospective and prospective.

Baker Affleck is in the process of reviewing our client trust files to determine the extent of UPEs. Once we have identified the clients affected by the issue we will contact you for the purpose of arranging a free consultation to discuss the available options.

In the meantime, if you wish to discuss your options please contact your Baker Affleck accountant or our Tax Consultant, Juris Stega on (07) 5538 3088.