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Your Association at Work - October 2009
Present entitlement U-turn?
On 17 September, the Financial Review ran a front page story about the ATO targeting trusts. Referring to a confidential paper that had been supplied to the professional bodies, it reported that the ATO was considering treating unpaid present entitlements to company beneficiaries as loans.
The article stated that "the ATO wants to tax certain trust distributions to a company as a loan . . . "."Under the structure in question, funds are allocated to a private company but not paid, creating a so-called unpaid present entitlement."
"There is now some suggestion from some quarters in the Tax Office that the definition of loan . . would include present entitlements."
Naturally, any U-turn in interpretation would have catastrophic consequences for such a company's shareholders and their associates with such loans being, in many cases, deemed to be dividends under Division 7A.
The tax industry first became aware of a possible U-turn, when Mark Konza, a Deputy Commissioner, gave a speech on 31 March this year in Canberra.
He stated that: "What initially commences as an unpaid present entitlement can, factually, become a S.109D loan from the private company beneficiary back to the trustee."
Our position
The NTAA is adamantly opposed to any new interpretation.
The Tax Office's position in relation to unpaid present entitlements has been settled for many years and we can see no basis for suggesting that an entitlement, in the absence of anything further, could morph into a loan.
Furthermore, tax practitioners have every right to expect they can attend to clients' tax affairs with some certainty as to the application of the law, and without fear of any retrospectivity.
A meeting has been scheduled for Friday 25 September with the ATO. We will represent taxpayers' interests with robust and, we expect, constructive dialogue. Any developments will be reported on our Website immediately.
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