The Tax Office has been very interested in the way business owners and operators distinguish between their cash and the cash inside a business.
Trusts are the latest in a long line of rules and regulations introduced over the last few years to pin down the flow of cash between different entity types and business owners and operators.
A common tool utilised by many businesses using a discretionary trust is to distribute income to a company, pay tax at the corporate tax rate but leave the distribution in the trust for use by the business owners. In effect, the distribution only occurs on paper. Owners then use the distribution as working capital to fund growth, or in some cases to fund personal assets. The Tax Office intends to tax any of these distributions that remain with the trust (called unpaid present entitlement) at the applicable marginal tax rate.
This change essentially leaves 3 main options:
- Ensure that distributions to corporate beneficiaries are paid in full before the company’s lodgement day for the year in which the income is appointed;
- Put a complying 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
- Look at restructuring to achieve the best result for the business or the business owners.