Published in Dynamic Business, 22 July 2010

Changes to Trusts by the Australian Taxation Office will begin to impact small business this year, with business owners urged to complete a new Taxation Plan to avoid trouble.

Managing Partner of elliotts, Matthew Schlyder, said trusts have previously been able to distribute to a range of beneficiaries including individuals and companies.

“Up until now, businesses have used this allowance as an effective tax deferral strategy. Distributing to a company means that taxable profit is taxed at 30% instead of a potential 46.5%, and accountants have been advising it as part of their client’s taxation plans.”

“Often the distribution was done on paper so the cash profit could be left in the Trust to fund business working capital. A dividend did not have to be physically paid out of the company until the Directors determined,” Mr Schlyder said.

The ATO announced a change in position on such distributions on 16 December 2009, finalising its view on Trust distributions on 2 June this year, according to Mr Schlyder.

“Significantly, the final ruling is retrospective so Trustees who have made distributions to companies which are unpaid need to determine the impact it will have on the amount payable to the tax office.”

Mr Schlyder explained that, where Trusts have made distributions to companies before 16 December 2009, there is some quarantining available, provided certain rules are met.

“If the unpaid amount is determined to be a loan, the amount that is owing may have to be repaid over a period of seven years in most circumstances, with interest at the ATO determined rate under a documented loan agreement. This can have a significant impact on tax payable so it is vital that trustees consider the implications of these earlier distributions now.”

However, all distributions made after 16 December 2009 will be subject to the new laws.

“Loan agreements will need to be entered into with specific terms depending on security offered. The ATO determines the interest rate to be charged on these loans and the minimum repayments due each year,” Mr Schlyder said.

According to Mr Schlyder, with tax time nearing, these new laws will have a major impact on the tax payable by a large percentage of small and medium sized businesses and corporates.

“In most cases, business owners will need to complete a new Taxation Plan in order to structure their affairs so that they legally pay the least amount of tax possible and retain more income. Every business owner should have a Taxation Plan which is up to date and complies with the latest ATO rulings and taxation legislation.”