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Tax experts challenge ATO on unpaid trust distributions

Publication date: 18 Oct 10 | Source: THE TAX INSTITUTE

Joint statement by:

Institute of Chartered Accountants in Australia

National Institute of Accountants

Taxation Institute of Australia

Taxpayers Australia

Four of Australia's leading professional tax and accounting bodies, representing over 100,000 accountants and tax advisers, have united to call for sweeping reforms of the antiquated laws governing the taxation of trusts.

In 2009 the ATO introduced a controversial crackdown on "unpaid present entitlements" - distributions by trusts to associated private companies that were not paid, but remained intermingled with other funds of the trust.

The professional bodies believe the Tax Commissioner's technical interpretation of the taxation laws (Division 7A of the Income Tax Assessment Act 1936) that apply to unpaid present entitlements is not supportable and is at odds with the original policy intent.

While the practice statement on unpaid present entitlements released by the ATO last week embraced some of the practical recommendations put forward by the professional bodies, the fundamental incorrectness of the ATO interpretation remains. This will increase the cost of a major source of financing typically employed in the SME market.

The professional bodies have called for an urgent test case to challenge the Tax Commissioner's interpretation of the laws that apply to unpaid present entitlements, and will raise the issue again at a meeting today in Canberra of the ATO's peak external stakeholder forum, the National Tax Liaison Group.

The recommendation is for the test case to be heard by the Federal Court and funded under the ATO's test case litigation program, to provide judicial guidance on whether the Commissioner's position on this important aspect of the law is correct. The Tax Commissioner has accepted the proposition that a test case is an appropriate vehicle through which to resolve this issue.

The unpaid present entitlement issue, alongside a High Court decision earlier this year on the taxation of trust income and distributions, highlights the need for major review into the taxation of trusts. The Henry tax review, along with recommendations made recently in Treasury's "Red Book", both indicate that the government should re-write the trust laws which are more than 50 years old and are not adequate to deal with the modern use of trusts as trading and investment vehicles.


Media enquires contact

Jasmine Hogg - The Institute of Chartered Accountants in Australia 0423 791 647

Tony Greco - National Institute of Accountants 0419 369 038

Craig Regan - Lighthouse Communications for the Taxation Institute of Australia 0408 448 527

Roger Timms - Taxpayers Australia 0434 648 864