Amendments to the taxation of discretionary trusts (section 109UB)

On 29 June 2004, the Tax Laws Amendment (2004 Measure No.1) Act received Royal Assent. This Act contains, amongst other things, amendments to Division 7A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) (including the repeal of s109UB).

The Act amends Division 7A of the ITAA 1936 by inserting new integrity rules that deem certain payments, loans or forgiven debts by a trustee to a shareholder (or their associate) of a private company to be an assessable dividend.

The rules are designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying, and then distributing the underlying cash to a shareholder of that company. The rules replace the former section 109UB of the ITAA 1936 that has a similar, but more limited, application.

Key points

• On 12 December 2002, the Treasurer announced that the Government would amend section 109UB of the ITAA 1936 dealing with distributions from trusts, to address concerns with the effectiveness and fairness of the deemed dividend rules.
• The new provisions extend the operation of former section 109UB to cover distributions of the underlying cash that are in the form of a payment or forgiven debt in addition to loans.
• The new provisions allow loans provided by a trust to a shareholder of a private company to be repaid or put on a commercial footing within certain timeframes and, therefore, escape the operation of the deemed dividend rules.

Legislation

You can download the Tax Laws Amendment (2004 Measures No. 1) Act 2004 and Explanatory Memorandum from www.aph.gov.au