Certain trust amounts treated as dividends
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On 29 June 2004, legislation was enacted that replaced the previous rules that treated certain trustee loans as dividends from a private company.
The new rules apply to certain transactions that occur on or after 12 December 2002 between the trustee of a trust estate and a shareholder of a private company or shareholder's associate where the private company is a beneficiary of the trust. It is these shareholders and associates who need to have regard to the new rules.
Trust loans, payments and forgiven debts treated as dividends
These rules apply where a shareholder (or a shareholder's associate) of a private company receives a financial benefit through a trust in the form of a loan, payment or a forgiven debt, where the private company is the beneficiary of a trust estate. An amount may be treated as a dividend and included in the assessable income of the shareholder (or the shareholder's associate) of a private company if, on or after 12 December 2002, the trustee of a trust estate:
- makes a payment that discharges or reduces a present entitlement to an amount that is attributable to an unrealised gain
- makes a loan, or
- forgives a debt in favour of a shareholder (or a shareholder's associate) of a private company, and
- the private company has an unpaid present entitlement from the trust estate.
From 12 December 2002 until 18 February 2004, the rules apply if a private company had an unpaid entitlement at the time of the payment, loan advance or debt forgiveness.
After 18 February 2004, they also apply if a present entitlement arises after the payment, loan advance or debt forgiveness but before the lodgment day and the present entitlement remains unpaid before lodgment day.
- For the purposes of these rules, the creation of a present entitlement is not a 'payment'.
- Where a payment is only partly attributable to an unrealised gain, it is only the attributable part that is taken into account for the purposes of these rules.
The lodgment day is the earlier of the due date for lodgment and the date of lodgment of the trust's tax return for the income year in which the payment, loan or debt forgiveness occurs.
Trust amounts that will not be treated as dividends
The following transactions do not result in an amount being treated as a dividend:
- a payment which discharges a debt due to the shareholder (or shareholder's associate) by the trustee of the trust estate where the payment is no more than would have been paid had the trustee and the shareholder (or shareholder's associate) been dealing with each other at arm's length
- a payment, loan or debt forgiveness that is made to a private company
- a loan that is repaid before the lodgment day
- a loan that meets the criteria of an 'excluded loan' before the lodgment day
- a loan that is made in the ordinary course of the trust's business on the usual terms which the trustee applies to similar loans made to parties at arm's length
- a payment where the unrealised gain has been or will be included in the net income of the trust estate for an income year up to and including the year following the one in which the payment is made
- a payment or loan which forms part of the assessable income of the shareholder or associate by virtue of some other provision of the ITAA 1936 or the ITAA 1997
- a payment or loan which has been specifically excluded from the assessable income of the shareholder or associate by virtue of an exempting provision in the ITAA 1936 or the ITAA 1997.
Note: Subject to some limited exceptions, a loan is not taken to be repaid if, at the time of the repayment, it was intended to obtain a loan from the trustee of the trust estate of an amount similar to or larger than the repayment.
A loan is an excluded loan if it meets the criteria set out for private company loans.
If a loan is an excluded loan, it is amalgamated with all other excluded loans made in the income year which have the same maximum term. The shareholder (or their associate) must make a minimum yearly repayment in respect of the amalgamated loan for subsequent income years. Any shortfall in making the minimum yearly repayment may be treated as a dividend subject to the private company's distributable surplus. The formula for calculating the minimum yearly repayment is the same as shown in the example, assuming the loan was made by a trustee.
Note: An excluded loan is not included in an amalgamated loan if the loan is fully repaid before the lodgment day.
Amount included as an unfranked dividend
The amount included as an unfranked dividend in the assessable income of the shareholder (or shareholder's associate) is equal to the lesser of:
- the amount of the loan, payment or forgiven debt
- the amount of the unpaid present entitlement less any amounts that have been taken to be loans or treated as dividends because of previous applications of section 109UB of the ITAA 1936 or of these rules, and
- the distributable surplus of the private company with the unpaid present entitlement.
The distributable surplus of the private company is calculated using the formula.
Last modified: 04 Mar 2016QC 27923