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  • Distributions in excess of beneficiaries’ shares of net income

    Trust distributions in excess of the amounts assessed to beneficiaries are known as tax deferred distributions (TDDs).

    Generally, we will not seek to assess TDDs as ordinary income where taxpayers hold interests in trusts as:

    • investments, either on capital account, or subject to the CGT primary code rules applying to superannuation entities, MITs and the superannuation business of life insurance companies, and have consistently treated the TDDs as non-assessable amounts under the CGT cost base and reduced cost base rules
    • revenue assets (not subject to CGT primary code rules), and have taken TDDs, including CGT concessional amounts, fully into account in working out revenue gains and losses on those interests.

    Situations where the assessing of TDDs as ordinary income will be considered include (but are not necessarily limited to):

    • the type referred to in Taxation Ruling IT 2512, which deals with ‘Financing unit trusts’, and similar arrangements involving the use of a trust structure to raise finance where TDDs are received in lieu of interest or similar amounts that would normally form part of assessable income
    • the type referred to in Taxation Ruling TR 2014/D1, which involves the use of trusts to make distributions to persons as a reward for the performance of services, whether as an employee or otherwise
    • arrangements where there may have been tax planning to maximise the extent to which trust distributions are characterised as TDDs.

    The assessability of TDDs will also be considered where they relate to trust interests that are:

    • subject to the taxation of financial arrangements (TOFA) regime and treated as assessable income under TOFA rules
    • held as trading stock – in these situations a corresponding closing stock adjustment may also be appropriate in some situations when a cost basis is being used.
      Last modified: 22 Feb 2023QC 47436