When trust distributions to a company are left unpaid
What happens when a trust appoints income to a private company beneficiary but does not actually make the payment?
The tax treatment of this unpaid amount was at the centre of a recent case before the Administrative Appeals Tribunal (AAT) that saw a taxpayer successfully challenge the ATO’s long held position (Bendel and Commissioner of Taxation [2023] AATA 3074). For many years, the ATO’s position has been that if a trust appoints income to a private company beneficiary but does not actually make the payment, this unpaid amount can be treated as a loan. Under Division 7A of the tax rules, these loans can be taxed as unfranked dividends unless they are managed using a complying loan agreement with annual principal and interest repayments.
This AAT decision challenges an important ATO position, with the tax outcomes being potentially significant for trust clients that currently owe (or may have owed in the past) unpaid trust entitlements to related private companies.
But this is not the end of this story. On 26 October 2023, the Tax Commissioner lodged a notice of appeal to the Federal Court. There is no guarantee that the Federal Court will reach the same conclusion as the AAT. We will need to wait and see.
As the case progresses, we will let you know about the impact.
Fixed-term employment contracts limited to 2 years
From 6 December 2023, employers can no longer employ an employee on a fixed-term contract that:
· is for 2 or more years (including extensions)
· may be extended more than once, or
· is a new contract:
o that is for the same or a substantially similar role as previous contracts
o with substantial continuity of the employment relationship between the end of the previous contract and the new contract, and either:
· the total period of the contracts is 2 or more years,
· the new contract can be renewed or extended, or
· a previous contract was extended. The changes were introduced as part of the Pay secrecy, job ads and flexible work amendments. See the Fair Work Ombudsman’s website for more details.
