Small-to-medium sized businesses in trusts may be forced to restructure

The Federal Government & the Australian Taxation Office (ATO) continued to alienate themselves from the business sector last week with the Tax Office releasing its final ruling on discretionary trusts distributing surplus income to corporate beneficiaries.

This means that some trust distributions may be recorded as a deemed dividend for Div 7A purposes. Accordingly, these deemed dividends may be taxed at 46.5 % instead of the corporate tax rate of 30%.

From a business perspective where businesses are owned by a family trust (one of the most common ownership structures for SME’s in Australia), profits that have previously been reinvested for capital expenditure, expansion and debt reduction may now be taxed at the 46.5% penalty tax rate.

The ATO has adopted this approach despite objections from accountants’ representative bodies. The implications for the SME sector already struggling in a “stimulus free trading period”, for job opportunities within the sector and for a recovering economy are patently obvious. Further, it casts doubt over strategic planning for the SME sector where, advice on structuring for a SME given in November, 2009 will be vastly different to that given post last week’s ATO announcement.

Worse still, since the draft ruling in November, 2009, there have been numerous submissions to the ATO and articles written outlining all of the reasons the ATO position is wrong under the law. Accountants therefore suspect that at some stage this issue will be decided by the courts which, in the meantime, means that the SME sector continues to struggle under this period of uncertainty.

The logical outcome from the ATO position is that an already struggling SME sector may need to under go a costly restructuring process to enable it to meet changing capital expenditure needs, employ Australians and compete in the commercial market place.

About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia serving business with technical and commercial expertise in agribusiness and SME’s and a full range of specialist corporate and business advisory services including succession planning, superannuation, assurance and advisory, corporate finance, taxation consulting and turnaround and insolvency.

RSM Bird Cameron is a core member firm of RSM International, the sixth largest accounting and consulting organisation in the world.

Important advice to help businesses prepare for potential changes to Australian tax laws

Sydney, October 15, 2009 – RSM Bird Cameron, a leading Australian accounting firm, has developed a check list for Australian businesses to prepare for potential changes in Australian taxation brought about by the Konza Proposition, budget changes to Division 7A legislation and the Henry Review.

The Australian Taxation Office (ATO), through the Konza Proposition, is seeking to treat unpaid present entitlements (UPEs) between discretionary trusts and corporate beneficiaries as loans, which would trigger the application of Division 7A deemed dividend provisions and effectively result in hundreds of millions of unexpected tax liabilities for private companies and their shareholders and associates.

There are a number of influences at work here and the result is impossible to predict. It is commonly known that the ATO is not a ‘fan’ of trusts and discretionary trusts in particular. Certainly, trusts generate some difficult issues for modern tax law.

Craig Cooper, director – taxation services, RSM Bird Cameron, said, “As expected, businesses are up in arms as to what these changes could mean and what they should be doing to prepare.”

RSM Bird Cameron recommends businesses follow these actions to assess how these changes may affect them:

1. Invest time to develop a working understanding of the issues in play and the factors influencing those issues.

2. Understand how these issues may apply to your circumstances as you may not be directly affected.

3. Re-acquaint yourself with the terms of your trust deed. There have been a number of court decisions and other developments that may require a reassessment of positions that have been taken for granted.

4. Review your trust accounts and other secretarial and compliance requirements, against a current “best practice” check list in conjunction with your financial advisor.

Cooper said, “At any given time, there will be many technical and policy issues in dispute between the ATO and the business world. The Konza Proposition is just another example of these disputes, although the importance of the issue elevates it above many others.

“However, there is a framework within which these differences are developed, and ultimately settled, with government legislation the final arbiter if required.

“It is also possible that a recommendation to revisit entity taxation and to tax trusts as if they were a company from the Henry Review may overshadow the Konza Proposition,” concluded Cooper.

-ENDS-

About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia serving the middle market with technical and commercial expertise over the full range of specialist corporate and business advisory services including assurance and advisory, corporate finance, taxation consulting and turnaround and insolvency.  

RSM Bird Cameron is a core member firm of RSM International, the seventh largest accounting and consulting organisation in the world.