Changes Ahead – Discretionary Trusts with Company Beneficiaries

Hello Chasers,

Many of you operating a small business will have a discretionary trust because of the asset protection qualities and flexibility in determining where the taxable profit is distributed. Those of you that also include a company as a beneficiary to take advantage of a lower fixed rate of tax of 25% will now have an additional issue to be aware of as a result of the ATO changing its long-standing approach after releasing tax determination TD 2022/11.

When a trustee of a trust makes a decision to create an entitlement to income of the trust in favour of a company beneficiary (i.e., a privately held company), certain steps need to be taken to ensure that if the entitlement to the distribution remains unpaid (that is, no cash equal to the amount of the entitlement is paid to the company beneficiary), that this does not trigger what is called a ‘deemed dividend’ in the hands of the trust.

A deemed dividend is likely to give rise to unwanted taxation consequences for the trust.

Historically, one way to avoid triggering a deemed dividend in such circumstances was to place the amount representing an unpaid distribution in a sub-account in the trust for the benefit of the corporate beneficiary.

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