NO.055

TAXATION OF DISCRETIONARY TRUSTS – REPLACEMENT OF SECTION 109UB

I am announcing today details of the new provisions dealing with

distributions from trusts that the Government intends to introduce

in place of section 109UB of the Income Tax Assessment Act 1936.

On 12 December 2002, I announced, in response to the recommendation

of the Board of Taxation in its report on the Taxation of Discretionary

Trusts, that the Government would improve the effectiveness and fairness

of the deemed dividend rules contained in Division 7A of the Income

Tax Assessment Act 1936.

The design of the rules to give effect to the Government’s decision

has significantly benefited from consultation with tax practitioners

and industry. I thank those who have made contributions as part of

that process. The final details of the amendments will be subject

to further consultation.

Details of the proposed amendments, which will provide certainty

and assistance to taxpayers in preparing their 2003 income tax returns

and to trusts in finalising their distributions, are set out in the

attachment.

CANBERRA

25 June 2003

Contact:

David Alexander

02 6277 7340

ATTACHMENT

Proposed rules to replace section 109UB

To improve the effectiveness and fairness of section 109UB in the Income

Tax Assessment Act 1936 (ITAA 1936), the Government will replace

section 109UB with provisions that have the following features.

In a situation where:

• a private company is presently entitled to trust

  income of a trust estate but that income has not been paid to the

  company; and

• the trustee distributes the underlying cash to a shareholder (or their associate)

  of the company in the form of a loan, payment, or forgiven debt;

the loan, payment, or forgiven debt will be subject to the deemed dividend rules

contained in Division 7A of the ITAA 1936.

For the purpose of the rules, certain payments will be excluded.

Such payments would include those that are otherwise assessable, settled

amounts, and distributions attributable to certain tax preferences (such

as the 50 per cent CGT concession and the disposal of pre‑CGT assets).

Some changes will be included to address concerns regarding

the fairness of the existing section 109UB.

• Generally, where the loan is taken to fall within

  the operation of Division 7A, the terms and conditions applying to

  the actual loan between the trust and the shareholder (or their associate),

  including repayments made in respect of the loan, are taken to apply,

  or to have arisen, in respect of the deemed loan from the private

  company to the shareholder (or their associate).

• Special transitional rules will apply until the date of introduction of the legislation.
  • In cases where the distribution is taken

    to be in the form of a loan, the shareholder (or their associate)

    will have until the due date of lodgement of their tax return

    (in respect of the year in which the loan is made) to repay

    the loan.

  • If the loan has not been repaid by this

    time, the loan will be taken to have fallen within the operation

    of Division 7A at the time the loan was made, under which

    it is deemed to be a loan from the private company to the

    shareholder (or their associate).

  • The need for equivalent rules on an ongoing basis will be the subject of further

    consultation.

Consistent with my press release (number 81 of 2002), the amendments

will apply in respect of loans, payments and forgiven debts arising

on or after 12 December 2002.