Peter Costello

Media Releases

Taxation of Discretionary Trusts - Replacement of Section 109UB

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.

25 Jun 2003

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