Set out below are three recent developments in Australian tax law which may be of interest to you: the use of corporate beneficiaries of a trust with unpaid present entitlements, GST grouping and indirect tax sharing agreements. If any of these topics are of interest to you, please continue reading.

Related trust structures – Taxation Ruling TR 2010/3

The Federal Commissioner of Taxation (Commissioner) released finalised Taxation Ruling TR 2010/3: Income tax: Division 7A loans: trust entitlements (Ruling) on 2 June 2010.

In the Ruling the Commissioner indicates where he considers a private company with an unpaid present entitlement (UPE) from a related trust will be considered to have made a loan to the trust for the purposes of Division 7A.

In the Ruling, the Commissioner considers that the private company beneficiary will have made a Division 7A loan to the trust where either:

  1. A UPE has been satisfied and the company agrees to loan the amount to the trust; or
  2. If the corporate beneficiary does not call for payment of a UPE that has not been satisfied and thereby agrees that the UPE can be used for trust purposes.

A Division 7A loan for the purposes of the Ruling includes a loan within its ordinary meaning; an advance of money with an expectation of repayment; the provision of credit or other financial accommodation where a principal sum is ultimately payable; a payment of an amount for, on behalf of, an entity where there is an obligation of repayment; and transactions that in substance affect such a Division 7A loan.

The Commissioner expresses in the Ruling that a Division 7A loan can be implied from the circumstances that arise.

The Commissioner’s interpretation set out in the Ruling will apply both retrospectively and prospectively (subject to the period of review). However the Commissioner has indicated that he will limit his interpretation (as expressed in the Ruling) in relation to UPEs that have not been satisfied, where those UPEs arise on or after 17 December 2009.

The Commissioner has also released Draft Practice Statement Law Administration PS LA 3362 to provide practical guidance on how he will administer his view set out in TR 2010/3.

As a result of the Commissioner’s increased focus on UPEs, we recommend that affected family trust structures review their use of corporate beneficiaries and their continued use in the future. We would be happy to assist you with this.

Goods and services tax (GST)

On 28 June 2010 Tax Laws Amendment (2010 GST Administration Measures No. 2) Act 2010 (the Act) received Royal Assent. The Act introduced measures to allow for flexibility and reduce potential compliance costs faced by GST groups and GST joint ventures.

Grouping

The Act allows (for tax periods commencing on or after 1 July 2010):

  • A GST group and GST joint venture to form, change or dissolve.
  • To change the Representative (of the GST group or joint venture) on any day prior to the day that the Representative is required to give the Commissioner a GST return for the tax period in which the formation, change or dissolution takes place.

Indirect Tax Sharing Agreement

The Act also allows from 1 July 2010 GST group members and participants in a GST joint venture may limit their indirect tax liability by entering an indirect tax sharing agreement (ITSA).

The ITSA will not relieve the Representative of its liability for the full indirect tax amount of the group or joint venture. Rather, where the Representative fails to pay the full indirect tax amount, the ITSA will operate to limit the liability of each Member that is party to the ITSA.

The main effects of the ITSA (provided it is entered prior to the time that amounts for a tax period becomes payable and other requirements are satisfied) are:

  1. The joint and several liability of a Member for the indirect tax payable by the Representative is limited to its contribution amount for the tax period; and
  2. It will be possible for a Member to achieve a “clear exit” from the group or joint venture in the tax period that it leaves, provided it makes a payment to the Representative.

An ITSA will apply to all amounts payable under indirect tax laws this includes GST, fuel tax, luxury car tax and wine equalisation tax.

The following requirements must be present for an ITSA to be valid:

  • A Representative and relevant Member must be parties to the ITSA;
  • For each tax period, it must be possible to identify an amount (contribution amount) under the ITSA for each Member that is party to the ITSA;
  • The contribution amount must represent a “reasonable allocation” of the Representative’s total liabilities;
  • The ITSA must be in an approved form.

The Australian Taxation Office will release guidelines on what is required for an ITSA, including the circumstances where a contribution amount will be a reasonable allocation. You should note that there are other requirements that must be met for an ITSA to be effective.

We would be happy to assist you with arranging for an ITSA to be prepared if you require one, or would like to discuss any of these matters.

For queries regarding any of the matters set out in this Tax Alert, please contact Steve Fitzsimons on 02 9232 5111 or steve.fitzsimons@hr-ss.com.au.