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News Bulletin : ADA News Bulletin March 2011
26 MARCH 2011 If your dental practice structure includes a trust, or you have a family trust you are probably wondering why there is a sudden need to review your trust deed. The simple answer is the High Court decision handed down in 2010 known as 'Bamford's case'. While it is true to say that the Bamford's case answered some curly questions around the relationship between tax and trust law, this is only part of the story. The bottom line, without getting into the complexities -- it is important for a dental practice owner to consider whether their trust deed will have a financial impact on their practice and personal incomes. When the case was initially handed down, most believed it was a strong win for the taxpayer. This is because the most contentious issue was whether a trust deed could define trust income for the purposes of the Tax Act. On this issue, the High Court held in favour of the taxpayer. As a result, trust deeds will generally determine what is 'income' and not 'trust law principles', as argued by the ATO. So, given that the most contentious issue in the Bamford's case was won by the taxpayer, why is there now a need to review trust deeds? TO DISTRIBUTE ALL FORMS OF 'INCOME' The first reason is to make sure you can take advantage of the principle that emerged from the case. Many dentists have older trusts that were established for their practices, to hold property or for investment purposes. These deeds may have no clause to define 'income'. This can be a problem for many common transactions. For example, if the trustee sells an asset and crystallises a capital gain yet has no other income, the capital gain would not form part of the income of the trust and could not be distributed to beneficiaries. Generally, when there is no income to distribute, any taxable income (in this case, capital gains) is taxed at punitive rates in the hands of the trustee. Not a good financial result! TO CHECK HOW EXPENSES ARE TO BE TREATED This is the second reason to review your trust deed. At Crowe Horwath, we generally take the view that it is better to have a deed that gives the trustee discretion to make distributions from gross income before deducting expenses. Some deeds do not mention expenses or require expenses to be deducted in a certain order. Again, this can result in taxable income being taxed at punitive rates in the hands of the trustee because there is a loss for trust purposes. TO CHECK UNPAID PRESENT ENTITLEMENTS ARE NOT DEEMED LOANS It is also important to ensure that your trust deed does not deem any unpaid present entitlements (amounts due to beneficiaries) to be loans. It is not uncommon to find that the clause that defines what it means to "pay, set aside or apply" trust income will also state that any unpaid amounts constitute loans. Under a recent Taxation Ruling, most unpaid present entitlements arising after 16 December 2009 constitute loans. However, there is some 'grandfathering' for those that emerged prior to this date. If your trust deed states that any unpaid present entitlements constitute loans, it is unlikely they will benefit from the 'grandfathering' arrangements. Where a corporate beneficiary is the subject of the unpaid present entitlement, there may be retrospective tax consequences arising for your trust (under what is commonly known as 'Division 7A' rules). TO ENSURE THAT YOU CAN STREAM INCOME Many commentators argue that the Bamford Decision Impact Statement indicates that the ATO's view is that it is not possible to 'stream' classes of income to particular beneficiaries. For example: distribute all dividend income to my spouse. This issue has not yet been tested by the courts. Consequently, we recommend that where trustees would recommend that where trustees would like to stream income to particular beneficiaries, they ensure the deed contains a correctly worded streaming clause. TO ENSURE COMPLIANCE WITH TAX FILE NUMBER ('TFN') RULES Finally, there are also the closely held trust TFN rules that came into effect from 1 July 2010. While reviewing your trust deed, take the opportunity to ensure that all beneficiaries have provided their TFN to the trustee. As you can see it is a complex area, but can change significantly the financial result and what was common practise over many years. There is more than one good reason why it makes sense to review your trust deed -- and not just the income clause -- now! Andrew Chen is a Principal at Crowe Horwath. He specialises in improving financial and taxation incomes for dental professionals and professional practices. Phone: 02 9619 1626; or email: email@example.com Readers should not act only on the basis of material obtained in this newsletter because the contents are of a general nature and therefore do not take into account each person's individual circumstances and may be liable to misinterpretation. Do not act upon any of the information contained within this article without first obtaining specific advice from a tax advisor. Crowe Horwath assumes no obligation to update this publication after it has been issued. Whilst every effort has been made to ensure accuracy, information contained may not be complete, may have changed or may not be relevant to, or appropriate for your circumstances. FIVE GOOD REASONS to review your trust deed practice management Compiled by Andrew Chen
ADA News Bulletin February 2011
ADA News Bulletin April 2011