TAX NEWS - June 2010

NFF weighs in on small business trust tax

National Farmers Federation (NFF) officials are lining up to talk to Treasurer, Wayne Swan, the week following a controversial ruling by the Australian Taxation Office (ATO) on taxing small business trusts.

This month's ATO announcement has been blasted by the Taxation Institute of Australia as a blow to thousands of families and small businesses using trusts as an effective tax structure - including family farmers.

NFF economics and trade manager, Charlie McElhone, said the implications of the ATO decision in response to a landmark High Court decision on the taxation of trust income were still being scrutinised by farm tax specialists.

However, he said what may seem like a simple ruling to the taxation department could have complicated and costly implications for farm families whose trust entities had been set up over many years to fit with past taxation policy.

The ATO ruled that the long-standing practice of trustees retaining money allocated to a corporate beneficiary - known as an unpaid present entitlement (UPE) - was now considered a loan which attracts a top marginal tax rate as a "deemed dividend".

Mr McElhone said farming businesses often had multiple company structures because of historical and family partnership reasons and the ATO's decision could lead to "perverse outcomes for farm cashflows".

He and other NFF officials will be discussing its farm sector implications - and raising other rural economic issues - with Mr Swan.

As tax advisers now look at restructuring businesses and redrafting trust deeds to fit with the ATO ruling, they say family enterprises could lose the flexibility afforded by trusts to modify beneficiaries' entitlements to income.

Small businesses have typically used the funds for working capital which were deposited in trusts to take advantage of the 30 per cent company tax rate.

Tax counsel with the Institute of Chartered Accountants in Australia, Yasser El-Ansary, said ATO could have done better by introducing laws targeting use of the funds for private purposes.

Nationals Senator and spokesman on regional development, Barnaby Joyce, described the ATO decision as cumbersome and unlikely to generate much extra revenue for the tax department.

"It's inconvenient and it will most likely hit our more substantial sized farming businesses," said Senator Joyce, who is also an accountant.

"It seems a short sighted revenue chasing decision. No farm enterprise would go to the trouble of utilising a corporate beneficiary trust unless there is a good reason in the first place."