ATO Appeals $1B Trust Tax Refund Ruling

The Australian Taxation Office is pushing to overturn a major Federal Court decision that could result in $1 billion in tax refunds for nearly one million family trusts. The ruling challenges the ATO’s long-held stance on how certain unpaid trust entitlements should be taxed, creating uncertainty for corporate beneficiaries and trustees.

The dispute centres on whether unpaid present entitlements - amounts owed by a trust to a corporate beneficiary - should be classified as loans under Division 7A of the Tax Act. The ATO has treated these entitlements as loans since 2009, leading to additional tax obligations. However, the Federal Court recently found in favour of Melbourne accountant Steven Bendel, stating that these amounts should not be treated as loans.

If upheld, the ruling could prompt significant tax refunds for trusts that had their assessments increased over the years. Experts estimate around 971,000 family trusts could be affected, with potential refunds averaging $10,000 each. However, the ATO has now sought leave to appeal to the High Court, arguing for its interpretation of the tax rules to stand.

The High Court could take several months to decide whether to allow the appeal. If accepted, a final hearing might not occur until late 2024 or early 2025. In the meantime, tax specialists suggest trustees consider their options, with some advising that unpaid entitlements for the 2023 financial year be formalised as loans to avoid potential tax liabilities.

With uncertainty ahead, affected taxpayers are urged to stay informed and seek professional advice. The ATO has stated it will not make final decisions on past-year assessments until the appeal process concludes. Trusts and corporate beneficiaries will need to navigate this evolving situation carefully as they approach the 2025 tax year.

Source: Australian Financial Review, Blaze Acumen