If you operate a discretionary trust and distribute some of the income of the trust to a related company then a draft tax ruling issued in the week before Xmas may create some additional headaches for 2010

In a spirit of Xmas goodwill and cheer the Tax Commissioner released Draft Ruling TR2009/D8. This ruling says that where a trust has appointed income to a company beneficiary but has not actually paid the company the appointed amount, then these distributions made after 16 December 2009 will be deemed to be a loan from the company back to the trust. The effect of this, in most cases, is that the loan will be captured under Division 7A of the Tax Act. This is the section that says where a company makes a loan to a shareholder or an associate of a shareholder, that loan will be deemed to be an unfranked dividend unless the company and the shareholder has entered into a complying loan agreement and interest and principal is being paid on the loan.