The Bucket Has a Leak

A discretionary trust may appoint income to a corporate beneficiary and leave the cash in the trust. This is often described as a bucket-company strategy. The phrase sounds pleasingly domestic. The law is less relaxed about who is entitled to the money, who uses it and on what terms.

Start with the trust deed and resolution

The trustee must validly exercise its powers by the required time and identify the relevant income and beneficiaries. Taxable income, trust-law income and specific-entitlement rules do not always move together. Section 100A, reimbursement agreements and anti-avoidance provisions may also need consideration where someone other than the assessed beneficiary receives the practical benefit.

Unpaid does not mean unimportant

An unpaid present entitlement records that the corporate beneficiary is owed an amount. The ATO’s TD 2022/11 treats certain trust arrangements as financial accommodation for Division 7A purposes. The decision in Bendel challenged an important part of that position, and the ruling has been under review. This is an area where the date, precise arrangement and current appellate position matter.

Associated loans create a second layer

Payments, loans, debt forgiveness and the use of funds by shareholders or associates can produce deemed dividends under Division 7A. Complying loan agreements, minimum yearly repayments and distributable surplus are not end-of-year clerical decorations. Circular repayments and replacement borrowing may also attract specific integrity rules.

Do not copy last year blindly

Review the deed, resolutions, beneficiary entitlements, general ledger, bank movements, loan documents and actual use of funds together. A structure may be commercially sensible, but the records must tell the same story as the money.