The recent decision by the Full Federal Court in Lewski's case shook things up in the world of trust income distribution. They overturned the Tribunal's ruling, siding against the ATO. Essentially, they said that on June 30, 2006, no beneficiary had a right to any trust income. Usually, this would mean the trustee owes tax on the trust's taxable income, although the ATO might have missed its window to assess the trustee.
Here's why the court made this call:
They saw the resolutions made on June 30, 2006, as linked. One resolved to distribute income, while the other changed that distribution under certain conditions. Reading them together, they found that no one was entitled to the income outright.
They said the distribution to Roslyn Lewski was uncertain because it depended on a later ATO audit adjustment. Same went for Australian Commercial Underwriting Pty Ltd; their share was up in the air until the ATO audit happened.
A similar situation was explored in TD 2012/22, where the ATO allowed distributions to individual beneficiaries but raised issues with distributions to corporate beneficiaries. However, Lewski's case flipped this, saying no one was entitled to any income. The ATO plans to re-evaluate TD 2012/22 in light of this decision.
This has led to some uncertainty. Trustees should steer clear of wording that creates uncertainty, like mentioning ATO adjustments. Instead, they might opt for fixed dollar distributions to avoid this mess.
Should you have any questions or need assistance, feel free to reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our live calendar.