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For small businesses, we as accountants consider which is the best entity for you to operate. There is no one size fits all, as there are a range of factors to consider which is the best structure for you.
For primary producers, it is common practice to operate via a family trust. A trust provides flexibility to distribute to anyone within a family group, and also provides asset protection. This can be a popular entity where there are multiple families operating as one business.
Trusts are separate legal entities, and any net income is for the benefit of beneficiaries. Trusts effectively act like sieves – the income is passed down to beneficiaries and taxed in their hands, and retain the same character of income in the trust. That is why trusts are so popular for primary producers, as it retains the character of the trust. Beneficiaries receive primary production income, which means it is subject to income averaging and can make Farm Management Deposits to help reduce primary production income.
The definition of beneficiaries is typically quite broad, and generally include companies. This allows the trust to distribute to a company, where the income is taxed at a flat rate, which is usually 25%. However, there has been a longstanding requirement that any distributions to a company are subject to Division 7A – until now.
In basic terms Division 7A is part of the Tax Act that is intended to prevent profits or assets being provided to shareholders or their associates tax-free. If benefits are provided, there are actions which must be taken to ensure a deemed dividend does not arise. Without being too technical, I could simply summarise that a deemed dividend is bad! In 2009 Division 7A was widened to include trust distributions to companies where the money was not paid to the company and instead retained by the trust.
A recent court case has now caused great uncertainty with trust distributions to companies and Division 7A. In Commissioner of Taxation v Bendel [2025] FCAFC 15, the Court ruled than an unpaid present entitlement resulting from a trust allocating income to a corporate beneficiary does not constitute a loan for Division 7A purposes. This was a Full Federal Court decision which was in favour of the taxpayer. The Commissioner had already appealed the decision by the Administrative Appeals Tribunal. By the time this article is published we may have clarity on whether the Commissioner appeals to the High Court. To muddy the waters even further, we have a Federal election looming. It will be interesting to see if the Australian Taxation Office provides any further statement confirming its position regarding Division 7A and how the law will be administered while the judicial process continues.
Watch this space for any further developments regarding the Bendel case or any announcement from the Australian Taxation Office, and talk to your accountant if you need to explain your position in greater detail.