Let’s look at a bigger picture view of trusts and companies where there are a number of associated or linked businesses, companies and/or trusts (which the ATO sometimes calls interposed entities).  

A common error comes about when small business owners who are running their business through a trust, set up a separate company as a beneficiary of the trust and then don’t quite get things right.

The common mistake made by people who have set up this particular structure usually occurs when the benefit or amount owed to the company is kept in the trust under the premise that ‘I was only going to take it back out from the company to use in the trust’. 

If the trust does not pay the original distribution amount that was intended to be distributed to the company it may be considered a payment to the trust. 

Without a full payment or a complying loan agreement, the trust is taken to have received an unfranked deemed dividend (untaxed payment), from the company regardless of your intentions. This dividend amount could be taxable to the trustee of the trust at the highest marginal tax rate, depending on the circumstances within the trust. Also, the company can’t get a deduction for the payment either.

If this happens over a number of years, when it’s picked up it can be a very expensive mistake.

In this situation where you are trying to retain or reinvest profits in your business which runs through the trust, it is critical that you understand the requirement to set up a complying loan. If you are not sure you are doing things the right way check in with your trusted professional adviser or contact the ATO.