Update on tax and corporations law
October 22, 2012
A recent judicial decision and an amendment to the Corporations Act have significant implications for trustees and shareholders respectively.
Bankworth Olive Grove –v- DCT (2010) QCA 80 and its effect upon trustees.
In Bankworth Olive Grove –v- DCT (2010) QCA 80, the Queensland Court of Appeal held that the Commissioner of Taxation was entitled to summary judgment against a trustee assessed under section 99A of the Income Tax Act.
The summary judgment was for the amount of $81 million, even though the trustee had not received any of the money on which tax was assessed.
The originator of the trusts was involved in a tax avoidance scheme.
Although the trustee could file an objection to the assessment, this did not relieve the trustee from paying the tax in the meantime and recovering it in due course if the objection were to succeed.
The Court of Appeal found that the trustee remains trustee throughout the whole of the period in which the relevant taxable income is derived and up to the date liability for the tax accrues, a trustee assessed to tax must pay the assessment even thought it has received none of the income.
This case emphasises the potential problems that could arise from acting as a trustee, and highlights the critical importance of anyone acting as a trustee ensuring that a trust’s tax affairs are in order.
Changes to the Corporation Act for the payment of dividends
The Corporations Act was recently amended to change the law relating to payment of dividends.
Previously, dividends could only be paid out of profits.
However, the recent changes to the Corporations Act have created a new three pronged test, which requires any Australian company paying dividends to its shareholders to ensure that:
1. the company’s assets must exceed liabilities after payment of dividends;
2. the payment of the dividend must be fair and reasonable to shareholders as a whole; and
3. the payment of the dividend must not materially prejudice creditors.
One question which arises is whether a proprietary company can continue to pay differential dividends (which of course is a common practice). It may be argued by shareholders who do not receive a dividend that this is not reasonable to shareholders as a whole.