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Chapter 18: Defining ‘distribution’ in an entity regime

A case for reform

The current concept of ‘distribution’ has been developed in the context of companies, with additional rules covering distributions from private companies and issues of bonus shares. The current treatment of distributions from trusts differs markedly from the treatment of distributions from companies.

A strategy for reform

To develop a unified approach to the taxation of distributions made by entities that would achieve uniformity across all entities, reduce ambiguities, take contemporary means of distribution into account and ensure the integrity of the entity tax regime.

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Reform options

What definition of distributions should be used and how should member benefits not in the definition be treated?

What should be the treatment of created ownership rights?

Option 1
Apply a broad definition of distribution to all benefits to members.

Definition would include benefit of loans provided at less than commercial interest rates. (Expand scope of existing definition, and incorporate Division 7A.)

Option 2
Apply a broad definition of distribution but exclude certain benefits provided by widely held entities.

(Existing private company treatment would apply to all closely held entities - through option discussed of simpler treatment of non-commercial loans.)

Option 3

Subject to consideration of FBT in Chapter 38:
- adopt either Option 1 or Option 2 but tax certain benefits under FBT;
- apply FBT provisions to certain non-cash benefits to person in capacity as member.

Move to dividend treatment with cost base adjustment alternative for certain proportionate issues.