THE ATO HAS TODAY RELEASED – PCG 2017/13 DIVISION 7A – UNPAID PRESENT ENTITLEMENTS (UPE) UNDER SUB-TRUST ARRANGEMENT MATURING IN THE 2017 OR 2018 INCOME YEAR.

Quick summary

The ruling, on Division 7A of the Income Tax Assessment Act 1936, essentially permits the final principal repayments of ‘option 1’ – 7 year interest only reinvestment or sub-trust arrangements – to be further deferred. Arrangements established on or before 30 June 2011 will be due and payable by 30 June 2018. However, under PCG 2017/13, taxpayers  will be permitted to establish a loan, rather than pay back the principal ‘reinvestment’ provided this is done before the lodgement date of the 2018 year Company income tax return (generally 15 th May 2019). The new loan’s term will be 7 years.  Failure to do this will result in a deemed un-franked dividend being included in the 2018 year.

Background

Trust distributions declared but not paid (Unpaid Present Entitlements or UPE’s in tax jargon) to an associated family group company give rise to a future obligation of the Trust back to the Company. This obligation comes about because, technically, the company has made an allowance, or what we term a financial accommodation, by permitting the trust to hold onto these funds and reuse them for the trust’s activities.

This is probably a source of numerous discussions that you have with your accountant and tax advisors. The practice is common place and comes about because of the tax differential offered by having trust profits appointed to a family company rather than a private individual.

Back in 2010 the Commissioner issued TR 2010/3 and PS LA 2010/4 which gave taxpayers 3 choices when choosing to establish these arrangements and thereby created a mechanism for the deferring of the requirement to otherwise include these funds in assessable income.

One of these options – option 1 – requires that the amounts appointed to the company but not paid – a UPE – be placed under a separate investment arrangement and held on ‘sub-trust’ to be repaid within 7 years. The investment needs to be documented and have interest only paid upon it at the ATO stipulated rate. If you recall a discussion with your accountant about paying interest to your company from your trust – this is most likely the situation you recall.

The proviso of course is that the entire principal must be repaid by the expiration of the arrangement, which is a maximum of 7 years.

 PCG 2017/13

Today, the Commissioner has stated he will accept a further loan which is compliant under s.109N of Division 7A to be established in lieu of full repayment of the principal of these ‘option 1 sub-trust’ arrangements. Section 109N is the current provision for standard Company to Shareholder loans.

Section 109N requires, at a minimum, the ATO interest rate be used (this is lower than the interest only sub-trust rate), a minimum repayment amount be made each year and also the types of payments that are acceptable. That is, generally cash or a dividend must be booked against this minimum repayment.

The concession is restricted to arrangements put in place prior to 30 June 2011. As the arrangements have only been permitted since 2010 this means that only option 1’s established at 30 June 2010 and 30 June 2011 will be able to be dealt with in this way.

It will be interesting to see whether this concession will be rolled out in due course when option 2 – 10 year, interest only, sub-trusts become due and payable or whether further relief will be provided to arrangements maturing beyond 2018.

PCG 2017/13 Division 7A – unpaid present entitlements (UPE) under sub-trust arrangement maturing in the 2017 or 2018 income year.

https://www.ato.gov.au/law/view/pdf/cog/pcg2017-013.pdf

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