This controversial draft Taxation Ruling TR 2009/D8, released in December last year, details circumstances in which the Commissioner's opinion, a private company with an Unpaid Present Entitlement from an associated trust may be taken to be a loan to the trust under the Division 7A requirements.
Currently any loan made by a private company to a shareholder or associate of the company is treated as an unfranked dividend unless there is an approved written loan agreement in place.
It is quite common that group structures (such as Trusts) make distributions that remain "unpaid" (also known as "unpaid present entitlements" or UPE's), the trust retains the UPE's and reinvests them in the trust's operations. This currently represents an effective tax minimisation strategy.
In draft Taxation Ruling in question, the Commissioner has now taken the view that where a trust has resolved to appoint income to a related company beneficiary but has not actually paid the company the appointed amount, then these distributions will be deemed to be a Division 7A loan from the company back to the trust.
The draft ruling is a departure by the ATO from its long standing position and the thrust behind the ruling can be said to be revenue driven. Based on the ATO's recent audit and review activity of high net worth individuals it is believed that there may be more than $1 billion of trust distributions to companies that remain unpaid. Accordingly, one can understand why the ATO may be encouraged to change their view and seek to tax unpaid trust distributions to companies.
Generally, in the latter situation the ATO's views will only apply from 15 December 2009. However, there may be instances where the ATO will consider retrospective application.
The only exception to an Unpaid Present Entitlement becoming a loan for Division 7A purposes is where:
- The amount of the distribution is set aside on sub-trust, and
- The sub-trust is entitled to all the benefits that flow from the investment income in the main trust
The Release of TR 2009/D8, if finalised in its current form will most certainly impact the treatment of Unpaid Present Entitlements in the future and consideration will need to be given to alternative distribution strategies going forward.
If the Commissioner continues in this view and it becomes final ruling, then trusts that have used corporate beneficiaries to limit tax payable on distributions, but where distributions have not been paid will need to change strategy. Otherwise, they will trigger an additional tax liability.
It is going to be necessary to review your structure before any lodgements are finalised in 2009/10, however with the ATO's views in relation to UPE's being in draft form, it is difficult to determine a precise course of action.
As such, we will keep you updated as to any "news" and advise you when a course of action is determined. If you have any queries please don't hesitate to contact me on john.riseley@srj.ascenta.com.au
