TR 2009/D8 ARTICLE
On 16 December 2009, the ATO released a draft Taxation Ruling (“TR 2009/D8”) which contains the Commissioner’s view on the circumstances in which a private company with an unpaid present entitlement (“UPE”) to an amount from an associated trust, where the funds representing the UPE remain intermingled with funds of the trust, may be taken to have made a loan to that trust within the provisions of Division 7A.
Background
It is not uncommon in many family structures to have a company as a beneficiary of a trust and the trust makes the company beneficiary presently entitled to the income, but the money stays within the trust for generally commercial purposes – creating a UPE.
The draft Ruling considers whether such a UPE can be taken to be a loan made by the private company to that trust within the meaning of Division 7A, in which case, unless a complying Division 7A loan agreement is put in place, the trust will be deemed to have received a dividend under Division 7A.
The ATO’s long standing position was not to treat these UPEs as loans unless the trust actually lends the money to a shareholder or their associate.
The Commissioner’s view
The Commissioner’s now argues that the definition of “loan” in Division 7A is very wide and includes the provision of ‘financial accommodation’.
Where the UPE funds are not held specifically for the benefit of the corporate beneficiary, the Commissioner considers the UPE will be converted into a loan. This is irrespective of whether the funds are on-lent to a shareholder (or associate) of the corporate beneficiary.
It is proposed that the final ruling will apply both before and after the date of issue (ie. 16 December 2009).
Fortunately, the draft Ruling outlines an exception to this application. If the Commissioner’s view is less favourable, which is generally what is expected to be the position, then the Ruling does not apply to UPEs “arising before the date of issue of the draft ruling”.
This implies that UPE balances arising up to and including 15 December 2009 are (favourably) quarantined in a similar manner to what was generally done for “pre-December 1997” loan balances upon the introduction of Division 7A.
Other issues to come out of the draft Ruling
1. The ruling will only be applicable to subsisting UPEs that have been raised on or after 16 December 2009.
2. The Commissioner will assume that the corporate beneficiary has knowledge of the trustee’s use of the funds that represent the UPE where the trust and company form part of the same family group.
3. Where the company has knowledge that funds are being used for trust purposes rather than for the absolute benefit of the company, the non-calling of payment amounts to making a Division 7A loan. This effectively makes “not asking” a conscious non-doing of an act and thus intentionally not calling for payment of the UPE.
4. If an unpaid trust distribution is accounted for as a loan between both parties, the amount will be treated as a loan for Division 7A purposes. Therefore, proper accounting of these amounts becomes important.
There has been significant backlash by professional bodies who do not agree with the Commissioner's view that the knowledge of the trustee of the trust of itself can be attributed to the private company and therefore, these professional bodies are of the view that a loan arising from a set-off of the UPE amount cannot not be effected unilaterally by the trustee of the trust without the express concurrence of the private company beneficiary.
Where to now?
As TR 2009/D8 is a draft Ruling which has been subject to significant submissions and consultations, we expect there to be more developments on the topic before the Ruling is finalised.
If the Full Federal Court decision in Bamford v FCT (2009) made it important to read the trust deed, now the UPE issue is yet another reason.
In the current form, we consider the draft Ruling to have a significantly adverse impact on the administration of trusts going forward and this issue will be relevant to many of our SME clients and will require some careful consideration.