TD 2022/11 was published on 13 July 2022 and provides details on the ATO’s approach to how Division 7A (Div 7A) may be applicable when a corporate beneficiary is entitled to trust income from 1 July 2022.
The following rulings were updated to include references to Tax Determination (TD) 2022/11 where relevant after the ATO released addenda to it last week.
- TD 2011/15 - Div 7A - Unpaid Present Entitlements (UPE) - Factors the Commissioner will take into account in determining the amount of any deemed dividend that may arise;
- TD 2015/20 - Div 7A: Is a release by a private company of its UPE a "payment" within the meaning of Div 7A?; and
- TR 2015/4 - CGT small business concessions: UPEs and the maximum net asset value test.
Div 7A operates to ensure that private companies are not able to make tax-free distributions of profits to shareholders or their associates in the form of payments, loans, or forgiven debts.
A private company will be taken to pay an unfranked dividend in an income year if it makes a loan to a shareholder or their associate and the loan is not fully repaid before the private company's lodgement day unless there is some exclusion that applies.
A 'loan' for the purposes of Div 7A includes a provision of credit or any other form of financial accommodation.
It is relatively common practice for trustees to distribute trust income to a related private company beneficiary, where relevant, which in turn is included in the profits of the corporate beneficiary.
TD 2022/11 mainly describes situations when a private company provides financial accommodation where it is made presently entitled to the income of a trust and either:
- That entitlement remains unpaid, or
- The trustee satisfies the present entitlement by setting aside an amount from the main trust fund (main trust) and holding it on a new separate trust (sub-trust) for the exclusive benefit of the private company beneficiary.
A private company beneficiary with a UPE, by arrangement or understanding, consents to the trustee retaining that amount to continue using it for trust purposes if the company:
- Has knowledge of an amount that it can demand immediate payment of from the trustee, and
- Does not demand payment.
This constitutes the provision of financial accommodation to the trustee and as a result, the private company beneficiary makes a loan to the trustee under the extended definition of a 'loan'.
The time when the amount of a beneficiary's entitlement is known will typically arise after the end of the income year, that is, in the following income year, in which the entitlement arises. This was a key focus of many submissions on the draft TD to the ATO.
UPEs arising during the 2022-23 income year may generally give rise to the provision of financial accommodation in the following year (i.e. 2023-24).
An example extracted from the TD is highlighted below in relation to a UPE that was subsequently put on a complying loan agreement:
Sub-Trust Arrangements – Will they exist?
Option 1 and Option 2 sub-trust arrangements were often used where the amount in the sub-trust was invested in the main trust under PSLA 2010/4 (now withdrawn).
This typically involved putting it under a 7-year or 10-year interest-only arrangement and not having to repay the principal until the end of the period or later.
These options are not available for trust entitlements arising on or after 1 July 2022 effectively making a sub-trust arrangement, the least preferred option for the majority of the cases.
Existing sub-trust arrangements are not impacted as a result of the new changes which:
- Arose on or before 30 June 2022, and
- Mature in or after the 2016–17 income year with either Option 1 or Option 2 as described in Practical Compliance Guideline (‘PCG’) 2017/3.
Key Dates and Application
The Addenda applies from 13 July 2022 (i.e. when TD 2022/11 was released).
Taxpayers and practitioners can continue to rely on both TR 2010/3 and PS LA 2010/4 in relation to trust entitlements that arose on or before 30 June 2022 not after.
TD 2022/11 also does not apply to UPEs arising before 16 December 2009.
Div 7A and sub-trust options involving UPEs can be particularly complex and varies based on the client’s circumstances. There is no one-size-fits-all approach.
If you believe you need to discuss your individual situation, reach out to your local RSM office and speak to one of your trusted tax advisers for further guidance on the matter.