Guidance at Last: UPE Sub-Trust Arrangements Maturing in 2017/2018
By now, many will be aware of the recent release of Practical Compliance Guideline PCG 2017/13, containing guidance for trustees with unpaid present entitlements (UPEs) held on about-to-expire “sub-trust” arrangements.
With the clock ticking on post-Dec 2009 UPEs put on 7-year interest only loans under Option 1 in PSLA 2010/4, many trustees and advisers have been anxiously awaiting the ATO’s latest pronouncement.
“Option 1” and Company UPEs
Following the ATO’s 2010 announcement that it would commence treating UPEs held for corporate beneficiaries as loans, trustees unwilling (or unable) to pay the UPE were required to place the money on “sub-trust” for the sole benefit of the company, or risk triggering deemed dividends under Division 7A.
PSLA 2010/4 effectively created three safe harbours within which the ATO would consider that the sub-trust requirement was met:
- Option 1, in which the “sub-trust” lent an amount representing the UPE to the main trust on a 7-year interest only loan;
- Option 2, which is the same as Option 1 but with a 10-year term and a higher interest rate; and
- Option 3, under which the trustee must invest an amount representing the UPE in a specific income-producing asset.
Trustees were given until 30 June 2011 to take action on post-16 December 2009 UPEs arising before 30 June 2010.
New Guidance for 7-Year Loans Expiring Soon
PCG 2017/13 applies to UPEs dealt with under Option 1 before 30 June 2011, meaning the 7-year term is due to expire in the 2017 or 2018 income years, by which time the trustee will be required to have repaid the principal entirely.
The Guideline states that the principal must either:
- actually be repaid; or
- be put on a 7-year loan complying with section 109N – i.e. a “Division 7A loan” stipulating a minimum interest rate.
The “options” contained in PSLA 2010/4 will not be available.
Division 7A loans require a written agreement. Minimum yearly repayments of interest and principal must then be made over the term of the loan.
If the unpaid amount is neither repaid nor put on a 7-year loan on “Division 7A terms” before the company’s lodgment day, a deemed dividend will arise at the end of the income year in which the “Option 1” loan matures.
Finally, the Commissioner warns that if the facts and circumstances indicate that there was never an intention to repay the principal under the “Option 1” loan, he may conclude that the arrangement was a sham and/or involved fraud or evasion.
The ATO’s ability to amend assessments is unlimited in cases of fraud or evasion (and the Guideline states that dividends would then be deemed in first year of the original Option 1 loan).
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