UPEs to companies arising after 16 December 2009 – analysis and comment

With effect from 16 December 2009 the Commissioner of Taxation has adopted a new approach in dealing with distributions of income made by trusts to related family companies where the amount of the distribution remains unpaid at the end of the tax year in which its made. In effect, the Commissioner now treats the unpaid present entitlement (UPE) owing by the trust as being a loan made by the company to the trust. Under Division 7A, if a loan is made by a company to a related trust, the amount of that loan will be treated as an unfranked dividend paid by the company to the trust in the year in which the loan is made. Prior to the Commissioner adopting this approach, it was common for trusts to “shelter” income at the corporate tax rate of 30% by distributing amounts to corporate beneficiaries. This step may now only be taken in accordance with the requirements now set out by the Commissioner is a new Practice Statement.

This document looks at some of the more important issues for dealing with unpaid present entitlements of discretionary trusts (UPEs) which arose after 16 December 2009  in favour of corporate beneficiaries within the same family groups. It is therefore relevant to the year ending 30 June 2010 and subsequent tax years. 

The comments are aimed at explaining the investment options set out in the Commissioner’s Practice Statement PS LA 2010/4 (Practice Statement) as it stands at 2 June 2011.  

The view of the operation of the law which is assumed by the Practice Statement is not necessarily the view which is taken by Riordans Lawyers. The issue at hand is to analyse the Commissioner’s statement as it stands. 

However, taxpayers should be aware that to follow a practice statement which turns out to be incorrect as a matter of law does not provide completer protection from a subsequent adverse assessment if  the practice statement is found to be wrong in law – the protection is merely against penalties and interest on underpayment. 

The concentration of the analysis below is on how to deal with the Practice Statement’s 7 and 10 year investment loans alternatives under “Option 1” and “Option 2” for UPEs arising in that tax year, and the timing for doing so. “Option 3” (investments in specific assets) is not dealt with in any detail.

 With regard to timing issues, it is suggested Practitioners should assume that the (relatively) “nice cop” ATO attitude at the time of introducing the new regime, may well become a “tough cop” attitude when dealing with individual taxpayers in later year audits. This new regime is not based on legislated concessions and therefore there may be limited scope for appeal to a court or to the AAT if confronted with a “tough cop” ATO auditor in a later year. 

UPEs arising in the 2010 tax year

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