UPEs which arose in the 2010 Year – what to do before 30 June 2011

Options and due dates for dealing with UPEs arising in the 2010 year

For UPEs standing in favour of corporate beneficiaries in family groups at 30 June 2010 there are essentially 3 options:

 1.      pay out the UPE before 30 June 2011;

2.      place the UPE funds into a sub-trust held for the sole benefit of the corporate beneficiary before 30 June 2011;

3.      accept that the UPE will become a Division 7A loan on 30 June 2011 and put in place a Division 7A loan agreement by the due date for lodgement of the corporate beneficiary’s tax return for the 2011 tax year (in any event, no later than 15 May 2012).

 Point 1 is uncontroversial and provides the simplest answer.

 As far as point 2 is concerned, the critical issue is to identify how a sub-trust which holds UPE funds can be said to hold them for the sole benefit of the corporate beneficiary. This is discussed below.

 As far as point 3 is concerned, if all else fails the trust and the corporate beneficiary have until the corporate beneficiary’s lodgement day to put a Division 7A loan agreement in place. If our understanding of the ATO view is correct, this may turn out to be the only realistic option for many taxpayers who have to deal with UPEs which arose in the 2010 tax year.

 What are UPE loan agreements?

In essence, the Practice Statement provides three options for loan agreements by which a sub-trust holding UPE funds can deal with them:


  1. a 7 year “interest only” loan to the “main trust”, with interest at the Division 7A  benchmark rate;
  2. a 10 year “interest only” loan to the main trust, with interest at the Reserve Bank’s prescribed rate (slightly higher than the benchmark rate); and
  3. investment in a specific income-producing asset or other investment in the main trust.

 The loan agreements can form part of the tax working papers of an entity, but must be legally binding on the parties.


This Information Brief looks only at the two loan options as they apply to UPEs which arose in the year ending 30 June 2010.

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