Unpaid Present Entitlements

On 16 December 2009, the Australian Taxation Office (ATO) issued Draft Taxation Ruling TR 2009/D8 outlining its interpretation of the tax treatment of an unpaid present entitlements (UPE) created in a private company beneficiary.

The ATO changed their previously held view that a UPE was not a loan for Division 7A purposes. Division 7A deems a loan from a private company to a shareholder or associate to be a deemed dividend. The ATO now consider that, in some circumstances, a UPE to a private company can be converted to a loan from the private company to the trust.

Since the issue of TR 2009/D8 both tax and legal professionals have lodged submissions questioning the legal basis upon which a UPE can be properly classified a loan or a financial accommodation. However, the ATO is not listening. It would appear that tax leakage is driving the change in the ATO’s view as the tax rate on UPEs to private companies is capped at 30%.

The current position is as follows:

pre-16 December 2009 UPEs held on sub trust benefit from a carve-out and should be quarantined in the trust accounts;
UPEs should not be described as a loan in the trust accounts;
be careful not to convert a pre-16 December 2009 UPE into a loan; and
post-15 December 2009 UPEs become loans when created and quantified.

The ATO is expected to issue further guidelines on the tax treatment of post-15 December 2009 UPEs by 30 June 2010.

The information outlined above is based on a draft taxation ruling and is subject to change upon issue of the final ruling or through legislative amendment.

For more information relating to your specific circumstances please contact your Baker Affleck accountant on (07) 5538 3088 or click here to send an email request.