9 October 2023
by David Prichard
- Related topics
The tax landscape is always changing and in the case of Division 7A (think private companies, shareholders and trusts) there have been significant historical changes either as a patchwork quilt of legislation or “simple” interpretational changes impacting taxpayers. One such significant change was that the ATO took the view that an unpaid present entitlement (UPE) to a corporate beneficiary from a trust can be a form of financial accommodation, such that the general loan rules of Division 7A apply.
On 28 September, the AAT handed down a decision that is completely at odds with the ATO’s view on UPE’s forming financial accommodation. The case, in its simplest form can be summarised as follows:
- A corporate beneficiary became entitled to a share of the income of a trust with the amounts reflected in a ‘Current Account’ on behalf of the company and reported in ‘Liabilities’ in the trust’s balance sheet.
- The current account also reflected transactions relating to expenses paid by the trustee on behalf of the company.
- The unpaid current account at the relevant lodgement day was deemed dividend by the ATO under the general loan rules of Division 7A.
- The AAT found that a UPE is not a loan and that while the definition of a loan is very wide, it needs to be interpreted, taking into account other statutory provisions which include part of the patchwork quilt of legislation (known as Subdivision EA).
The Subdivision EA patch was introduced to deal with UPE’s from a Division 7A perspective and applied where a UPE exists, and a loan is made to a shareholder of the company (or associate). The AAT adopted a view that if the position is not caught by Subdivision EA, it doesn’t mean it falls into the general rules.
So what does this all mean?
The ATO are unlikely to simply walk away from a long held and actively campaigned view on UPE’s. Whilst the ATO have not provided any indications it is anticipated that they would be seeking to appeal the decision leaving the existing guidance on foot.
From a taxpayer perspective, it is a case of waiting and watching as even if the ATO lose on appeal there is the potential for the patchwork quilt legislative approach to fix this issue.
If you have any questions regarding these changes, please reach out to your Engagement Partner. As always, we will continue to keep you updated on future updates.