Unpaid present entitlement unitisation arrangements
We currently have concerns about a number of arrangements involving unpaid present entitlements (UPEs) and unit trusts that may have implications under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936).
We have identified cases where a private group seeks to extinguish unpaid present entitlements or avoid obligations under Division 7A by implementing an arrangement where a private company subscribes for units in a unit trust. The unit trust may then provide payments or loans to other entities within the private group.
These arrangements have attracted our attention, as they may give rise to various income tax consequences, such as the application of:
- Division 7A of the ITAA 1936
- Section 100A of the ITAA 1936
- Part IVA of the ITAA 1936.
Unpaid present entitlements
Division 7A may apply where there is a UPE – for example, where a private company is a beneficiary of a trust and is made presently entitled to income of the trust, but does not receive payment of the distribution.
The following arrangements or situations are attracting our attention:
- Private companies include assessable trust distributions, but do not receive payment of the distribution from the trust before the earlier of the due date for lodgment or the lodgment date of the trust’s tax return for the year in which the loan was made
- A complying loan agreement has not been put in place
- Failure to put the funds on a sub-trust for the sole benefit of the private company beneficiary
- Failure to repay loans or sub-trust investments at the conclusion of the term specified in the original agreement
- Arrangements purporting to extinguish the UPE of the private company beneficiary
- Non-lodgment of returns and activity statements.
If you have entered into, or are considering, such an arrangement, we recommend you phone the ATO Tip-off hotline on 1800 060 062 to discuss the arrangement.
For more information and legal guidance, see:
- Private company benefits – Trust entitlements
- TR 2010/3 Income tax: Division 7A loans: trust entitlements (withdrawn)
- PS LA 2010/4 Division 7A: trust entitlements (withdrawn)
- TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?
- TR 2022/4 Income tax: section 100A reimbursement agreements
- PCG 2022/2 Section 100A reimbursement agreements – ATO compliance approach.