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Edited version of your written advice
Authorisation Number: 1012756674690
Ruling
Subject: Commercial debt forgiveness and Division 7A
Question 1
Will the debt forgiveness rules in Section 245-10 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the forgiveness of an unpaid present entitlement (UPE) of a trust beneficiary of a family discretionary trust?
Answer
No
Question 2
Will the forgiveness of an unpaid present entitlement, that existed prior to 16 December 2009, cause or result in, for the purposes of Division 7A, an assessable dividend taken to have been paid by the Company to the Trust?
Answer
No
This ruling applies for the following period
Year ending 30 June 2015
The scheme commenced on
1 July 2014
Relevant facts and circumstances
The trust is a discretionary family trust.
The trust accounts show an unpaid present entitlement for a beneficiary of the trust.
The beneficiary has paid tax on these unpaid distributions as required.
The distributions were made by the trust over many years.
No interest has ever been charged and there is no interest accruing on the beneficiaries loans for the unpaid present entitlement.
Had interest been payable on any part of the debt it would not have been deductible to the Trust.
The beneficiary is a private company.
The distributions were made as unpaid present entitlements prior to 16 December, 2009.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 245-10 and
Income Tax Assessment Act 1997 Section 109F.
Reasons for decision
Section 245-35 of the ITAA 1997 states:
What constitutes forgiveness of a debt
A debt is forgiven if and when:
(a) the debtor's obligation to pay the debt is realised or waived, or is otherwise extinguished other than by repaying the debt in full; or
(b) the period within which the creditor is entitled to sue for the recovery of the debt ends, because of the operation of a statute of limitations, without the debt having been paid.
Section 245-10 of the ITAA 1997 states:
Commercial debts
Subdivisions 245-C to 245-G apply to a debt of yours if:
(a) the whole or any part of interest, or of an amount in the nature of interest, paid or payable by you in respect of the debt has been deducted, or can be deducted, by you; or
(b) interest, or an amount in the nature of interest, is not payable by you in respect of the debt but, had interest or such an amount been payable, the whole or any part of the interest or amount could have been deducted by you; or
(a) interest or an amount mentioned in paragraph (a) or (b) could have been deducted by you apart from the operation of a provision of this Act (other than paragraphs 8-1(2)(a), (b) and (c)) that has the effect of preventing a deduction
The term 'debt' is not defined in the income tax legislation.
Where words used have acquired a legal meaning, it will be taken that the legislature intended to use them unless a contrary intention clearly appears from the context (O'Connor J, Attorney-General (NSW) v. Brewery Employees' Union of New South Wales (1908) 6 CLR 469 at 531).
Paragraph 245-10(b) of the ITAA 1997 provides that the debt forgiveness rules apply to a debt if interest was not payable by you on the debt, but "… had interest or such an amount been payable, the whole or any part of the interest or amount could have been deducted by you;'.
This indicates that the clear intention is that the provisions apply to a commercial debt on which interest is capable of being charged.
An unpaid present entitlement from a trust is not a commercial debt on which interest is capable of being charged.
An unpaid present entitlement is accordingly not a commercial debt that the debt forgiveness provisions apply to.
Division 7A
Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements (TR 2010/3) expresses the Commissioner's opinion on circumstances in which a private company with a UPE from an associated trust estate makes a 'loan' to that trust within the meaning of subsection 109D(3), in circumstances where funds representing that UPE remain intermingled with funds of the trust.
Law Administration Practice Statement PS LA 2010/4 Division 7A: trust entitlements (PSLA 2010/4) provides guidance on the administration of TR 2010/3.
The principles in TR 2010/3 and PS LA 2010/4 apply to UPEs owing by a trust to any entity, including an associated private company. Therefore, if a trust appoints income to an associated private company but does not pay the funds to the company, the UPE is capable of amounting to financial accommodation and may be a loan for Division 7A purposes unless the conditions in PS LA 2010/4 are satisfied.
Paragraphs 27 to 30 of TR 2010/3 explain that due to public statements made by the Commissioner prior its issue, these rules do not apply to UPEs that arose before 16 December 2009.
Specifically, paragraph 29 states that the Commissioner's earlier view was that UPEs that came into existence before 16 December 2009 and retained on trust were not 'loans' for the purposes of Division 7A of the ITAA 1936.
In your case, as the UPE came into existence prior to 16 December, 2009, the forgiveness of the UPA will not be deemed a 'loan' for Division 7A purposes and will not affect the assessable income of the trust.
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