Tax Laws Amendment (2004 Measures No. 1) Act 2004 (95 of 2004)

Schedule 8   Distributions to certain entities

Part 1   Division 7A amendments

Income Tax Assessment Act 1936

3   After Subdivision E of Division 7A of Part III

Insert:

Subdivision EA - Unpaid present entitlements

109XA Payments, loans and debt forgiveness by a trustee in favour of a shareholder etc. of a private company with an unpaid present entitlement

Payments

(1) Section 109XB applies if:

(a) a trustee makes a payment to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company) (the actual transaction ); and

(b) the payment is a discharge of or a reduction in a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain; and

(c) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place.

Loans

(2) Section 109XB applies if:

(a) a trustee makes a loan to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company) (the actual transaction ); and

(b) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place.

Forgiven debts

(3) Section 109XB applies if:

(a) all or part of a debt owed to a trustee by a shareholder or an associate of a shareholder of a private company is forgiven (except where the shareholder or associate is a company) (the actual transaction ); and

(b) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place.

Amount involved in the actual transaction

(4) The amount involved in the actual transaction is the lesser of:

(a) the amount actually involved in the actual transaction; and

(b) the amount worked out using the formula:

Unpaid present entitlement - Previous transaction

where:

previous transactions means the sum of:

(a) the amounts that, because of previous applications of section 109UB (as in force before the commencement of this section) have been taken to be loans; and

(b) the amounts that, because of previous applications of this Subdivision, have been included in an entity's assessable income;

in relation to the unpaid present entitlement.

unpaid present entitlement means:

(a) if the actual transaction is a payment - the amount of the present entitlement referred to in paragraph (1)(c) that remained unpaid on the earlier of the dates mentioned in that paragraph; and

(b) if the actual transaction is a loan - the amount of the present entitlement referred to in paragraph (2)(b) that remained unpaid on the earlier of the dates mentioned in that paragraph; and

(c) if the actual transaction is the forgiveness of a debt - the amount of the present entitlement referred to in paragraph (3)(b) that remained unpaid on the earlier of the dates mentioned in that paragraph.

The amount of the actual transaction where the entitlement is only partly attributable to an unrealised gain

(5) For the purposes of subsection (4), where the actual transaction was a payment and that payment was only partly attributable to an amount that is an unrealised gain, the amount of the actual transaction is taken to be the amount of the payment that was attributable to the amount that is the unrealised gain.

Creation of a present entitlement is not a payment

(6) The creation of a present entitlement to the capital or income of a trust estate is not, of itself, a payment for the purposes of this Subdivision.

Meaning of unrealised gain

(7) In this section:

unrealised gain , in relation to a trust estate and an actual payment, means any unrealised gain, whether of a capital or income nature, but does not include an unrealised gain to the extent that it has been or would be included in the assessable income of the trust, apart from this Division, for:

(a) a year of income before the year in which the actual payment was made; or

(b) the year of income in which the actual payment was made; or

(c) the year of income following the year in which the actual payment was made.

109XB Amounts included in assessable income

(1) An amount is included, as if it were a dividend, in the assessable income of the shareholder or associate referred to in subsection 109XA(1), (2) or (3) if:

(a) had the actual transaction been done by a private company (the notional company ); and

(b) had the shareholder or associate been a shareholder of the notional company at the time the actual transaction took place;

an amount (the Division 7A amount ) would have been included in the shareholder's or associate's assessable income because of a provision of this Division outside this Subdivision.

(2) Subject to section 109Y, the amount that is included under subsection (1) is the Division 7A amount.

Note: There are some modifications of this Division for the purposes of working out the Division 7A amount: see section 109XC.

109XC Modifications

Modifications for this Subdivision only

(1) The modifications in this section have effect for the purposes of the operation of this Subdivision.

General modifications

(2) This Division (but not this Subdivision) applies to an actual transaction done by a trustee of a trust estate with these modifications:

(a) a reference (except in section 109Y) to an amount paid to a private company has effect as a reference to an amount paid to the trustee; and

(b) a reference to a year of income of a private company has effect as a reference to the corresponding year of income of the trust estate; and

(c) a reference to the ordinary course of a private company's business has effect as a reference to the ordinary course of the trust estate's business.

Modified operation of section 109E

(3) A loan referred to in this Subdivision that is made during a year of income of a trust estate is taken to have been fully repaid at the end of the year for the purposes of paragraph 109E(3)(a) if it is fully repaid by the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for that year of income of the trust.

Modified operation of section 109J

(4) Section 109J does not apply to a payment to the extent that it is a discharge of or a reduction in a present entitlement.

Modified operation of section 109N

(5) A loan referred to in this Subdivision is taken to have been made under a written agreement for the purposes of paragraph 109N(1)(a) if a written agreement is made in relation to the loan before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the loan was made.

Modified operation of section 109R

(6) For the purposes of applying section 109R to an actual transaction:

(a) a reference in that section to obtaining a loan from a private company has effect as a reference to obtaining a loan from the trustee; and

(b) a reference in that section to property transferred to a private company has effect as a reference to property transferred to the trustee; and

(c) a reference in that section to an amount paid by a private company for a transfer of property has effect as a reference to an amount paid by the trustee for a transfer of property.

Modified operation of section 109Y

(7) Section 109Y applies to the Division 7A amount in this way:

(a) assume that the private company referred to in subsection 109XA(1), (2) or (3) had been taken to have paid a dividend to the shareholder or associate referred to in that subsection equal to the Division 7A amount; and

(b) assume that the dividend was taken to have been paid at the end of the year of income of the company in which the actual transaction took place; and

(c) a reference in that section to a private company's distributable surplus has effect as a reference to the distributable surplus of the private company referred to in paragraph (a).

Certain provisions do not apply

(8) Subsection 109D(1A), sections 109K, 109NA and 109NB and paragraphs 109R(3)(a), (b) and (ba) do not apply to an actual transaction.