The ATO released Practical Compliance Guideline PCG 2017/13 on Wed 19.7.2017, provides guidance to trustees who, in accordance with Practice Statement PS LA 2010/4, validly adopted investment Option 1 before 1 July 2011 and placed funds representing an unpaid present entitlement (UPE) under a sub-trust arrangement on a 7-year interest only loan with the main trust. These arrangements will generally mature in the 2018 income year (although the ATO is aware of several arrangements that matured on 30 June 2017).
In Ruling TR 2010/3, the Commissioner takes the view that the general loan provisions in s 109D of Div 7A of the ITAA36 apply where there is a UPE from a trust to an associated private company and the company does not call for payment of the UPE (or its investment), thereby “agreeing” that the funds representing the UPE can be used for trust purposes. Practice Statement PS LA 2010/4 provides administrative guidance on applying TR 2010/3. In particular, it states that a UPE will not be treated as a loan for Div 7A purposes if the funds representing the UPE are held on sub-trust for the sole benefit of the corporate beneficiary. Taxpayers can determine the appropriate terms of the investment or can adopt one of the 3 safe harbour investment options put forward in the Practice Statement.
Option 1 involves investing the funds representing the UPE on an interest-only 7-year loan at the Div 7A benchmark interest rate. Under this option, the corporate beneficiary must pay the annual interest before the lodgment day of the main trust’s tax return and the trustee must repay the principal at the end of the loan term. For UPEs arising between 16 December 2009 and 30 June 2010, trustees had until 30 June 2011 to place the funds on sub-trust. Accordingly, those trustees who adopted Option 1 would be required to repay the principal of the loan in either the 2017 income year or the 2018 income year.
Key points from PCG 2017/13
- The Guideline confirms that in order to comply with Option 1, the trustee must actually repay the principal of the loan at the end of the loan term (generally by 30 June 2018). If the trustee fails to meet this condition on maturity of the investment, and a new complying 7-year loan is not put in place, a deemed dividend will arise at the end of the income year in which the loan matures, the ATO warns.
- Where the trustee fails to repay the principal at the end of the loan term, the Commissioner accepts that a 7-year loan on complying terms can still be put in place between the sub-trust and the corporate beneficiary, thus providing a further period for the amount to be repaid, with periodic payments of both principal and interest. To be effective, this must be put in place prior to the private company’s lodgment day (generally 15 May 2019).
- PCG 2017/13 includes a timeline for a UPE that was placed on a sub-trust on 30 June 2011. The following dates are particularly relevant:
- 30 June 2018 – the deadline for repaying the principal of the loan and final interest;
- 15 May 2019 – the deadline for entering into a new 7-year complying loan agreement (if the principal is not repaid in full by 30 June 2018); and
- 30 June 2019 – the first minimum yearly repayment is due under the new loan.
[ATO website: PCG 2017/13; TT Month; LTN 135, 19/7/17]