On Wed 23.2.2022, the ATO released the well signalled Draft Determination TD 2022/D1 on the application of Div 7A in relation to unpaid present entitlements (UPEs) and sub-trusts (see related TT article). Specifically, the Draft sets out the ATO’s revised draft views that a private company beneficiary provides “financial accommodation” to the trustee or a shareholder (a loan for Div 7A purposes) if:

  • in relation to a UPE – the company has knowledge of an amount that it can demand immediate payment of but does not demand payment, thereby consenting to the trustee retaining that amount to continue using it for trust purposes. It seems that, for UPEs, the financial accommodation can be turned into a loan on commercial terms, that is deemed (under s109N of the ITAA36) to not to be a loan that is deemed to be a dividend (under s109D) [see paras 71 & 72] or
  • in relation to a sub-trust held for the company’s benefit – the company has knowledge that a shareholder (or shareholder’s associate) is using all or part of the sub-trust funds. The ATO says that a Div 7A loan will arise in this situation even if the sub-trust fund is on commercial terms, with a return paid to the fund [see para 15]. It is not clear to me, exactly why this difference might be and the ATO doesn’t seem to explain it.

The ATO says that the company will be deemed to have the requisite knowledge if the company and trustee “have the same directing mind and will”. My understanding is that this brings forward the time when ‘financial accommodation’ given, to the time when the same directing mind has calculated the trusts trust law ‘income’ and knows the amount (say 31.12.23, for the year ended 30.6.23, at which point in time the beneficiary has to be ‘presently entitled’ to the amount, that is ascertainable but not yet ascertained). As I understand it, previously the ‘financial accommodation’ (by not calling for payment of the entitlement) had to be for some time beyond then.

It is the ATO’s intention that when the Draft is finalised, it will replace TR 2010/3 (Income tax: Division 7A loans: trust entitlements) and PS LA 2010/4 (To provide practical guidance on the administrative aspects of Taxation Ruling TR 2010/3) with effect from 1 July 2022.

  • The ATO no longer agrees with the view expressed in TR 2010/3 that there is no financial accommodation to the trustee of the main trust if the funds representing the UPE remain intermingled in the main trust as a consequence of an investment back by the sub-trust, provided the investment is on terms entitling the sub-trust to all the benefits from use of those funds and a repayment of the principal of the investment.

PROPOSED DATE OF EFFECT: trust entitlements arising on or after 1 July 2022.

The ATO undertakes not to devote compliance resources to sub-trust arrangements that correspond to the guidance in TR 2010/3 and PS LA 2010/4 if the entitlement arose before 1 July 2022 (even if the sub-trust is put in place after 30 June 2022).

ATO website: TD 2022/D1, TR 2010/3, PS LA 2010/4, LTN 35, 23/2/22

[Tax Month – February 2022 – Previous 2022, 24.2.22]