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The issue of UPEs to companies is nothing new. It is an old problem. But TD 2022/D1 reflects a new ATO approach to this old problem.
TD 2022/D1
TD 2022/D1 covers unpaid present entitlements to companies and the resulting Div 7A issue resulting from that. Here is Andrew Henshaw of Velocity Legal in Melbourne with some helpful insights.
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
TD 2022/D1
The new tax determination – in draft form – TD 2022/D1 is to apply from 1 July 2022, so fairly soon. It is to replace TR 2010/3 and PS LA 2010/4.
The issue it covers is the failure to demand payment of a UPE. That constitutes financial accommodation, therefore Division 7A will apply (per TR 2010/3)
The main outcome of TD 2022/D1 is that almost no sub-trust arrangements will be permitted going forward. This is contrary to PS LA 2010/4 that explicitly allowed sub-trust arrangements. And TD 2022/D1 changes the timing of from when on you might need a Div 7A loan.
Sub Trust Arrangements
Sub trust sounds very technical and complicated but it is basically just a separate account. Create a separate account in the Trust’s ledger with XYZ Pty Ltd’s name on it and you have a sub trust.
That used to be a convenient way out. Just create a sub trust (ie. separate ledger account) and you were spared the consequences of Div 7A. No longer…if TD 2022/D1 gets its way. Sub trust arrangements will be off the table from 1 July 2022 if TD 2022/D1 makes it through.
Timing
It all depends on from when the company gains knowledge of its entitlement and can demand immediate payment of its present entitlement. The moment the company could demand payment of its entitlement and doesn’t, you have financial accommodation in form of a loan.
When the company obtains knowledge and could demand payment will depend on whether the entitlement is a fixed amount or a calculated amount like a percentage.
Fixed amount
For a fixed amount the date of financial accommodation to the trust (ie. loan to the trust) is the date of the trust resolution.
Let’s say on 30 June 2023, Bob as the trustee resolves that AUD 10,000 of ABC Trust’s income for the 2022-23 income year is to be distributed to XYZ Pty Ltd.
An entry is made in the accounting ledger of ABC Trust on the same date detailing the appointment of trust income and UPE.
The result?
XYZ Pty Ltd is taken to have knowledge of the amount and hence it can demand immediate payment from the trustee on 30 June 2023.
If XYZ Pty Ltd does not demand payment of the AUD 10,000 then it provides financial accommodation to Bob as trustee for ABC Trust in the 2022-23 income year.
XYZ Pty Ltd’s lodgment day for the 2022-23 income year is 31 March 2024. On that basis, the trust must enter into a section 109N compliant loan agreement by 31 March 2024.
Variable Amount
Now the same example with a variable amount.
On 30 June 2023, Bob resolves that 100% of ABC Trust’s income be distributed to XYZ Pty Ltd. At this time, XYZ Pty Ltd doesn’t know the amount of trust income (if any) that it can demand immediate payment from the trust.
On 1 August 2023, Bob determines the net income of ABC Trust as AUD 10,000. This is recorded in the Trust’s accounting ledger on the same date.
The result?
XYZ Pty Ltd is taken to have knowledge of the amount. Hence it can demand payment of from the trust on 1 August 2023. So that is the date from which financial accommodation will start if there is no payment.
If XYZ Pty Ltd does not demand immediate payment of the AUD 10,000, then it provides financial accommodation to ABC Trust in the 2023-24 income year.
So by making the distribution a variable amount (ie percentage) rather than a fixed amount, ABC Trust bought XYZ Pty Ltd and itself another year. Now the s109N Div 7A loan only needs to start in the 2024 financial year rather than in the 2023 financial year.
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So this was TD 2022/D1 which focuses on unpaid present entitlements owed to a company and hence Div 7A. In the next episodes, we will focus on the other three publications re s100A – especially TA 2022/1.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 09 May 2023
Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.
