Sep 2017 2 Minutes
Sub-Trust arrangements maturing 2018
The ATO has recently released guidance in the form of Practical Compliance Guideline PCG 2017/13 on the treatment of the 7-year sub-trust arrangements that are set to mature on 30 June 2018. This applies to trustees who, in accordance with Practice Statement PS LA 2010/4, validly adopted investment Option 1 for UPEs arising between 16 December 2009 and 30 June 2010.
In order to comply with investment Option 1, the trustee must actually repay the principal of the loan at the end of the loan term. If the trustee fails to meet this term of the investment agreement, when an investment Option 1 sub-trust matures in the 2018 income year, any unpaid principal of the loan will be treated by the ATO as the provision of financial accommodation and therefore a Division 7A deemed dividend.
However, the ATO will accept that a 7-year loan on complying terms in accordance with section 109N of the ITAA36 may be put in place between the sub-trust and the private company beneficiary prior to the private company's lodgement day. This will provide a further period for the amount to be repaid with periodic payments of both principal and interest. For sub-trust arrangements maturing on 30 June 2018, the trustee must enter into a 7-year complying loan agreement by 15 May 2019 (e.g. the lodgement due date) and must make the first minimum repayment (principal and interest) by 30 June 2019.
Effectively this gives Trusts 14 years in which to repay the 2010 UPE, the first 7 years interest only, and the next 7 years under Division 7A principal and interest repayment terms.
Given the sub-trust arrangements were effectively an administrative concession allowed by the ATO to, in some way, atone for their U-turn on the treatment of UPE’s, there is some doubt as to whether this approach has any support within the legislation.
Arguably, if the trustee does not make the principal repayment by the end of the 7-year arrangement, the deemed dividend arose in the income year the UPE was first made which means the ATO may be out of time to amend the 2010 tax return. However, for those taxpayers that take up this offer to convert their sub-trust to a complying Division 7A loan, they will then fall squarely back into Division 7A, ensuring that any future breach of repayments will crystallise a deemed dividend.
Those clients with Sub Trusts maturing in 2018 should carefully consider the ATO’’s offer.
Please contact Juanro Prinsloo or Iggy Moro if you have any queries.