10. Unpaid present entitlements
On Friday 20 February 2009 the Thomson's Weekly Tax Bulletin refers to Mark Konza's comments on unpaid present entitlement's and the possibility of their conversion into loans and the potential application of section 100A.
In a recent speech to a Taxation Institute seminar it was indicated that the Tax Office may be considering treating unpaid present entitlements as loan were they are shown in the accounts as loans. While situations exist where unpaid present entitlements could be been converted into loans, there will need to be strong evidence that the unpaid present entitlement stops being an amount held on trust for the corporate beneficiary and becomes a loan. The fact that the unpaid present entitlement is shown in the accounts as a loan will usually be as a result of incorrect accounting treatment and not as a result of the conversion into a loan. The bodies are concerned that the Tax Office may use incorrect accounting treatment of the unpaid present entitlement as basis of saying it has been converted into a loan.
The question is whether the Tax Office would impose section 100A in the context of unpaid present entitlements is also of concern. In what situations the tax office would be looking to use section 100A in the context of unpaid present entitlements. In particular will its use be limited to more blatant avoidance arrangements such as in Raftland or is the Tax Office seeking to apply it more generally.
Could the Tax Office clarify their position on these matters and in particular whether they are considering issuing a determination or other product on these issues?
Response
In a recent speech to a Taxation Institute seminar it was indicated that the Tax Office may be considering treating unpaid present entitlements as loan [sic] were [sic] they are shown in the accounts as loans', the Tax Office considers that Deputy Commissioner, Mark Konza’s comments have been taken out of context to the extent that the comments have been construed as meaning that a 'loan' must be shown in the accounts before it can become a section 109D loan for Division 7A purposes.
Whether the accounting treatment is correct or not is not the issue. The issue is whether an unpaid present entitlement has converted to a section 109D loan – which is a question of fact.
As outlined in the presentation to the TIA on 10 February 2009, 'what initially commences as an unpaid present entitlement can, factually, become a section 109D loan from the private company beneficiary back to the trustee.'
Examples of when this could occur included:
- a private company beneficiary may make a loan to the trustee of a trust if the trustee, acting under the authority of the trust deed or with the acquiescence from the beneficiary, credits moneys owing by the trustee to the beneficiary to a loan account in the name of the beneficiary, and
- a loan may also be created if the moneys owing by the trustee of a trust to a private company beneficiary are credited to a loan account in the name of the beneficiary without the authority of the beneficiary if the beneficiary later acquiesces in and adopts the trustee’s actions in crediting the loan account.'
In regard to the use of section 100A in regard to unpaid present entitlements, it was noted that 'there may be circumstances in which an agreement for the non payment of a private company beneficiary’s present entitlement to trust income may be associated with the provision of money, property, services or other benefit to another person, including the trustee themselves, pursuant to a reimbursement agreement within the meaning of section 100A.'
Section 100A will be used where reimbursement agreements are found to exist.
No tax determinations or other products are currently under development. These issues are highly dependent on the facts of each case.
Meeting discussion
Deputy Commissioner, Mark Konza advised members that the intent of the speech referred to was to engage in a technical discussion with the members of the particular professional association. The Tax Office had noticed a growing trend of a number of cases with large amounts of unpaid present entitlements and wanted to alert the membership of issues that can arise.
Members were advised that the matters are fact dependent and need to be considered on a case by case basis. There may be instances where the unpaid present entitlements are in fact a loan. Where there is no loan there is still a need to consider what is happening in the trust as section 100A might apply.
Furthermore, where there was a non-business use of the funds, eg acquisition of a private residence, there may be a need to consider the possible application of section 100A.
There was some discussion of the examples provided. Members were advised that these were drawn from observations and were provided to assist discussion of the issues.
The Commissioner noted that this discussion didn’t involve an interpretative issue, but rather indicated a need to work with the profession to ensure that these arrangements are working appropriately.
It was agreed that a number of the issues including the application of Part IVA, could be discussed at a future workshop. A number of examples would be considered plus areas where guidance could be provided. It was thought that this workshop could be arranged to take place on the same day as the Division 7A workshop to enable stakeholders to attend both workshops. Discussion concerning the background rationale relating to these examples resulted in agreement to provide this information to members as background prior to the workshop.
Action item
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NTLG0903/03
A workshop is to be arranged to consider the issues raised in the discussion and areas of potential guidance associated with unpaid present entitlements.
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Post meeting update
Deputy Commissioner, Mark Konza’s speech to the TIA 'Is the Tax Office widening its crackdown on lawyers and accountants' was published on the Tax Office website as of 31 March 2009.
Sections within Agenda items
Last Modified: Friday, 3 July 2009
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