Dominic Belvedere from the Small and Medium Enterprises (SM&E) business line presented a technical update on Division 7A.
Discussion
Dominic spoke about the status of the draft TR 2009/D8. Following a view put forward in 2009 as to whether Division 7A can apply to distributions made from a trust to a related private company when the distribution remains unpaid the ATO issued draft Ruling TR 2009/D8 on 16 December 2009. The ruling addressed the ATO's view as to when an actual loan exists and when an unpaid present entitlement (UPE) may itself be a loan under Division 7A.
It is expected that the final ruling will be issued before 30 June 2010.
It's the ATO view that a UPE itself may be subject to Division 7A as it may fall within the extended definition of a loan in subsection 109(D) (3) and the UPE may be a Division 7A loan because it is:
- a provision of credit or any other form of accommodation, or
- a transaction which in substance affects a loan.
The ruling considers that a UPE will be a Division 7A loan where:
- a private company has (or had) a present entitlement to an amount from a trust that is part of the same family group as the company; and
- funds representing the present entitlement remain intermingled with other funds of the trust estate or are otherwise able to be used for the general purposes of the trust.
There two sections in the ruling:
- section 2 deals with actual loans
- section 3 deals with UPEs not converted to a loan.
Section 2 of the draft ruling applies retrospectively as well as prospectively. It also applies to UPEs that have been extinguished and replaced by an actual loan.
The ATO will consider that this type of loan can arise in the following situations:
- there is a document evidencing a loan agreement between the company and trust
- the company and trust both record the amount as a loan rather than a UPE
- the trustee exercises a power to apply funds for the benefit of the corporate beneficiary and this is evidenced and it is recorded as a loan.
Such loans have always been subject to Division 7A, there is nothing new here.
With respect to section 3, the ruling puts forward a view that a UPE can itself be a Division 7A loan under the extended definition of a loan but this only applies to UPEs created from 16 December 2009. This part of the ruling will have a prospective application and only apply to UPEs created from 16 December 2009.
The ATO accepts that there will be limited application for Subdivision EA under the ruling. The ruling clearly states that where Division 7A applies to a UPE then subdivision EA will have no application in respect of that UPE. However subdivision EA could still apply in certain situations. For example, in relation to UPEs created prior to 16 December 2009 and where the UPE is not considered to be a Division 7A loan as for example it is held on sub-trust or intermingled with trust funds and the benefits flow to the beneficiary private company.
Working group members were advised that the Public Rulings Panel met on 5 May to deliberate the ruling. Also the Public Rulings branch took the unusual step of accepting a request by the professional bodies to present the views of their members directly before the panel.
Some members expressed concern about the 30 June issue date for the final ruling feeling they will not have enough time to advise clients.
The ATO replied that it's mindful of this and assured members the product should be available earlier than the 30 June.
The practice statement currently under development will provide guidance on the application of the ruling and addresses a number of the administrative concerns raised in the feedback received with respect to draft TR 2009/D8. Some of the issues that will be addressed are:
- Guidance on the identification of a section 2 and section 3 loan. A flow chart will be included to assist with the commentary provided.
- What evidence is required to establish that the UPE is used for the absolute benefit of the private company.
- Evidence required to substantiate the existence of a sub trust.
- Does the sub trust need to lodge a tax return.
- Importantly when does a post 16 December 2009 UPE convert into a loan?
Working group members were advised that the practice statement will issue as a draft on the same date the taxation ruling will issue as a final. Tax practitioners and the professional bodies will have the opportunity to provide feedback before a final practice statement is issued.
The ATO will continue to consult with tax practitioners and the professional bodies with respect to these products.
Members were advised that a draft ruling on the requirements of section 109RB as it applies to the Commissioner's discretion, including the technical interpretation of phrases 'honest mistake' and 'inadvertent omission' will also be addressed in a public ruling. A draft ruling is expected to issue before the 30 June 2010. In addition to the draft ruling, a practice statement will be developed that will address the practical application of the Commissioner's discretion, which will include how an 'inadvertent omission' or 'honest mistake' is to be established. The practice statement will also address contributing factors that the Commissioner must have regard to in making a decision.
The ATO referred to ATO ID 2010/82 issued for guidance on the minimum yearly repayments required in the first year after a Division 7A loan is made.
Finally a member commented that in spite of the budget and the Henry review small business still has concerns around Division 7A it's more than just an issue for agents but one for small business as well.
Outcome
The chair thanked Dominic for his presentation.
Sections within Agenda items
Last Modified: Wednesday, 19 January 2011