• What if a payment is made and then loaned back to the trustee on or after 1 July 2009?

    The law was amended for certain payments made on or after 1 July 2009. Before the amendments, one of the conditions that needed to be satisfied for all payments made by trustees to give rise to a deemed dividend was that the payment is a discharge or a reduction of a present entitlement that is attributable to an unrealised gain.

    Loan-back arrangements were being entered into to circumvent the operation of Division 7A where:

    • the payment received by the shareholder (or their associate) that discharged or reduced a present entitlement to an unrealised gain was significantly more than the unpaid present entitlement held by the private company
    • the shareholder (or their associate) then loans back to the trust the amount of the payment that exceeds the unpaid present entitlement held by the private company
    • in subsequent income years, the trustee declares a present entitlement to the private company that remains unpaid
    • the trustee makes loan repayments to the shareholder (or their associate).

    The loan repayments to the shareholder (or their associate) were not caught by the operation of Division 7A as the payment made was not a discharge or a reduction in a present entitlement that is attributable to an unrealised gain.

    As a result of the amendments which apply to payments made on or after 1 July 2009, the condition that the payment be a discharge or a reduction of a present entitlement that is wholly or partly attributable to an amount that is an unrealised gain is disregarded if:

    • Division 7A had previously applied because the trustee made a payment to the shareholder (or their associate) in a previous year of income that was a discharge or a reduction of a present entitlement that is attributable to an unrealised gain (the original transaction)
    • the shareholder, or associate of the shareholder, makes a loan or loans to the trustee on or after 1 July 2009 and either:
      • a reasonable person would conclude (considering all circumstances) that at the time the original transaction took place the shareholder (or their associate) intended to make the loan or loans to the trustee
      • the shareholder (or their associate) made the loan or loans to the trustee before the original transaction took place and a reasonable person would conclude (considering all circumstances) that the trustee obtained the loan or loans to make the payment, and
       
    • the payment made by the trustee is applied to repay all or part of the loan or loans.

    Example 11

    In the 2010-11 income year, the Autumn Trust re-values an asset and makes a distribution of $5 million to Lucas who is a shareholder of Willis Pty Ltd. Willis Pty Ltd holds a $500,000 unpaid present entitlement for Subdivision EA purposes to an amount from the net income of Trust A. Lucas will be required to include $500,000 of the payment he receives in his assessable income for the 2010-11 income year, subject to the distributable surplus of Willis Pty Ltd.

    When Lucas receives the payment from the Autumn Trust A, he immediately loans the amount back to the trust for $4.5 million. The trust is obliged to repay the loan over successive income years.

    In the 2012-13 income year, Willis Pty Ltd holds an unpaid present entitlement for Subdivision EA purposes of $500,000 from the net income of the Autumn Trust A. The trustee of Autumn Trust A again makes a payment of $500,000 to Lucas. However, this payment now represents a repayment of the outstanding loan to Lucas rather than a payment in relation to an unrealised gain.

    Before the 2009-10 income year, Lucas would not have been required to include this payment in his assessable income as if it were a dividend. However, from the 2009-10 income year the condition that the payment be a discharge or a reduction of a present entitlement that is wholly or partly attributable to an amount that is an unrealised gain is disregarded. As a result loan repayments made by the trustee may result in a deemed dividend (provided all related conditions are satisfied

    In these arrangements the general Division 7A exclusion for payments that discharge pecuniary obligations does not apply.

    Further Information

    For information on how Division 7A applies to entities that are interposed between the trust and the shareholder (or associate), or where another trust is interposed between the company and the trust, refer to Division 7A - trust amounts treated as dividends - payments and loans through interposed entities.

    End of further information
      Last modified: 09 Jul 2010QC 17635