• Avoiding Division 7A consequences

    The trustee can avoid Division 7A treating the UPE as a dividend paid by the private company to the trust by paying out the UPE.

    For UPEs that have arisen between 16 December 2009 and 30 June 2010 inclusive, the UPE becomes a loan for Division 7A purposes if the trustee of the trust fails to place the funds on a sub-trust by 30 June 2011. The trustee may then choose to pay out the entitlement by the lodgment day of the relevant company's tax return. For a company with a 30 June year end, the amount must be paid out by the lodgment day of the 2011 company tax return to avoid Division 7A treating that entitlement as a dividend paid by the private company to the trust.

    For UPEs arising on or after 1 July 2010, the UPE will be treated as a loan for Division 7A purposes if the trustee of the trust fails to place the funds on a sub-trust by the lodgment day of the trust return for the income year in which the UPE arose. The trustee may then choose to pay out the entitlement by the lodgment day of the company tax return for the income year in which the UPE is treated as a loan for Division 7A purposes (that is, for the year immediately after the year in which the UPE arose). This is to avoid Division 7A treating the UPE as a dividend paid by the private company to the trust.

    Example 1

    Company X receives $1,000 of distributions from Trust T on 30 June 2011 and the amount remains unpaid. Company X and Trust T both have income years ending on 30 June. The trustee of Trust T fails to put the $1,000 on a sub-trust for the sole benefit of Company X by the lodgment day for the 2011 return for Trust T. The trustee must then pay out the $1,000 to Company X by the lodgment day for the 2012 return for Company X in order to avoid Division 7A treating the UPE as a dividend paid by Company X to Trust T.

    Where a trustee has a number of UPEs and they were created both before and after 16 December 2009, then in paying out an entitlement to the company, the trustee is able to choose (whether or not at the company's request) whether they pay out a UPE that arose before or after 16 December 2009. That is, there is no requirement to pay out pre-16 December 2009 UPEs first.

      Last modified: 22 Jun 2011QC 24445