• Requirement of an investment agreement

    Content of a legally binding investment agreement

    PS LA 2010/4 requires an investment agreement to be legally binding. However, it also states that the document evidencing that legally binding agreement may be prepared as part of the tax return working papers.

    The agreement need not be professionally prepared and is not the same as a Division 7A complying loan agreement. You may, however, choose to engage a professional to prepare the agreement where you believe it is appropriate to do so.

    We will consider a document containing the following to be sufficient evidence of a legally binding loan agreement between the main trust and the sub-trust:

    a. the names of the parties

    b. the loan terms, including

    • the amount of the loan
    • the date the loan amount is drawn
    • the requirement to repay the principal amount of the loan
    • the period of the loan
    • the interest rate payable on the loan
    • interest payment to be made annually on the last day of the income year
     

    c. that the parties named have agreed to the terms

    d. when the agreement was made, for example, the date it was signed or executed.

    Example 2

    We would consider the following document prepared as part of the tax return working papers, in respect of a UPE that arose on or before 30 June 2010, to be sufficient evidence of a legally binding agreement:

    PrivCo's entitlement to $10,000 of the income of DiscFamily Trust for the 2010 income year has been set aside and held on sub-trust (known as PrivCo Sub-trust).

    The trustee of PrivCo Sub-trust and the trustee of DiscFamily Trust have agreed that PrivCo Sub-trust will lend the sum of $10,000 to DiscFamily Trust in accordance with Option 1 in PS LA 2010/4. This loan was made and this agreement took effect from 30 June 2011 for a period of seven years with interest payable at the Division 7A benchmark interest rate as defined in subsection 109N(2) of the Income Tax Assessment Act 1936.

    The parties have agreed that interest payments will be:

    • calculated annually on the last day of DiscFamily Trust's income year
    • paid by DiscFamily Trust to PrivCo Sub-trust no later than the earlier of
      • the date DiscFamily Trust lodged its income tax return for the year in respect of which interest was calculated
      • the due date for lodgment of that return, with the exception of the final interest payment, which is to be paid by DiscFamily Trust to PrivCo Sub-trust no later than 30 June 2018.
       
     

    The trustee of PrivCo Sub-trust has further agreed to distribute and pay the interest it receives from DiscFamily trust no later than that date.

    DiscFamily Trust has agreed and is obliged to repay the $10,000 to PrivCo Sub-trust no later than 30 June 2018.

    - Signed by the trustee of the PrivCo Sub-trust and DiscFamily Trust -

    - Date -

    Example 3

    We would also consider the following document prepared as part of the tax return working papers for the trust's tax return for its 2011 or subsequent income years, when a UPE arises during that year, to be sufficient evidence of a legally binding agreement. The document has assumed that the 2011 trust lodgment day for DiscFamily Trust is 15 May 2012.

    PrivCo's entitlement to $10,000 of the income of DiscFamily Trust for the 2011 income year has been set aside and held on sub-trust (known as PrivCo Sub-trust).

    The trustee of PrivCo Sub-trust and the trustee of DiscFamily Trust have agreed that PrivCo Sub-trust will lend the sum of $10,000 to DiscFamily Trust in accordance with Option 1 in PS LA 2010/4. This loan was made and this agreement took effect from 15 May 2012 for a period of seven years. Interest is payable at the Division 7A benchmark interest rate as defined in subsection 109N(2) of the Income Tax Assessment Act 1936.

    The parties have agreed that interest payments will be:

    • calculated annually on the last day of DiscFamily Trust's income year,
    • paid by DiscFamily Trust to PrivCo Sub-trust no later than the earlier of
      • the date DiscFamily Trust lodged its income tax return for the year in respect of which interest was calculated
      • the due date for lodgment of that return, with the exception of the final interest payment, which is to be paid by DiscFamily Trust to PrivCo Sub-trust no later than 14 May 2019.
       
     

    The trustee of PrivCo Sub-trust has further agreed to distribute and pay the interest it receives from DiscFamily trust no later than that date.

    DiscFamily Trust has agreed and is obliged to repay the $10,000 to PrivCo Sub-trust no later than 14 May 2019.

    - Signed by the trustee of the PrivCo Sub-trust and DiscFamily Trust -

    - Date -

    Investment agreement as evidence of trustee's decision

    The investment agreement not only evidences the investment from the sub-trust to the main-trust, but also helps to demonstrate the fact that the trustee decided to hold the funds representing the UPE on a sub-trust for the sole benefit of the private company beneficiary in the first place. Accordingly, the trustee is expected to put the investment agreement in place by the date specified in PS LA 2010/4.

    PS LA 2010/4 states that such a decision must be made by:

    • 30 June 2011 - for UPEs that came into existence between 16 December 2009 and 30 June 2010 inclusive
    • the lodgment day of the trust tax return - for UPEs that come into existence on or after 1 July 2011.

    Ongoing investment agreement

    The main trust and the sub-trust may enter into an ongoing agreement for the holding on sub-trust and subsequent investment by the sub-trust into the main trust of all future distributions from the main trust to the private company beneficiary. However, such an agreement will need to be appropriately drafted and should clearly contain all the necessary terms of a legally binding agreement for all successive years. The trustee should ensure that the agreement does not lead to an unintended result, such as the resettlement of the relevant trust estate.

    Failure to pay the annual return on time

    If the trust fails to pay the annual return to the private company by the trust's lodgment day, we will consider that the requirements in PS LA 2010/4 have not been satisfied and the trustee would have breached the terms of the investment agreement. The non-payment of the annual return may result in a Division 7A dividend being deemed to be paid to the main trust.

      Last modified: 22 Jun 2011QC 24445