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  • Unit trust arrangements and unpaid present entitlements

    We currently have concerns about a number of arrangements involving one or both of unpaid present entitlements and unit trusts. These arrangements may have implications under Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936).

    Unpaid present entitlement unitisation arrangements

    We've identified cases where a private group seeks to extinguish unpaid present entitlements (UPEs) or avoid obligations under Division 7A by implementing an arrangement where a private company subscribes for units in a unit trust. The unit trust may then provide payments or loans to other entities within the private group.

    These arrangements have attracted our attention and we are concerned that they may give rise to various income tax consequences, such as the application of:

    • Division 7A ITAA 1936
    • Section 100A of the ITAA 1936
    • Part IVA of the ITAA 1936.

    Unpaid present entitlements

    Division 7A may apply where an unpaid present entitlement exists. We focus on situations where Division 7A may operate – for example, where a private company is a corporate beneficiary of a trust and is made presently entitled to income of the trust, but does not receive payment of the distribution. This amount is known as an unpaid present entitlement (UPE).

    What attracts our attention:

    • Private companies include assessable trust distributions, but do not receive payment of the distribution from the trust before the earlier of either the due date for lodgment, or the date of lodgment of the trust’s tax return for the year in which the loan was made.
    • A complying loan agreement has not been put in place.
    • Failure to put the funds on a sub-trust for the sole benefit of the private company beneficiary.
    • Failure to repay loans or sub-trust investments at the conclusion of the term specified in the original agreement.
    • Arrangements purporting to extinguish the UPE of the private company beneficiary.
    • Non-lodgment of returns and activity statements.

    If you have entered into, or are considering implementing, such an arrangement we recommend that you phone the ATO Aggressive Tax Planning hotline on 1800 060 062 to discuss your arrangement.

    See also:

      Last modified: 12 Jan 2018QC 54321