If the trustee is taken to have made a payment to the target entity then the Subdivision EA payment rules apply to the deemed payment subject to one modification. Under Subdivision EA, for a payment to result in a deemed dividend a condition that needs to be satisfied is that the payment made by the trustee to the shareholder or an associate of a shareholder is a discharge of, or a reduction in, a present entitlement of the shareholder or associate that is wholly or partly attributable to an amount that is an unrealised gain.
If an entity is interposed then the actual payment to the target entity is made by an interposed entity rather than the trustee. To enable Subdivision EA to apply the condition is modified to treat the payment by the interposed entity as a payment for the purposes of the condition.
On 1 March 2010, Green Pty Ltd enters into an arrangement involving Green Trust, Low Pty Ltd, Low Trust and Vicki, who is a shareholder of Green Pty Ltd.
As part of this arrangement, the Green Trust declares a present entitlement of $100,000 to Green Pty Ltd. The present entitlement remains unpaid. Green Trust then loans $100,000 to Low Pty Ltd who on lends to Low Trust, which makes a $100,000 payment to Vicki. The $100,000 payment to Vicki is a discharge of a present entitlement attributable to an unrealised gain in Low Trust (as set out in the diagram).
The effect of the interposed entity rules is that Green Trust has made a payment to Vicki.
Since the payment from Low Trust to Vicki is the discharge of a present entitlement attributable to an unrealised gain, one of the conditions relating to payments under Subdivision EA is also satisfied. The other condition relating to an unpaid present entitlement is also satisfied because Green Pty Ltd has an unpaid present entitlement from Green Trust. Accordingly, Subdivision EA will apply (refer to the fact sheet Division 7A - trust amounts treated as dividends - payments).