Unrelated transactions - subparagraph 32(e) of PS LA 2010/4
One of the requirements for the self-corrective option is that the loan account in which the amount is included is entirely comprised of amounts correlating to UPEs and repayments of such UPEs between the trust and the private company (that is, its balance is not affected by any unrelated transactions).
Whether a transaction would be viewed as an unrelated transaction would depend on the nature of the transaction. Each transaction will need to be carefully examined to determine if it correlates to UPEs and repayment of the UPEs between the trust and the private company.
For example, a transaction which comprises of payment of taxes to us by the trustee on behalf of the private company beneficiary could be viewed as a payment to the private company and thus a reduction in the UPE owing by the trustee. Such a transaction would not be taken to be an unrelated transaction.
Accordingly, such a transaction would not preclude you from adopting the self-corrective option where all other conditions in paragraph 32 of the PS LA 2010/4 are satisfied.
Form of the declaration - subparagraph 32(g) of PS LA 2010/4
The declaration does not need to be in any specific format, as long as it satisfies all the conditions required in sub-paragraph 32(g) of PS LA 2010/4.
Such a declaration does not need to be in the form of a statutory declaration. A declaration in the format below would be sufficient to us:
I, John Smith, the trustee of DiscFamily Trust, declare the following to be true and correct:
A. the 2009 financial accounts of DiscFamily Trust and PrivCo have incorrectly classified the amount of $10,000 as a loan from PrivCo to DiscFamily Trust. This amount is in fact a UPE
B. with the exception of the financial accounts and their underlying workpapers, including the journal entries, accounting ledgers and trial balance, all available evidence supports the view that the $10,000 is in fact a UPE
C. the private company has never included the amount of $10,000 in calculating the amount of loan reported at Label 8N of PrivCo's 2009 income tax return
D. DiscFamily Trust has not paid or credited any interest on or in respect of the $10,000
E. the loan account in which the $10,000 is included is entirely comprised of amounts correlating to UPEs and repayment of such UPEs between DiscFamily Trust and PrivCo
F. on or before 31 December 2011, the financial accounts of all relevant entities are amended or restated to properly classify the amount as a UPE.
Trustee's (or director's) name: John Smith
Trustee's (or director's) signature: - signed
Date: - date
Witness' name: Jane Smith
Witness' signature: - signed
Date: - date
Amending or restating accounts
Where you satisfy all the conditions in paragraph 32 of PS LA 2010/4, you may restate the amounts in the accounts for the most recent year, with notes identifying which year the restatement relates to.
Where the UPE relates to an earlier year and has been repaid in full at the time of preparing the most recent accounts, we would expect that a separate note is included in these accounts and that entities make the note on or before 31 December 2011 (as required by PS LA 2010/4).
You can still self-correct if you genuinely believe that an amount recorded in the accounts as a loan is in fact a mere UPE which has been misclassified as a loan. In such a case, it would be advisable to document your reasons for the position adopted or seek professional advice. You may be required to explain the position in the event of a review by us.
Interest and penalties may be payable should we disagree with your position.
End of danger
As a preferred course of action you may consider lodging a request for private binding ruling on whether the amounts constitute a UPE or a loan. We will then review your individual facts and circumstances and determine whether the amounts recorded as a loan in the financial accounts are in fact a UPE.
Alternatively, you may accept that the UPE has been mistakenly satisfied and replaced with an ordinary loan, but request that the Commissioner exercise his discretion under section 109RB to disregard the application of Division 7A.
Self-corrective options not limited to small business taxpayers
You are able to correct your accounts for misclassification of UPEs as loans as described above. However, only small business entities are able to self-assess whether the Commissioner will exercise his discretion contained in section 109RB (as outlined in paragraph 34 of PS LA 2010/4).
A small business entity is defined to be an entity which carries on a business and, together with affiliates and other connected entities, has a turnover of less than $2 million (section 328-110 of the Income Tax Assessment Act 1997).
If you are a small business who does not satisfy this test, or you are a small business taxpayer who cannot satisfy the conditions in paragraph 34 of PS LA 2010/4, you may still apply in writing to the Commissioner to exercise discretion in section 109RB.