Whether UPE relates to assets of trust
Paragraph 62 suggests that not every UPE will relate to the assets of the trust. It should be amended to state that a UPE, as defined in the draft Ruling, will always relate to the assets of the trust.
The final ruling should also state that where a loan merely replaces an existing UPE that relates to trust assets (that is, the funds represented by the loan are used for the same purposes as the UPE) then the loan will relate to the assets of the trust. In particular, where a trust deed stipulates that a UPE 'automatically' converts to a loan, the Ruling should state that this loan will relate to the assets of the trust.
If the ATO takes a contrary view, an example should be provided. The Ruling should then confirm whether double counting would arise in such a situation.
|Modification made to wording of paragraph 62 as suggested.
However, we do not agree that where a UPE is replaced by a loan, that loan will automatically relate to trust assets. Regardless of whether the loan arises by agreement between the trustee and beneficiary or by operation of the deed, the relationship between the loan and the assets of the trust will depend on what use the borrowed funds are put to in each case. That is, the test for whether that loan relates to trust assets will be the same as for any other loan obligation owed by the trustee on behalf of the trust.
For example, if the UPE is converted into a loan and the trustee then neither keeps those loan funds as an asset of the trust nor uses them to acquire other trust assets, but rather facilitates or allows those funds to otherwise leave the trust, Bell v. Federal Commissioner of Taxation  FCAFC 32 suggests (at paragraph 39) that the trustee's liability to repay the loan may not relate to any asset of the trust.
In such a case, whilst the loan will not be taken into account as a relevant liability, the funds corresponding to the loan will have left the trust so will not be counted as trust assets. That is, the trust will have neither an asset nor a liability to count in respect of the loan.
In the connected beneficiary's hands, the loan will be a CGT asset. A loan is a 'debt' within the meaning of paragraph 152-20(2)(a) (being a legal obligation to pay a sum of money to another) so it will not be disregarded.
In this example, the value of the loan is therefore counted only once in the trust's net asset value, as part of the assets of the connected beneficiary.