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Edited version of your written advice

Authorisation Number: 1051469931805

Date of advice: 30 January 2019

Ruling

Subject: Division 7A – financial accommodation – sub-trust arrangement

Question

Do the sub-trust arrangements entered into by the trustee of the Head Trust in relation to all post 16 December 2009 unpaid present entitlements owing to the private company beneficiary ensure that the private company beneficiary does not provide financial accommodation to the trustees for the trust for the purposes of the extended meaning of ‘loan’ in subsection 109D(3) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year of income ended 30 June 2019

Year of income ended 30 June 2020

Year of income ended 30 June 2021

Year of income ended 30 June 2022

Year of income ended 30 June 2023

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The trustees for the main trust acquired a parcel of land on which a building was constructed.

The purchase of the land and subsequent construction of the building was financed by way of:

As at 30 June 2017, the main trust had UPEs owing to the private company beneficiary consisting of a pre 16 December 2009 UPE amount, and post 16 December 2009 UPE amounts which arose during several income years.

A lease agreement has been entered into between the trustees for the main trust and an associated entity (which carries on a business under a business name) for an annual rental.

All the post 16 December 2009 UPE amounts have been placed on a sub-trust arrangement.

The terms of the sub-trust are:

Following repayment of the commercial loan, trust distributions from the head trust to the beneficiary company are now paid in cash by the due date for lodgement of the trust’s income tax return following the year in which the trust distribution is made.

Because the funds that are the subject of the sub-trust arrangement were invested in land and buildings, the sub-trust arrangement will continue until the investment of the beneficiary company is withdrawn, that is, until the land and buildings are eventually sold. At this time the head trust will have sufficient funds to enable it to repay the UPE amounts invested by the company.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7A

Income Tax Assessment Act 1936 Section 109D(1)

Income Tax Assessment Act 1936 Section 109D(3)

Income Tax Assessment Act 1936 Section 109N

Reasons for decision

Summary

As a result of the sub-trust arrangement entered into by the trustees of the Head Trust, there is no provision of financial accommodation between the private company beneficiary and the trustee for the purposes of subsection 109D(3) of the ITAA 1936.

Detailed reasoning

Division 7A of Part III of the ITAA 1936 (Division 7A) operates to treat certain loans and other payments made by a private company to a shareholder or their associate as assessable income (unfranked dividends) of the shareholder or associate.

Section 109D provides that where a private company makes a loan to a shareholder or their associate in an income year, and the loan is not fully repaid by the lodgement day of that income year, the loan is taken to be a dividend paid to the shareholder or their associate at the end of that income year, unless the provisions in subdivision D of Division 7A prevent the loan from being treated as a dividend, including entering into a complying loan agreement under section 109N.

For the purposes of Division 7A, a loan includes ‘the provision of credit or any other form of financial accommodation’ (paragraph 109(3)(b)). As discussed in Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements, financial accommodation includes where there is an unpaid present entitlement (UPE) and a consensual agreement between the private company beneficiary and the trustee of the trust that:

As explained in TR 2010/3, by not calling for payment of its present entitlement to trust income, the private company beneficiary is effectively allowing the trustee to use those funds for trust purposes. As such, there is effectively a loan of money from the company to the trustee of the trust. However, where funds representing the UPE are held on sub-trust by the trustee for the sole benefit of the private company beneficiary, the Commissioner accepts that there is no financial accommodation for the purposes of subsection 109D(3) and Division 7A will have no application.

As outlined in Law Administration Practice Statement PS LA 2010/4 Division 7A: trust entitlements, the Commissioner accepts that a valid sub-trust arrangement exists where:

In the current case:

Therefore, the Commissioner accepts that the sub-trust arrangement is in accordance with TR 2010/3 and the UPE amounts that have been placed under the sub-trust arrangement will not be financial accommodation under paragraph 109D(3)(b), and accordingly not a loan to which Division 7A will apply.


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