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Edited version of private advice
Authorisation Number: 1051530598465
Date of advice: 21 June 2019
Ruling
Subject: Trust entitlements and unpaid present entitlements
Question 1
Is the Trust a part of the same 'family group' as described in Taxation Ruling TR 2010/3 of that with its unit holders and/or the beneficiaries or other entities associated with the unit holders?
Answer
No.
The Trust is not part of the same family group as the unit holders and/or beneficiaries or other entities associated with the unit holders because the unit holders that are related to each other (in the same family group) account for less than 50% of the units in the Trust.
Question 2
Will any post 16 December 2009 Unpaid Present Entitlements between the trust and any of its unit holders (which include corporate entities) constitute a loan or an 'in-substance' loan for the purpose of section 109D of Division 7A of the Income Tax Assessment Act 1936?
Answer
No.
As the arrangement involves each unit holder agreeing that the funds to which it is proportionately entitled can be used to reduce the debts of the Trust, this use is proportionately for the benefit of each of the unit holders. On that basis, the unit holders are not providing any pecuniary aid or favour to the Trustee. They are instead collectively agreeing that the funds be used for their sole benefit.
This ruling applies for the following period:
Year ending 30 June 2020
The scheme commences on:
1 July 2019
Relevant facts and circumstances
The Trust is an Australian resident unit trust that has many issued units. No additional units have been issued since the trust was settled.
The trustee of the Trust is a trustee company.
The Trustee owns and derives rental income from land on which a business is conducted.
The purchase of the land was financed by borrowings, upon which interest is paid by the Trustee.
The shareholders of the Trustee are the same as the unit holders of the Trust and their shareholding is in the same proportion as their unit holding in the Trust.
All units on issue in the Trust are of equal value, carry equal rights to the income and capital of the Trust fund and have a right to one vote per unit. In addition the Trustee's constitution states that there is the right to one vote for each share held. The shareholders agreement then further states that meetings will be decided by a majority of shareholding (that is 50.1% or more) and additionally that decision must be supported by at least two shareholders. On this basis, even if one shareholder holds an interest greater than 50.1%, they are still required to have the support of another shareholder before a decision is ultimately agreed upon.
Two of the unit holders are related to one another and account for less than 50% of the units in the Trust.
All other unit holders, which hold the remaining more than 50% of the units, are not associated to each other or the related unit holders, and have simply come together to participate in a common investment in real property via a unit trust.
A clause of the trust deed requires the Trustee to distribute amongst the unit holders in accordance with the entitlement of the units so held the amount decided to be distributed in respect of the accounting period.
The Unpaid Present Entitlements (UPEs) outstanding are on a strictly proportionate basis (that is, no one unit holder has been paid any of their entitlements - each unit holder's entitlements are equally outstanding).
The distributions have been made and will be made on a strictly proportional basis to unit holders based on units held.
At a past meeting of the unit holders it was agreed that all profits in the Trust would be used to retire debt. Accordingly, it is understood that none of the unit holders will demand payment of any of their entitlements over the period covered by this ruling. The Trustee has no intention to otherwise discharge any such entitlements over the period covered by the ruling, however, if any entitlements are so discharged (in full or in part), all unit holders will have their entitlements discharged (in whole or in part) proportionately.
The Trustee has used and will use the funds representing the UPEs to repay debt in each financial year.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 109D
Income Tax Assessment Act 1936 subsection 109D(3)
Income Tax Assessment Act 1936 paragraph 109D(3)(a)
Income Tax Assessment Act 1936 paragraph 109D(3)(b)
Income Tax Assessment Act 1936 paragraph 109D(3)(c)
Income Tax Assessment Act 1936 paragraph 109D(3)(d)