The Australian Taxation Office (ATO) has launched a new assault on unpaid present entitlements (UPEs). For practitioners this is alarming. If there is an aspect of the Division 7A private company regime which has been given plenty of attention, it is the treatment of UPEs.
The fact that UPEs are not considered loans led to the introduction of section 109UB a few months after Division 7A began in 1997.
The shortcomings of section 109UB led to its replacement and broadening with the introduction of subdivision EA, section 109XA - XC, in 2002.
It's fair to say that practitioners understand there are special rules for UPEs which they've tried to follow.
The ATO is now attacking UPEs on two new fronts.
Firstly, it is suggesting that, in many cases, the UPEs are in fact loans simply because they have been recorded (incorrectly) as loans. Since when did the way someone recorded a transaction in a general ledger determine the true legal effect of the transaction?
In most cases the terms of a trust deed are such that a UPE is held on a bare trust for the beneficiary ie there is no loan. (The issue then becomes whether there is a loan between that bare trust and the 'main trust').
The second attack is the application of section 100A which is an 'old' anti-avoidance provision originally targeted at trust stripping arrangements. Being an anti-avoidance provision, it is drafted broadly, so much so that it can potentially apply to a wide variety of circumstances not necessarily envisaged in the beginning.
The ATO has had recent success which section 100A in Raftland's case and has indicated that it will fire more section 100A rockets.
Both of these attacks are disturbing and should not be ignored.
Interestingly, the ATO appears to have never raised the prospect of Part IVA applying to situations where there is a distribution to a corporate beneficiary which remains unpaid for a long time. The longer the time, the more it would appear that the purpose of the distribution is simply to cap the tax liability at the 30% company rate: could Part IVA easily apply?
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