Practical Compliance Guideline (PCG) 2017/13 confirms the ability for a sub-trust arrangement using the 7-year option 1 investment agreement to be converted into a compliant loan, as described under section 109-N of Income Tax Assessment Act 1936 (ITAA 36). The ability to refinance UPE for an additional 7 years may be advantageous to taxpayers that would otherwise have been required to repay such arrangements by either 30 June 2017 or 30 June 2018.
PCG 2017/13 clarifies that:
- if the trustee fails to repay loan entered into under investment option 1 at the end of the loan term in the 2017 or 2018 income year, any unpaid principal of the loan will be treated by the Commissioner as the provision of financial accommodation, and therefore a Division 7A loan;
- where all, or part, of the principal loan is not repaid on or before the date of maturity, and a 7-year loan on complying terms with section 109N is not put in place between the sub-trust and the private company beneficiary prior to the private company’s lodgement day, a deemed dividend will arise to the extent of the unpaid amount;
- the Commissioner will not accept that the rolling over of all or part of the investment Option 1 that is not repaid into a further investment option described in PS LA 2010/4 (invest the funds representing the UPE on an interest only 10-year arrangement, or in a specific income producing asset or investment) will prevent the amount being treated as the provision of financial accommodation to which Division 7A may apply; and
- the Commissioner may consider the arrangement a sham, and/or that there was fraud or evasion, if the facts and circumstances indicate that there has never been an intention to repay the principal of loan at the end of the 7-year interest only loan. In this case, the Commissioner may go back beyond the standard period of review and deem a dividend in the income year in which the provision of financial accommodation originally arose.
The guideline only applies to the refinancing of UPEs into 7-year complying 109-N loans. It does not address 25-year complying 109-N loans. So as is with much of the treatment of UPEs and loans under the current ATO interpretation, there are inconsistent approaches adopted that are not necessarily in accordance with the law.
As a result of PCG 2017/13, taxpayers who entered into a sub-trust arrangement using the 7-year Option 1 investment agreement should consider the possibility of converting their arrangement into a compliant loan under section 109-N prior to the private company’s lodgement day. This will provide the affected taxpayers with a further 7 years to repay the amount by periodic payments of both principal and interest.
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