We wrote about Draft Taxation Determination TD 2022/D1 (Draft TD) on Division 7A and unpaid present entitlements (UPEs) here. On 12 July 2022, the Australian Taxation Office (ATO) finalised the Draft TD as Taxation Determination TD 2022/11 (Final TD).

The Final TD applies to trust entitlements that arise on or after 1 July 2022.

For trust entitlements that arose on or before 30 June 2022, Taxation Ruling TR 2010/3 (TR 2010/3) and Practice Statement Law Administration PS LA 2010/4 (PSLA 2010/4) continue to apply. However, the ATO has withdrawn TR 2010/3 and PSLA 2010/4 with effect from 1 July 2022.

Is the Final TD different to the Draft TD?

In the Draft TD, in the absence of a sub-trust arrangement (below), the ATO considered that:

where a corporate beneficiary is presently entitled to a certain amount of trust income, typically a fixed sum, the beneficiary is taken to have knowledge of that amount at the time of creation of the UPE and the UPE becomes a loan for the purposes of Division 7A from that time; and
where a corporate beneficiary is presently entitled to an uncertain amount of trust income, typically a percentage or ‘the balance, beneficiary is taken to have knowledge of the amount at the time the trust’s accounts are finalised (typically in the income year after the year in which the present entitlement arose).

This ‘dual approach’ compliance issue caused angst among practitioners and was the focus of many submissions on the Draft TD. In the Final TD the ATO has scrapped the dual approach with the timing for when financial accommodation occurs, and thus a section 109D loan, being the same for all UPEs – certain or uncertain. This change is welcomed.

The approach in the Final TD is:

a corporate beneficiary makes a loan when the financial accommodation is provided. This will occur when the corporate beneficiary has knowledge of an amount that it can demand immediate payment of from the trustee and does not demand payment of the amount;
if the corporate beneficiary and the trustee have the same directing mind and will, the corporate beneficiary is taken to have knowledge of the amount that it can demand immediate payment of from the trustee when the trustee does; and
the time when the amount of a beneficiary's entitlement is known will typically arise after the end of the income year (typically when the trust’s accounts are finalised).

The timelines under the Final TD and the withdrawn PSLA 2010/4 on when financial accommodation and a section 109D loan arise are similar. The main difference is under the PSLA financial accommodation is at the lodgment time of the tax return for the year in which the present entitlement arose. Under the Final TD financial accommodation will now typically be when the accounts for the year of the present entitlement are finalised.

Sub-trusts, going the way of CD ROMs?

Some people still have CD ROMS, few people buy new ones.

One area that has not changed from the Draft TD is that relating to sub-trusts. Under PSLA 2010/4 (now withdrawn), Option 1 and Option 2 sub-trust arrangements were often used where the amount in the sub-trust was invested in the main trust in working capital, plant and equipment, or real property acquisitions. Interest only arrangements, as allowed under PSLA 2010/4, enabled trading trusts to finance the business on interest only terms.

While the Final TD includes sub-trust arrangements, the requirement that the funds on sub-trust be held for the exclusive benefit of the corporate beneficiary, and not used by a shareholder or associate of that corporate beneficiary, including by the main trust, means that few, if any, are likely to enter into sub-trust arrangements under the Final TD.

Clarification for pre-16 December 2009 UPEs

The Draft TD was unclear on what the withdrawal of PSLA 2010/4 would mean for pre-16 December 2009 UPEs (grandfathered under PSLA 2010/4). The ATO clarified in the Final TD that:

taxpayers can continue to rely on both TR 2010/3 and PS LA 2010/4 in relation to trust entitlements that arose on or before 30 June 2022; and
the Final TD does not apply to unpaid present entitlements arising before 16 December 2009.

What does the Final TD mean?

Where a trust bestows present entitlements and either pays those in full or the UPE is discharged and placed on complying Division 7A loan terms, the effect of the Final TD should be minimal.

Where there has been a practice of PSLA 2010/4 sub-trust arrangements, the views in the Final TD will be a material change for present entitlements arising on or after 1 July 2022. There is a risk that ‘rolling-over’ proforma resolutions, accounting entries, and documentation to the 30 June 2023 year could result in non-compliance with the Final TD and by extension the ATO’s view on the operation of Division 7A.

Sladen Legal’s tax team regularly advises on Division 7A and UPEs. If you have any questions about what the ATO views may mean for you and your arrangements, please contact:

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au

Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au

Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 405 847 261
E: ehennebry@sladen.com.au

Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au