CGT issues when creating and dealing with UPEs

A Matter of Trusts

Taxation in Australia

Until recently, unpaid present entitlements (UPEs) have been a rarely considered aspect of trusts, especially in relation to tax considerations post their creation. However, in the last few years, the position of the Australian Taxation Office (ATO) on the application of Div 7A of the Income Tax Assessment Act 1936 (Cth) (ITAA36) to UPEs to corporate beneficiaries1 has brought UPEs into focus. In more recent times, the ATO has released draft determinations, a determination and a ruling on the interaction of UPEs with a number of tax provisions, including the bad debt rules and the small business tax concessions.2 In addition to the issues raised by the ATO, there are a number of other tax matters concerning UPEs. In particular, capital gains tax (CGT) must be considered when creating and dealing with UPEs. As will be seen in this article, the CGT consequences of dealing with UPEs can be a vexed issue and, as such, any dealings with UPEs should only occur after a careful consideration of any intended tax consequences of the proposed transaction.

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