investment Option 1 loans and Division 7A
On 19 July 2017 the Commissioner of Taxation
(Commissioner) issued Practical Compliance
Guideline PCG 2017/13 (Guideline). This Guideline
provides taxpayers with administrative guidance where an unpaid
present entitlement (UPE) has been dealt with in
accordance with investment Option 1 outlined in Law
Administration Practice Statement PS LA 2010/4 Division 7A:
trust entitlements (Option 1 Investment and
PS LA 2010/4) and the repayment of the
Option 1 Investment principal is required to be made in the 2017 or
2018 income years.
The Guideline only applies where an UPE:
- has been dealt with in accordance with Option 1 Investment;
and
- the repayment of the principal of the Option 1 Investment is
required to be made in the 2017 or 2018 income years.
PS LA 2010/4 provides guidance on the administrative aspects of
where UPE funds remain intermingled with funds of a trust but are
claimed to be held on sub-trust for the sole benefit of a private
company beneficiary.
Pursuant to PS LA 2010/4 the Commissioner considers that UPE
funds on a sub-trust are held for the sole benefit of the private
company beneficiary if they are lent to the main trust under a
7-year interest only loan with the principal of the loan repayable
at the end of the 7-year interest only loan. This is referred to in
PS LA 2010/4 and this alert as an Option 1 Investment.
Trustees who adopted an Option 1 Investment on, or before, 30
June 2011 will be obligated to repay the Option 1 Investment
principal in the 2017 or 2018 income years. PS LA 2010/4 makes it
clear that to comply with Option 1 Investment, the
trustee must actually repay the principal at the
end of the Option 1 Investment term.
If the trustee fails to repay the principal when an Option 1
Investment matures (in the 2017 or 2018 income years), any unpaid
principal will be treated by the Commissioner as the provision of
financial accommodation and therefore a loan pursuant to Division
7A of the Income Tax Assessment Act 1936 (ITAA
36 and Division 7A) purposes. If
not repaid prior to the private company's lodgment day, a Division
7A deemed dividend will arise, being the amount of the unpaid
Option 1 Investment principal.
In the Guideline, the Commissioner accepts that a 7-year loan on
complying terms in accordance with section 109N of the ITAA 36
(Division 7A Loan) may be put in place between the
sub-trust and the private company beneficiary prior to the private
company's lodgment day. This will provide the taxpayer with a
further period for the amount of the principal to be repaid with
periodic payments of both principal and interest. The
Commissioner therefore provides taxpayers with the administrative
concession, allowing repayment of the Option 1 Investment principal
by placing it on Division 7A Loan terms.
In certain circumstances section 109R of ITAA 36
(section 109R) applies to disregard a payment as a
repayment of a loan for Division 7A purposes. In the Guideline the
Commissioner confirms that he will not seek to apply section
109R to the principal of an investment Option 1 loan placed on
Division 7A loan terms in accordance with the Guideline.
On a cautionary note, the Commissioner states in the Guideline
that where 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, the sub-trust arrangement
was not entered into in accordance with PS LA 2010/4 and this may
lead the Commissioner to consider that the purported arrangement
was a sham, and/or that there was fraud or evasion. In these
circumstances, 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.
Cornwall Stodart can assist you with complying with the
Commissioner's guidance, including preparation of Division 7A Loan
agreements. We can also assist you with reviews of your ownership
structures and Division 7A requirements.
Disclaimer
The statements herein are not intended to amount to advice
and should not be relied upon without first obtaining specific
advice applicable to your situation.