Announcements
COVID-19 update: We’ve published information on the Jobkeeper payment, early access to super, and cash boost for businesses and employers. You can also check out the COVID-19 board.

ATO Community

Re: Div 7A Agreement for UPE

Highlighted

Enthusiast

Views 265

Replies 4

Hi

 

Just wondering who the lender and borrower should be on Div 7A Loan agreement for the UPE Loan in this scenario.

Family Trust B                                                 : received all franked dividend from the company A. 

Company A (Bucket company)                       : received 80% of net income (including franked distribution) from Trust B

Individual beneficiary C and D                        : received 20% of net income (including franked distribution) franked distribution from Trust B 

 

In my opinion, the lender is the company A and the borrower is the Family Trust B.

 

Existing Div 7A Loan agreement for that UPE loan was made between the family Trust and the individual and that agreement is prepared by the lawyer. That's why it makes me confused.

 

Can someone share your knowledge in this area? 

 

Thanks. 

 

PinkyT

1 ACCEPTED SOLUTION

Accepted Solutions
Highlighted

Best answer

Community Manager

Replies 0

Hi @PinkyT,

 

Great information from TaxedoMask.

 

Suggest you contact our early engagement area to assist  you further.

 

Thanks

 

Kylies

4 REPLIES 4
Highlighted

Master

Replies 3

Prima facie, arrangement appears to fall afoul of s100A. The ATO provides an example of this here (see example 5) and I have roughly summarised below - emphases and bits inside [ ] are mine.

 

ATO considers section 100A applies

The ATO considers that the following arrangement would constitute a reimbursement agreement:

  • The trustee of a trust [Family Trust B] owns all of the shares in a private company [Company A]. The company [Company A] is also a beneficiary of the trust and undertakes no activity, but derives a small amount of bank interest on its own account [Assumed to be true as its a 'bucket company'].
  • The directors of the trustee company and the beneficiary company are the same (or related) individuals. [Assumed to be true]
  • The trustee resolves to make the company [Company A] presently entitled to all, or some part of, trust income at the end of year 1, and distributes it to the company in year 2 before the company lodges its year 1 income tax return. [Assumed to be true]
  • The company includes its share of the trust's net income in its assessable income for year 1 and pays tax at the corporate rate. (Division 7A does not apply because the company’s entitlement is paid before it lodges its income tax return for the year in which the entitlement arose.) [Assumed to be true]
  • The company pays a fully franked dividend to the trustee in year 2, sourced from the trust income, and the dividend forms part of the trust income and net income in year 2. [Assumed to be true]
  • The trustee makes the company presently entitled to all, or some part of, the trust income at the end of year 2 (possibly including the franked distribution). The arrangement is repeated.

 

Where this is found to be the case, 'the beneficiary shall, for the purposes of this Act, be deemed not to be, and never to have been, presently entitled to the relevant trust income.' - s100A (1) ITAA 1936

 

Highlighted

Enthusiast

Replies 1

Hi @TaxedoMask 

Thanks for your answers. 

 

Unforunately, I am still confused.

 

What if the entitlment from the trust was not actually distributed and paid in cash, will Div 7A arise? If it arises, who should be the parties on the Div 7A Loan agreement. (The company and the trust?)

(Division 7A does not apply because the company’s entitlement is paid before it lodges its income tax return for the year in which the entitlement arose)

Master

Replies 0

@PinkyT 

The key takeaway is that if 100A applies, the amount is not treated as an "entitlement" and is assessed at the trustee level (top tax rate). Since there is no "entitlement", there's no Div7A.

 

I would recommend getting proper tax advice which incorporates a full set of the facts in order to determine what the true outcome should be.

Highlighted

Best answer

Community Manager

Replies 0

Hi @PinkyT,

 

Great information from TaxedoMask.

 

Suggest you contact our early engagement area to assist  you further.

 

Thanks

 

Kylies