[vc_row][vc_column][vc_column_text]On the 13th of July 2022, the ATO released Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation’?

The Determination describes when a private company provides ‘financial accommodation’ where that company is made presently entitled to trust income and either:

• that entitlement remains unpaid; or
• the trustee sets aside an amount from the main trust and holds it on a new separate trust (sub-trust) for the company.

The Determination applies to trust entitlements arising on or after 1 July 2022.

Upon the release of the final Determination, the ATO simultaneously withdrew TR 2010/3 Income tax: Division 7A loans: trust entitlements and PS LA 2010/4 Division 7A: trust entitlements with effect from 1 July 2022.

However, the ATO has confirmed that it will not devote compliance resources to arrangements entered into on or before 30 June 2022 in accordance with these withdrawn guidance materials.

TD 2022/11 explains that a company with a UPE provides ‘financial accommodation’ to the trustee where it:

• has knowledge of an amount from which it can demand immediate payment from the trustee;
• consents to the trustee retaining the amount and continuing to use the funds for trust purposes; and
• does not demand payment of the amount.

Such arrangements will need to be converted to a complying Division 7A loan otherwise a deemed dividend may arise for the trustee.

Further, where a company is presently entitled to an amount from a trust and that amount is set aside by the trustee and held on sub-trust for the company’s sole benefit, this will not be the provision of financial accommodation.

However, a company that is presently entitled provides financial accommodation to a shareholder/associate where:

• that amount is set aside by the trustee and held on sub-trust; and
• the company consents to those funds being used by the shareholder/associate.

This will need to be managed as a complying Division 7A loan otherwise a deemed dividend may arise for the shareholder/associate.

The ATO has confirmed that the word ‘use’ takes its ordinary meaning and includes allowing the funds to be used as security in respect of financial arrangements of the shareholder/associate.[/vc_column_text][vc_column_text]Timing

The TD 2022/11 confirms that the provision of financial accommodation to the private company beneficiary will typically occur after the end of the income year in which the entitlement arises.

This will be the case whether the entitlement is expressed as:

• a fixed amount from the trust income;
• a percentage of trust income (or some other calculable amount); or
• a combination of fixed and calculable amounts.

An example from the TD as follows:[/vc_column_text][mk_image src=”https://trovegroup.com.au/wp-content/uploads/2022/07/diag2-1.png” image_size=”full”][vc_column_text]However, it will be a question of fact as to when a beneficiary will be aware of their absolute entitlement.

Paragraphs 10 and 11 of TD 2022/11 indicate that, where the beneficiary of a trust and the trustee have the same directing mind and will, the beneficiary will be taken to have knowledge of the amount it can demand payment of when the trustee does, which may be on or before the year end and not necessarily after year end.

Pre-16 December 2009 UPEs

The Determination confirms that it does not apply to UPEs arising before 16 December 2009.

UPEs arising before 16 December 2009 continue to be grandfathered and the company does not provide financial accommodation to the trustee where it does not demand payment of these UPEs.

Legacy Sub-trust Arrangements

PCG 2017/3 was revised on 7th June 2022 and applies to sub-trust arrangements created in respect of UPEs arising from the 2009–10 to 2021–22 income years (inclusive).

Interest-only sub-trust arrangements set out in Option 1 and Option 2 in withdrawn PS LA 2010/4 may continue until maturity and remain eligible for converting into a complying Division 7A loan any unpaid principal outstanding on maturity.

Any sub-trust arrangement implemented for UPEs arising on or after 1 July 2022, unless the funds are held on sub-trust for the company’s sole benefit, will generally be a loan for Division 7A purposes.[/vc_column_text][/vc_column][/vc_row]