The ATO has released a draft determination discussing the factors the Commissioner will consider when determining the amount of any unpaid present entitlement arising if a private company's entitlement to trust income is through interposed trusts.
The Draft Taxation Determination sheds light on the workings of section 109XI of the Income Tax Assessment Act 1936 (ITAA 36) which was introduced on 29 June 2010 and which took effect from 1 July 2009.Anna Tang and Nicole Siemensma
The notion of unpaid present entitlements through interposed trusts is a very complex area within tax legislation. This Draft Taxation Determination enables private companies and trustees:
If Division 7A of the ITAA 36 applies, then certain payments, loans and forgiven debts that a private company arranges for its shareholders or their associates are deemed to be unfranked dividends. You can read a brief outline of Div 7A here
An 'unpaid present entitlement' is a distribution from a trust that a trustee has decided to make, but has not yet paid out. It also applies to an amount not yet paid out of a sub-trust.
For further information please see ClearLaw article 'The ATO shifts its view on Division 7A loans and unpaid trust entitlements'.
Section 109XA of the ITAA 36 deems a private company to have made a payment, loan or forgiven a debt owing to an entity (target entity) for Division 7A purposes if the following conditions are satisfied:
Section 109XI was introduced to prevent taxpayers circumventing the operation of section 109XA by interposing one or more trusts between the trustee and the private company. The diagram below, shows how the circumventing arrangement worked. (The diagram further below shows how that circumvention no longer works.):
Section 109XI was introduced in on 29 June 2010 and came into effect on 1 July 2009. The effect of the section is to provide that a private company is deemed to be presently entitled to an amount from the net income of a trust estate (target trust) for the purposes of section 109XA if:
The diagram below, shows how section 109XI now prevents taxpayers circumventing the operation of section 109XA by deems there to be a present entitlement between the private company and the target trust:
Accordingly, if the conditions in section 109XI are satisfied (see below), then the amount which the private company is taken to be, or to become, entitled to from the net income of the target trust for the purposes of section 109XA is the amount (if any) determined by the Commissioner of Taxation (Commissioner).
That present entitlement is then taken into account for the purposes of the section 109XA.
On 15 December 2010, the ATO released a Draft Taxation Determination [i] setting out the factors the Commissioner will take into account in making this determination.
Broadly, the Draft Taxation Determination provides that when the Commissioner is determining the amount of present entitlement a private company has, or will have, from the net income of a trust estate under section 109XI, the Commissioner will take into account several factors occurring before the earlier of the following dates (determination date):
The factors that the Commissioner will take into account include the following:
The amount the Commissioner determines to be the present entitlement of the private company from the net income of a trust estate under section 109XI cannot be more than the lower of:
The Draft Tax Determination was published on 15 December 2010 with public comments due by 4 February 2011.
Watch this space for any variations to the Draft Tax Determination, based on comments received.
Once the Tax Determination is final it is likely to apply both before and after the date it is issued.
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Tax and Revenue Team.
Read about the Cleardocs Division 7A Loan Agreement
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[i] Draft Taxation Determination TD 2010/D9.
[ii] This Subdivision deals with unpaid present entitlements.
Andrew is a lawyer in the Maddocks Tax & Revenue team.
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His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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