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Prior to 30 June 2011, family groups had several options to deal with unpaid present entitlements (UPEs) owed by a family trust to a related company. One option was to place the funds representing the UPE on a sub-trust arrangement. The sub-trust could then loan the funds (interest only) back to the family trust for 7 years. Family groups which used this sub-trust option need to deal with the funds soon or risk a Division 7A deemed dividend arising.
Daniel Hui, Maddocks LawyersOn 19 July 2017, the Australian Taxation Office (ATO) released Practical Compliance Guideline PCG 2017/13 (PCG 2017/13) as a reminder to those family groups that used the 7 year sub-trust option under Practice Statement Law Administration PS LA 2010/4 (PS LA 2010/4). Broadly, those arrangements worked as follows:
PCG 2017/13 provides guidance on the administration of sub-trust arrangements once the 7 year loan period expires, and states that:
Finally, PCG 2017/13 states that where the facts and circumstances indicate that there has never been an intention to repay the principal loan at the end of the 7 year interest-only loan, the Commissioner may 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 loan initially arose.
As family groups had until 30 June 2011 to enter into sub-trust arrangements, the 7 year loan period will expire no later than 30 June 2018. However, family groups may have entered into the sub-trust arrangement earlier and the 7 year period may be closer to expiring (if it has not done so already).
Family groups should review their Division 7A arrangements for any 7 year sub-trust arrangements. To the extent any 7 year sub-trusts have been put in place, family groups and their advisors should consider:
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.
You can read earlier ClearLaw articles on a range of matters.
You can read Practical Compliance Guideline 2017/13 here.
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.
Daniel advises extensively in the following areas:His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.