Following extensive consultation with CPA Australia representatives, the ATO has issued Practice Statement PS LA 2010/4, which sets out a range of administrative concessions in respect of unpaid present entitlements (UPEs) owed to trusts by private company beneficiaries arising under Taxation Ruling TR2010/3.
Very broadly, taxpayers who have misclassified UPEs as loans or who were unaware that ordinary loans made by trusts to related private companies, can seek corrective action prior to 30 June 2011 in order to prevent a deemed dividend arising under Division 7A subject to various conditions being met.
Where a UPE made after 16 December 2009 is not regarded as an ordinary loan a deemed dividend will not arise if the UPE is held on a sub-trust for the sole benefit of the private company beneficiary. This approach will require the trust to pay an agreed annual return on the UPE as well as a repayment of the principal funds representing the UPE.
The Practice Statement allows such UPEs to be treated as either loans with a seven or 10-year term with interest respectively paid at either the section 109N interest rate or at the Reserve Bank of Australia small business variable housing rate with principal repayable within the loan term.
Alternatively, where the funds representing the UPE are invested in a specific asset the ATO will generally accept that no deemed dividend has arisen if all the income and capital gains arising from the asset are paid to the private company beneficiary.
Whilst CPA Australia strongly contends that the treatment of UPEs in Taxation Ruling TR2010/3 is contrary to the underlying policy intent of Division 7A, we welcome the finalised Practice Statement which provides some practical relief for affected taxpayers.