On 13 July 2022, the ATO issued its final position on the Division 7A consequences on unpaid present entitlements (UPEs) to corporate beneficiaries. This final tax determination was initially released in draft in February of this year and remains largely unchanged.
Division 7A is an anti-avoidance measure designed to stop private companies distributing tax-free profits to shareholders or their associates. It applies to loans, advances, payments and other credits made by companies to their shareholders or associates.
Division 7A is triggered when a company:
- Makes payments to a shareholder or shareholder’s associate, including transfers or use of property for less than market value;
- Lends money to a shareholder or shareholder’s associate without a specific loan agreement, and the loan is not fully repaid by lodgement day of that income year; and
- Forgives a debt owed by a shareholder or shareholder’s associate to the company.
Under division 7A, these payments are categorised as unfranked dividends and treated as assessable income unless they fall within specified exclusions.
The final ruling issued on 13 July 2022 replaces prior rulings, coming to effect from 1 July 2022. The ruling has introduced a change in view on when a UPE to a company provides ‘financial accommodation’ (and therefore a loan for Division 7A purposes). This would arise when the company:
- Has knowledge of an amount that it can demand immediate payment of 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.
What has changed in the finalised tax determination?
The difference between the finalised and draft tax determination relates to the timing of when financial accommodation is provided. The draft made a distinction between fixed and non-fixed amounts of distributions made to a corporate beneficiary. In the final ruling, the distinction between fixed and non-fixed amounts is no longer relevant.
The impact of the change in the finalised determination is that a UPE to a private company will not be deemed to be a loan for Division 7A purposes until after the year in which the trust distribution is made regardless of how the entitlement is expressed in the trustee resolution.
Should you have any concerns regarding these changes to Division 7A, please get in touch with your advisor.