In this episode we answer three Div 7A listener questions.
Div 7A Listener Questions
Div 7A is complex. And when you write to us, it is often about Div 7A. So in this episode Andrew Henshaw of Velocity Legal in Sydney will answer three of your questions.
Here is what we learned. But please also listen in since Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just listen through a podcast app on your mobile phone.
The questions come from Ryan Bottin-Noonan, Charitha Wasala and Dave Abbesworth.
# 1 UPE to Bucket Company
The first question is from Ryan Bottin – Noonan of Ark Accounting in Sydney. Ryan writes,
“A private company (ABC Pty Ltd) is a profitable trading entity. The shareholder of ABC Pty Ltd is ABC Trust, a discretionary trust with a corporate trustee. The director and shareholder of this corporate trustee is one and the same person.
There is a bucket company XYZ Pty Ltd that is a corporate beneficiary of ABC trust.
So now ABC Pty Ltd declares but does not pay a franked dividend to it’s shareholder ABC Trust. So ABC Pty Ltd has a liability against the Trust and the trust has a receivable. The cash stays in ABC Pty Ltd.”
ABC Trust now has income in the form of this dividend and they need to do something with this income to avoid the trustee being assessed at top marginal rates. And so they distribute the franked dividend to its corporate beneficiary – XYZ Pty Ltd – the bucket company in this structure. So now the bucket company has an unpaid present entitlement – a UPE receivable – against the trust and the trust has a liability against the company.
And so Ryan writes, “The whole time there is no cash payment, just a dividend from ABC Pty Ltd to ABC Trust and a distribution from ABC Trust to XYZ Pty Ltd. The Actual cash is sitting back in the trading entity ABC Pty Ltd. Is this situation considered a Div 7A loan and if so why?”
The company’s UPE against the trust is a form of financial accommodation and hence a Div 7A issue as per TR 2010/3.
The way to get around this is to officially pay the dividend and distribution. And to then make it a loan from XYZ to ABC Pty Ltd and to leave the trust completely out of it. Loans from company to company don’t fall under Div 7A.
# 2 Minimum Repayments
The second question came from Charitha Wasala of Envisoro in Sydney. He writes,
” The company has given a loan to a trust. The Trust is not a shareholder of the company but an associate. A 7-year, s 109n loan is in place to meet the minimum repayment. Minimum repayments will be through dividends declared by the company. Can the dividend be paid to the trust or must be paid to shareholder?”
A company can only pay dividends to shareholders. So in this case the company would pay the dividends to the shareholder who includes these in their assessable income. The shareholder then loans the money to the trust who then uses it to make minimum repayments on the s109n loan.
With all this the money doesn’t actually need to flow. Proper documentation of the transactions is usually enough.
# 3 Shareholder Dies
The third question came from Dave Abbesworth. Dave writes,
“ What happens if the trust made a loan to a shareholder way back before Div 7A, and now the shareholder dies?”
There is not much to go by, but we assume that there is a distribution from the trust to the company, but the trust didn’t pay this distribution, created a UPE and loaned the money to the shareholder instead. So this would be classic Div 7A territory if the loan had come into existence after 2009.
Talking about dates, let’s quickly reflect on two important dates for Div 7A. The first is the start of Div 7A in December 1997. And the second one is 2010, the year in which the ATO changed its position on UPEs through TR 2010/3. Actually it was 2010 but it applied from 16 December 2009.
The shareholder’s death has no effect on the UPE as such between trust and company since different entities. And the ATO has indicated in previous private rulings that a Div 7A deemed dividend can’t go to a taxpayer’s estate since a different entity again.
With these very old loans it is important to check whether the loan even still exists. It might have already been statute barred. And the time this happened might already be out of the ATO’s 4 or 2 year amendment period, so that ATO can’t go back and recognise income for the statute barring of the loan.
But with all this it is highly recommended to get a private ruling from the ATO since it all depends on the finer details of the case.
So these are the three Div 7A listener questions we covered in this episode. But please listen in since there Andrew covers a lot more material than we have listed here.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 01 May 2020