Dan’s Deliberations
Division 7A and maturing sub-trust arrangements
Most readers will be aware of the ATO’s administrative approach to the application of Division 7A to unpaid present entitlements (UPEs) owing from a trust to a corporate beneficiary as set out in TR 2010/3 and PS LA 2010/4. From 16 December 2019, the ATO considers that a UPE to a corporate beneficiary which remains intermingled with the funds of the trust will become a loan for Division 7A purposes (which includes the provision of “financial accommodation”) unless the UPE is held on sub-trust for the sole benefit of the corporate beneficiary. For those taxpayers that do not want to convert the UPE to a complying Division 7A loan, sub-trusts provide an alternative approach with a smaller cashflow impact.
The ATO outlined 3 acceptable sub-trust arrangements in PS LA 2010/4. Those options were:
- invest the funds representing the UPE on an interest only 7-year loan at the benchmark (Division 7A) interest rate;
- invest the funds representing the UPE on an interest only 10-year loan at the small business variable (other) overdraft rate (currently about 2% higher than the Division 7A interest rate); or
- invest the funds representing the UPE in a specific income producing asset or investment.
For options 1 and 2, the ATO’s expectation was that the principal would be repaid at the end of the interest only term. In practice though, many trusts have not been in a position to do this. This led to the ATO issuing PCG 2017/13.
In PCG 2017/13 the ATO states that if the principal is not repaid by the end of the interest only term, they “will accept” that a 7-year Division 7A loan may be put in place between the sub-trust and the corporate beneficiary.
When PCG 2017/13 was first issued on 19 July 2017 it applied to 7-year sub-trust arrangements maturing in the 2018 income year. The following is a summary of the key dates:
- 30 June 2010 – Corporate beneficiary is made presently entitled.
- 30 June 2011 – UPE is put on a 7-year sub-trust arrangement.
- 30 June 2012 to 30 June 2017 – Interest payments required to be made.
- 30 June 2018 – Final interest payment due + principal required to be repaid. If the principal is not repaid this amounts to the provision of financial accommodation and therefore a loan for Division 7A purposes.
- 15 May 2019 (or lodgment day) – Complying 7-year Division 7A loan agreement must be in place.
- 30 June 2019 – First minimum yearly repayment of interest and principal is due.
The ATO extended PCG 2017/13 on 15 August 2018 to 7-year sub-trust arrangements maturing in the 2019 income year and on 27 June 2019 to 7-year sub-trust arrangements maturing in the 2020 income year.
The ATO is yet to release guidance for 7-year sub-trust arrangements maturing in the 2021 income year. Also, the 2021 income year is the first year in which we will see 10-year sub-trust arrangements maturing; there is also no ATO guidance on those arrangements.
Despite the lack of guidance from the ATO, it is difficult to see what else the ATO could do but extend the guidance to sub-trust arrangements maturing in the 2021 income year. If you accept that while the sub-trust arrangement was in place and being complied with the corporate beneficiary was not providing financial accommodation (as the ATO does in TR 2010/3 and PS LA 2010/4), then financial accommodation only begins when the principal is not repaid by the end of the interest only term. It then follows as an application of the ordinary Division 7A rules, that:
- a loan is first made in the year the principal is not repaid (i.e. the 2021 income year);
- a complying Division 7A loan agreement must be in place by the corporate beneficiary’s lodgment day for the 2021 income year; and
- the first minimum yearly repayment of interest and principal is due on 30 June 2022.
However, PCG 2017/13 states:
“Where the facts and circumstances indicate that there has never been an intention to repay the principal of loan at the end of the 7-year interest only loan, the sub-trust arrangement was not entered into in accordance with PS LA 2010/4 and this may lead the Commissioner to 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 financial accommodation originally arose.” [Emphasis added.]
Where the sub-trust arrangement has been properly documented and complied with up until maturity, it would be a difficult argument for the ATO to run to assert the arrangement was a sham or that there was fraud or evasion.
Despite this ‘threat’ in PCG 2017/13, most taxpayers whose current circumstances prevent them from being able to repay their maturing sub-trust arrangements in full by 30 June, can take some comfort that the ATO’s approach in PCG 2017/13 should continue for the 2021 and later income years unless and until the proposed Division 7A reforms are implemented.
ATO Update
TR 2021/2 – Fringe benefits tax: car parking benefits
The ATO has issued Taxation Ruling TR 2021/2, which sets out the Commissioner’s views on when the provision of car parking is a car parking benefit. Amongst other things, the Ruling provides guidance on the meaning of ‘in the vicinity of’ (in the context of the employee’s primary place of employment) and the requirements for a commercial parking station.
PS LA 2011/29 – Updated Division 7A guidance
The ATO has updated its Division 7A guidance on the exercise of the Commissioner’s discretion under section 109RB of the Income Tax Assessment Act 1936 (Cth) by updating the list of ATO officers who can exercise this discretion on behalf of the Commissioner.
Product Ruling
The ATO has issued Product Ruling PR 2021/6 which sets out the income tax consequences of investing in the Aberdeen Standard Authorised Contractual Scheme.
Super guarantee rate to rise to 10%
The superannuation guarantee rate will rise from 9.5% to 10% from 1 July 2021. The rate is scheduled to progressively increase by 0.5% until it reaches 12% in July 2025.
State Taxes
Payroll Tax (SA): Apprentice wage subsidies
The South Australian Government has announced that the Payroll tax exemption for wages paid to eligible apprentices will be extended for 12 months until 30 June 2022 (covered in the Birchstone Brief for the week ended 13 November 2020).
Cases
Appeals
- The Commissioner has filed a notice of appeal to the Full Federal Court against the decision in Virgin Australia Airlines Pty Ltd v FCT [2021] FCA 523 (covered in the Birchstone Brief for the week ended 21 May 2021).
- The taxpayers have lodged an application for special leave to appeal to the High Court against the decision in Mussalli v FCT [2021] FCAFC 71 (covered in the Birchstone Brief for the week ended 21 May 2021).
Legislation
Treasury Laws Amendment (COVID-19 Economic Response) Bill 2021 – COVID-19 recovery grant payments
A Bill which extends the concessional tax treatment of COVID-19 recovery grant payments has passed both houses of Parliament. The Bill:
- makes eligible COVID-19 recovery grant payments non-assessable non-exempt income; and
- allows for the disclosure of protected information to Services Australia for the purposes of the administration of COVID-19 relief payments.
Superannuation Legislation
A trio of Superannuation Bills (the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020; Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020 and Treasury Laws Amendment (Your Future, Your Super) Bill 2021) (first covered in the Birchstone Brief for the week ended 19 February) have received assent and are now law. Amongst other things, the new legislation covers:
- restrictions on the creation of multiple superannuation accounts for new employees who do not specify a fund;
- increase to the maximum number of SMSF members from 4 to 6; and
- extension of the application of the bring forward rule.
Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2021 – Interest rate for adjusting “base amount” unchanged
The Family Law (Superannuation) (Interest Rate for Adjustment Period) Determination 2021 was registered on 15 June 2021. The Determination specified the interest rate to be used for adjusting the “base amount” allocated in a court order or a superannuation agreement under the Family Law Act 1975 (Cth). The interest rate will remain at 0.057 where the adjustment period is the financial year beginning on 1 July 2021.
Excise Amendment (Alcohol Manufacturers Remissions) Regulations 2021 – Excise duty
Regulations which provide excise duty relief for small time brewers and distillers have been registered (covered in the Federal Budget edition of the Birchstone Brief).
