In 2009 the ATO determined that trust distributions to corporate beneficiaries that remain unpaid would be subject to Division 7A of ITAA 1936. This meant that the UPE loan to the corporate beneficiary would be deemed to be a dividend paid by that corporate beneficiary unless there were particular loan arrangements in place between the trust and the corporate beneficiary.The ATO provided a number of options to deal with this problem (in Practice Statement PSLA 2010/4), one of whcih (‘Option 1’) was for the UPE loan to be converted to a 7-year interest-only loan.
These 7-year interest-only loans will mature during the 2017 and 2018 income years. On maturity of the loans a deemed dividend will arise to the extent of the unpaid principal amount if the loan principal is not repaid in full.
Practical Compliance Guideline PCG 2017/13
In PCG 2017/13 the ATO has indicated that those trusts who adopted Option 1 can convert the 7-year interest-only loan to a complying Division 7A loan which must provide for both principal and interest payments over the additional 7-year term of the loan. This new loan must be in place prior to the earlier of the actual date or the due date for lodgement of the corporate beneficiary’s income tax return for the year in which the 7-year interest only loan is due to mature.
The ATO has effectively allowed trusts an additional 7 years to repay the loan, albeit with periodic payments of both principal and interest, without there being a deemed dividend arising.
If you would like to discuss this further please contact your Walker Wayland NSW advisor.