ATO provides additional 7 years to repay certain corporate beneficiary entitlements

By Greg Nielsen - July 20, 2017

The ATO has released guidelines (PCG 2017/13) which will allow trusts to refinance unpaid entitlements of corporate beneficiaries for an additional 7 years, where those unpaid entitlements were due to be repaid by the trust by either 30 June 2017 or 30 June 2018. This can provide a significant cash flow benefit to taxpayers that would otherwise have been required to repay such arrangements.

What do the guidelines relate to?

The guidelines relate to unpaid entitlements (UPEs) of corporate beneficiaries to the income of a trust that were converted to a 7-year interest only loan.  A number of those arrangements are due to be repaid in full by 30 June 2017 or 30 June 2018.

What do the guidelines allow?

Under these new guidelines, the ATO will allow the unpaid amount of the UPE to be converted to a Division 7A complying 7-year loan.  That is, the ATO will allow so much of the original UPE as has not been paid to the corporate beneficiary by the end of the 7-year interest only loan, to be converted to a further 7-year loan.  However, the new loan must comply with Division 7A: that is, it must provide for principal and interest payments over the additional 7-year term.  

What do the guidelines not allow?

The ATO will not accept the refinancing to be done on an interest only basis or refinance through a 25-year Division 7A compliant loan. Nor will the ATO allow the refinanced amount to be subsequently converted to a Division 7A compliant 25-year interest and principal loan.

What will happen if no action is taken?

If the original 7-year interest only loan is not repaid in full by the due date for lodgement of the company tax return for the relevant income year in which the amount is due to be repaid, a deemed dividend will arise to the extent of the unpaid amount.   

When does the new division 7A compliant loan need to be put in place?

The new Division 7A compliant loan must be put in place prior to the earlier of actual or due date for lodgment of the corporate beneficiary’s income tax return for the year in which the 7-year interest only loan matures.  The ATO guidelines provide the following example:

30/06/2010

Private company becomes presently entitled to a share of the income of a trust (the UPE)

30/06/2011

The trustee converted the UPE to a 7-year interest only loan

30/06/2018

Date by which the repayment of the principal of the loan and the final interest payment must be made.  Failure to do so gives rise to a Division 7A loan in the 2018 income year unless a new Division 7A compliant loan agreement is put in place.

15/05/2019#

Date by which a new Division 7A compliant 7-year loan must be put in place.  Failure to do so will mean a Division 7A deemed dividend arises in the 2018 income year

30/06/2019

Date by which the first minimum yearly repayment under the new Division 7A compliant loan must be made

# - Date will depend on the lodgment date of the corporate beneficiary’s tax return.

What are the next steps?

Clients should contact their Pitcher Partners representative to review existing UPE arrangements and determine what action is required in light of the ATO’s new guidelines.


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