Another discussion paper on how to solve the problem of UPEs and Division 7A has been released... And it is very very interesting.
This discussion paper is by the Board of Taxation. And they suggest that a UPE to a corporate beneficiary should be excluded from Division 7A. But if you want a trust that can use income that has only been taxed like a company (at 30%), then just like a company the trust does not get the 50% CGT Discount.
They say, either treat the UPE to a company as a distribution loaned back that is subject to Division 7A, or tick a box on the trust tax return and stop the trust claiming the 50% CGT Discount. This new rule would not apply to assets held by the trust before this rule. Also, it will never apply to CGT on goodwill owned by the trust.
Its just a discussion paper but it seems like an idea that might get up.
And, if it gets up, how do you decide what to advise your clients? It will mean every CGT asset will now be bought in the bucket company or a service trust…
I know everyone will not agree with me but I think this is a brilliantly argued discussion paper as it understands SME structures and financing and finds an answer that supports these structures. And I hope it gets up.
I should mention the paper also looks at many other changes to Div 7A, like a single 10 year repayment plan (rather than 7 or 25 years if secured over real property) and payments not required every year, but subrules like 25% repaid by year 3, 50% by year 5… These sound good as well. But I would prefer a straight line ten year repayment with the ability to miss two year’s payment that are made up over the following two years.
The final report is due in October so lets wait and hope for a great outcome.