I know they are not as common since December 2009, but now that we are generally paying interest on new UPEs to corporate beneficiaries (as required under TR 2010/3) these UPEs can be a real pain.
Especially if the trust that retains the cash that created the UPE is not making a lot of money and so paying the interest and/or principal can become a problem.
Well the Commissioner has an answer. In Taxation Determination TD 2015/20 the Commissioner states that generally, if the company that is owed an amount by a trust that is represented by an Unpaid Present Entitlement “forgives” the UPE so that the trust no longer has to pay the company the amount, the “forgiveness” will be a deemed dividend under Division 7A.
For the tax nerds, the Commissioner concludes that it is not a debt forgiveness as the UPE is legally not a debt but rather it is a payment – same effect but different reasoning, it is still treated as a division paid by the company to the trust.
But have a look at example 2 from the Determination…
8. Unlucky Bob (an individual) is the trustee of Unlucky Trust, a sub-trust (within the meaning in TR 2010/3) settled in the 2011-12 income year with $1,000 of trust property to which a UPE relates. The sole beneficiary, and owner of the UPE, is XYZ Beneficiary Pty Ltd. Unlucky Bob is a shareholder of XYZ Beneficiary Pty Ltd. The subsisting UPE was not a Division 7A loan within the meaning of Taxation Ruling TR 2010/3 and was not a debt for the purposes of section 109F.
9. Unlucky Bob entered into a range of investments with the proper care and skill that a person of ordinary prudence would exercise.
10. During the 2013-14 income year, a market fall caused the value of the investments to become worthless. No amount of the loss was caused by an act or omission intentionally or negligently done, and there was no breach of trust which Unlucky Bob was required to make good to the Unlucky Trust estate.
11. XYZ Beneficiary Pty Ltd subsequently entered into a deed, by which it relinquished its entire equitable interest in the Unlucky Trust. It accounted for the released interest by making a credit entry against a ‘trust entitlement’ ledger to reflect that the interest ceased to be an asset of the company.
12. In these circumstances, the release by XYZ Beneficiary Pty Ltd confers no financial benefit upon Unlucky Bob. Accordingly, the release is not a payment within the meaning in subparagraph 109C(3)(b)(iii).
So if the trust is enough of a basket case, you can have the company forgive the UPE without Division 7A applying. Or at least some of the UPE could be written off if not all of the UPE will ever be able to be paid.
So it is possible to get the 30% tax rate in a trust and never have to given the money to the company, as long as the trust loses all of the money in bad investments.