TaxRambling.com

Since 2009 the Commissioner has told us a UPE to a corporate beneficiary becomes a loan and so we need to get an agreement in place and repay it over 7/10 years…

And a recent AAT case with two senior Tribunal members said he is totally wrong!!!!

The case is Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 and the decision states (jump to the end of the quote – the bold italic bit – if you are bored, but note how strongly they reject the Commissioner’s argue meant that a UPE can be a Div 7A loan)…

“Having regard to:
(a) the policy of Division 7A to tax those who in substance enjoy the benefit of corporate profits without bearing taxation that would arise had the company paid dividends in the usual way;
(b) statutory construction principles that call for
(i) regard to statutory context and legislative history; and
(ii) potentially competing provisions to be construed in a manner which ‘gives effect to harmonious goals’;
(c) there being no tiebreaker provision which mandates which of two competing assessing provisions would apply if an unpaid present entitlement constituted a loan within the meaning of s 109D(3);
(d) the s 109RB discretion not being designed to allow relieving discretions to be exercise outside the s 109RD(1)(b) gateways of honest mistakes and inadvertent omissions and thus not a discretion that would relieve inappropriate double taxing;
(e) Subdivision EA being a specific, and therefore lead, provision containing an express set of rules that can be regarded as a particular path has been chosen to deal with the taxation effect of unpaid present entitlements in favour of corporate beneficiaries in prescribed circumstances;
(f) the lack of clarity as to the nature of an unpaid present entitlement and the separate trust concept often broached in conjunction with the unpaid present entitlement topic;
(g) the expressed explanation accompanying s 109UB, the predecessor of Subdivision EA, to the effect:
(iii) that an unpaid present entitlement in favour of a corporate beneficiary and a contemporaneous loan by the trustee to a shareholder in the corporate beneficiary (or associate) is in substance a loan by the company to the shareholder; and
(iv) that an amount to which a company is entitled ‘held on a secondary trust for the benefit of the company’ is regarded as unpaid and within the ambit of s 109UB;
(h) the operation of Subdivision EA which taxes the shareholder in the foregoing circumstances as if the company had lent money directly to that shareholder which falls squarely within the Division 7A policy framework;
(i) there being no provision in either of the Assessment Acts that anyone points to that expressly allows assessment of two people arising out of the same circumstance with one of those people potentially not enjoying any benefit of the corporate profits that are the underlying cause of the assessment,

the necessary conclusion is that a loan within the meaning of s 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust.”

The AAT says subdivision EA of Div 7A says when a UPE can lead to Div 7A (only where the corporate beneficiary UPE is effectively loaned out to a shareholder) so if the UPE is merely retained and not loaned out it CANNOT be a loan under Div 7A…

Wow!