What is a UPE?

A trustee of a discretionary trust may resolve to distribute income to a beneficiary, but not pay the relevant amount immediately.  This situation often arises in relation to private company beneficiary (a so called “bucket company”).  If income is subject to a resolution to distribute, but not paid, the amount in question is referred to as an unpaid present entitlement (“UPE”).

Does Division 7A apply?

In 2010, the ATO issued Taxation Ruling TR 2010/3 which dealt with when UPEs will be considered to be loans for the purpose of Division 7A.

When will a UPE be treated as a loan?

A UPE will give rise to a loan for the purposes of Division 7A in two scenarios.

1. Loans within the ordinary meaning

   This circumstance arises where the trust and the company agree that the UPE will be treated as a loan back to the trust. This can be expressly agreed between the parties, or its existence can be implied where the amount is recorded in the financial accounts of the company and trust as a ‘loan’.

2. Division 7A loans within the extended meaning

   Division 7A operates to include within the meaning of a Division 7A loan the ‘provision of credit or any other form of financial accommodation’, as well as arrangements that in substance effect a loan of money.

What must be done?

Where there is a “loan” to which Division 7A applies, a written loan agreement which complies with Division 7A must be entered into by the parties to prevent Division 7A operating to deem dividends.  A new Division 7A loan agreement must be entered into for each year in which a new “loan” (either under the ordinary or the extended definition) arises.  Failure to do so will result in significant tax consequences!

At Law Central we have made dealing with Division 7A easy.  Our Division 7A Loan Agreement (either for use with conventional loans to shareholders or in relation to UPEs) is available online.

Are there others ways of dealing with a UPE?  Platinum and Gold members read on.