In Tax Tip #7 we discussed sub-trust arrangements to extend the ‘life’ of a UPE, in respect of Division 7A, from 7 to 14 or 17 years. However, the Commissioner has issued Taxation Determination (TD) 2022/D1 which brings an end to ‘general’ sub-trust arrangements and thus reversing his previous Taxation Ruling (TR) 2010/3 and Practice Statement Law Administration (PS LA) 2010/4. Importantly, in accordance with paragraphs 47 and 90 of TD 2022/D1, the Commissioner provides: 47. The Commissioner will take a compliance approach of not devoting compliance resources to sub-trust arrangements conducted in accordance with PS LA 2010/4 in respect of trust entitlements arising before 1 July 2022 (see paragraphs 89 and 90 of this Determination). … 90. We will not devote compliance resources to sub-trust arrangements that correspond to the guidance in TR 2010/3 and PS LA 2010/4 where the trust entitlement has been created on or before 30 June 2022. For the avoidance of doubt, this would include a sub-trust arrangement commenced on or after 1 July 2022 in respect of a trust entitlement arising before that date.
Tax Tip
On or before the upcoming 30 June 2022, any sub-trust that is in place, including a sub-trust arrangement that is in place on 30 June 2022, will continue to be afforded the concessional sub-trust arrangement which can extend the ‘life’ of a UPE, in respect of Division 7A, from 7 to 14 or 17 years. Note, although the TD 2022/D1 refers to ‘sub-trust arrangement commenced on or after 1 July 2022’, this does not mean a sub-trust arrangement that is implemented on or after 1 July 2022. The key terms are ‘trust entitlement arising before that date’. What this means is that a UPE must arise before 1 July 2022, and a sub-trust arrangement put in place before 1 July 2022, but of course that arrangement will continue on or after 1 July 2022 and be subject to the previous concessional treatment. Note, although the TD 2022/D1 is still in draft form, per our discussion below, we have no reason to doubt it will not be finalised. Further, even if it is finalised post-30 June 2022, it already has expressed it will apply to trust entitlements from 1 July 2022 onwards.
Question
Is the ‘U-turn’ from the Commissioner correct?
Answer
Unfortunately, yes. The previous TR 2010/3 and PS LA 2010/4 (both to be withdrawn from 1 July 2022) were concessional and technically incorrect. Per TD 2022/D1, and in which we agree, a sub-trust created from a UPE where the funds are used generally by the trust is financial accommodation because the amount is owed by the Trust to the Company and the Trust, in general, has the benefit of use of that amount and, importantly, not exclusively for the Company. It is worth noting circumstance two, set out in TD 2022/D1, where the Company is absolutely entitled to the funds supporting the UPE and in which Division 7A will not apply. Is this practical? Not in our view. The funds supporting the UPE are generally required by the trust for its general purposes and this arrangement is what we term the ‘general’ sub-trust arrangement. If the funds supporting the UPE were absolutely for the Company then it may be better to payout the UPE to the Company so that the Company’s funds are not intermingled with the trust’s funds and subject to risks that apply to the trust causing an asset protection concern.
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