ATO: Division 7A and UPEs

February 24, 2022
For unpaid present entitlements (UPEs) on or after 1 July 2022, the Commissioner’s view in Draft Taxation Determination TD 2022/D1 is that even if not converted to an ordinary loan, a UPE can amount to ‘the provision of financial accommodation’ by the private company beneficiary in favour of the trust, and therefore may be considered a loan for Division 7A purposes. It applies to all types of trusts, including discretionary trusts and unit trusts, and is particularly relevant in cases where the trust and the private company are part of the same family group.

The simplest way for the trustee to avoid Division 7A treating the UPE as a deemed dividend paid by the private company to the trust is by paying out the UPE.

The ATO further states that a trustee can still appoint a share of the net income of a trust to a private company beneficiary without immediately paying out that entitlement, and without attracting Division 7A. This can be done through either:

  • the creation of a sub-trust for the sole benefit of the private company beneficiary
  • if the private company beneficiary agrees to set off the UPE, by providing the trust with a Division 7A complying loan.