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On 23 June 2011 the ATO released further information about the application of Division 7A of Part III ITAA 1936 to an unpaid present entitlement (UPE) of a private company beneficiary to trust income, in situations where the trust and private company are related entities ultimately sharing the same directing mind and will. A UPE is an amount of trust income which the trustee of a trust appoints, but does not pay, to a private company beneficiary.

Taxation Ruling TR 2010/3: “Income tax: Division 7A loans: trust entitlements” and Practice Statement Law Administration PS LA 2010/4: “Division 7A: trust entitlements” outline the Commissioner’s view and administrative practice on the application of Division 7A and, in particular, s 109D to a UPE.

This document addresses certain supplementary issues relating to these rulings. As such, it should be read in conjunction with TR 2010/3 and PS LA 2010/4, and does not alter the Commissioner’s view as set out in those publications.

The Commissioner’s view, expressed in TR 2010/3, is that a UPE is capable of amounting to the provision of financial accommodation by the private company beneficiary in favour of the trust, and may therefore be a loan for Division 7A purposes. The view expressed applies to all types of trusts, including discretionary trusts and unit trusts. The view expressed is particularly relevant in cases where the trust and the private company are part of the same family group.

As the Commissioner first expressed his view on 16 December 2009, the Commissioner will apply this view only to UPEs which come into existence on or after this date.

The ATO document goes on to discuss UPEs on or after 16 December 2009, pre-16 December 2009 UPEs, and other issues.

For more information go here.