The Australian Taxation Office (ATO) has released an update to its compliance guidelines confirming that a valid sub-trust arrangement maturing during the year ended 30 June 2022 may be converted to a 7-year complying Division 7A loan.
The updated guidance extends this to all valid sub-trust arrangements arising on or before 30 June 2022 maturing in future years. That is, the guidance allows valid 7 and 10-year sub-trust arrangements put in place in respect of 30 June 2022 year entitlements be converted to 7-year complying Division 7A loans as they mature in 2030 and 2033 as appropriate.
What are the rules about?
In 2017 the ATO issued Practical Compliance Guideline PCG 2017/13 (“PCG 2017/13”) outlining its administrative approach to maturing “Option 1” and “Option 2” sub-trust arrangements that had been put in place to comply with Taxation Ruling TR 2010/3 and Practice Statement Law Administration PS LA 2010/4 (“2010 guidance”). These options allowed for a sub-trust to invest the funds representing an unpaid trust entitlement on a 7-year or 10-year interest-only loan respectively.
In brief, PCG 2017/13 stated that a deemed dividend would not be triggered where, instead of paying the outstanding principal to the company at the end of the term of the interest-only loan, a 7-year Division 7A complying loan could be put in in respect of sub-trusts maturing in the 2017 income year if done so prior to the private company’s lodgement date. The application of PCG 2017/13 has been extended on an annual basis for sub-trusts maturing in subsequent years.
Who do the changes apply to?
The latest update to PCG 2017/13 applies to Option 1 and Option 2 sub-trust arrangements involving a private company (or trustee) beneficiary that mature in the 2021-22 income year or any later income year.
When can PCG 2017/13 not be relied on?
PCG 2017/13 has always contained the following warning:
Where the facts and circumstances indicate that there has never been an intention to repay the principal of the loan at the end of either the 7-year interest-only loan or the 10-year interest-only loan, the sub-trust arrangement was not entered into in accordance with PS LA 2010/4 and this may lead the Commissioner to consider that the purported arrangement was a sham, and/or that there was fraud or evasion. In these circumstances, the Commissioner may go back beyond the standard period of review and deem a dividend in the income year in which the provision of financial accommodation originally arose.
When do the changes apply?
The updated PCG 2017/13 only applies to sub-trust arrangements in respect of entitlements arising in respect of the 2021-22 or an earlier year.
The 2010 guidance is to be withdrawn with effect for trust entitlements arising in respect of the 2022- 23 and later income years once Draft Taxation Determination TD 2022/D1 is finalised. TD 2022/D1 is the subject of an earlier bulletin (see here). To avoid doubt, the 2010 guidance and PCG 2017/13 will still apply to entitlements arising on or before 30 June 2022 where they are placed on complying subtrusts arrangements (e.g. Option 1 or Option 2 arrangements) sometime in the 2022-23 income year.
What is an example of how the changes will operate?
The following summary timeline for sub-trust arrangements for an entitlement arising on 30 June 2022 is based on tables in the updated PCG 2017/13:
What are the next steps?
Clients should contact their Pitcher Partners representative to review their situation and determine what action is required well before 30 June. 1 Date may be different depending on the lodgement day of the main trust’s tax return.