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ATO extends administrative practice for maturing sub-trust arrangements

ATO extends administrative practice for maturing sub-trust arrangements

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.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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