Unpaid Present Entitlements owed by a Trust to a corporate beneficiary can be taxed in the hands of the Trust pursuant to Division 7A if the UPE arose after 16 December 2009 and has not been paid out.
That is, if the Trust and corporate beneficiary form part of the same family group and the company has knowledge that the funds representing its UPE are being used by the trustee for trust purposes, this can be treated as a Division 7A loan from the company to the trustee.
Practise Statement LA 2010/4 allows a mechanism to avoid Division 7A in this circumstance by making a ‘Section three Loan” whereby a sub trust is formed. The UPE is lent by the sub trust to the trust for a period of time on interest only terms. The interest is paid to the corporate beneficiary. After the stipulated period of time, the loan is repaid to the sub trust who pays it direct to the corporate beneficiary.
Please contact Linda Alexander on 02 8249 4028 if you need help with an appropriate agreement to satisfy PS LA 2010/4.
This article is general information only and should not be relied on without obtaining further specific information.