Private ruling: Trust entitlements and unpaid present entitlements
Published: July 2012
Ruling period: Financial year ended 30 June 2010 | Financial year ended 30 June 2011 | Financial year ending 30 June 2012 | Financial year ending 30 June 2013 | Financial year ending 30 June 2014
Date scheme commenced: 1 July 2010.

Ruling: Q1: Is the Trust a part of the same 'family group', as described in Taxation Ruling TR 2010/3, of that with its unit holders and/or the beneficiaries or other entities associated with the unit holders? | A1:  | Q2: Will any post 16 December 2009 unpaid present entitlements (UPEs) between the trust and any of its unit holders (which include corporate entities) constitute a loan or an 'in-substance' loan for the purpose of section 109D of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: 

Relevant facts and circumstances: The Trust is an Australian resident unit trust that has many issued units. No additional units have been issued since the trust was settled. The Trust was formed by the Deed of Settlement of Unit Trust. This Deed was amended in respect of some clauses. The trustee of the Trust is a trustee company. The Trustee owns and derives rental income from land on which a business is conducted. The purchase of the land was financed by borrowings, upon which interest is paid by the Trustee. The shareholders of the Trustee are the same as the unit holders of the Trust and their shareholding is in the same proportion as their unit holding in the Trust. All units on issue in the Trust are of equal value, carry equal rights to the income and capital of the Trust fund and have a right to one vote per unit. In addition the Trustee's constitution states that there is the right to one vote for each share held. The shareholders agreement then further states that meetings will be decided by a majority of shareholding (that is 50.1% or more) and additionally that decisions must be supported by at least two shareholders. On this basis, even if one shareholder holds an interest greater than 50.1%, they are still required to have the support of another shareholder before a decision is ultimately agreed upon. A couple of the unit holders are related to one another and account for less than 50% of the units in the Trust. All other unit holders, which hold the remaining more than 50% of the units, are not associated to each other or the related unit holders, and have simply come together to participate in a common investment in real property via a unit trust. A clause of the Deed requires the Trustee to 'distribute amongst the Unit Holders in accordance with the entitlement of the units so held the amount decided to be distributed in respect of the accounting period…'. The UPEs outstanding as at 30 June 2011 are on a strictly proportionate basis (that is, no one unit holder has been paid any of their entitlements - each unit holder's entitlements are equally outstanding). The distributions have been made and will be made on a strictly proportional basis to Unit Holders based on units held. None of the entitlements have been discharged either partially or in full. The unit holders agreed that 'all profits in the Trust would be used to retire debt'. Accordingly, it is understood that none of the unit holders will demand payment of any of their entitlements over the period covered by the Ruling. The trustee has no intention to otherwise discharge any such entitlements over the period covered by the Ruling, however, if any entitlements are so discharged (in full or in part), all unit holders will have their entitlements discharged (in whole or in part) proportionately. The Trustee has used and will use the funds representing the UPEs to repay debt in the financial years up until and including 30 June 2014.

Relevant legislative provisions: ITAA 1936 section 109D.

Reasons for decision: Summary: Question 1: Is the Trust a part of the same 'family group' as described in Taxation Ruling TR 2010/3 of that with its unit holders and/or the beneficiaries or other entities associated with the unit holders? Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements provides the Commissioner's view on when a private company beneficiary with an UPE from an associated trust will be taken to have made a loan to that trust within the meaning of subsection 109D(3) of the ITAA 1936, in circumstances where funds representing that UPE remain intermingled with funds of the trust. As will be explained in response to question 2, a loan for Division 7A purposes includes the provision of financial accommodation and in-substance loans. Both of these require there to be a consensual agreement (paragraph 19 of TR 2010/3). A company can enter into a consensual agreement to provide financial accommodation to a trustee if it knows the funds to which it is entitled to receive from the trust are being used by the trustee for general trust purposes, and acquiesces to this use by not calling for payment of the UPE or for those funds to be invested for its own benefit instead (paragraph 21 of TR 2010/3). For these purposes, where a private company and a trust share the same directing mind and will and share a commonality of control, in the absence of sufficient evidence to the contrary, the Commissioner takes the view that the private company knows the use to which the trustee is putting the funds to which the company is entitled (paragraph 26 of TR 2010/3). That is, knowledge of the use to which the funds that the beneficiary is solely entitled to can be imputed by virtue of the relationship. In TR 2010/3, this relationship is referred to as one of a family group. Paragraph 3 of TR 2010/3 defines a family group as: a group of related entities including or comprising a private company and a trust , that ultimately share the same directing mind and will, or in other words where the same entities or persons have the practical ability to, or capability to, control the family group. In your case you have stated that the unit holders that are related (in the same family group) account for less than 50% of the units in the trust. The other unit holders are not connected to them. As they control less than 50% of the trust and the other unit holders are not related, the trust is not part of the same family group as the beneficiaries or other entities associated with the unit holders. The other corporate unit holders have different shareholders and directors that are unrelated. The trust unit holders have different trustees that are also unrelated. They do not share the same directing mind that will control the trustee company and trust. Therefore the trust is not part of the same family group as the unit holders and/or beneficiaries or other entities associated with the unit holders. However, although TR 2010/3 is mainly concerned with private company beneficiaries that are part of the same family group, it does not follow that the principles discussed in the Ruling do not extend to private companies that are not part of the same family group. Whether or not the private company has made a loan for Division 7A purposes is a question of fact. If the unit holders have actual knowledge that the funds to which they are entitled are not being used for their own benefit, then knowledge will not need to be imputed by virtue of a family group, and the unit holders may nonetheless be taken to be providing financial accommodation to the trustee. Question 2: Will any post 16 December 2009 UPEs between the Trust and any of its unit holders (which include corporate entities) constitute a loan or an 'in-substance' loan for the purpose of section 109D of Division 7A of the ITAA 1936? Division 7A of Part IIII of the ITAA 1936 (Division 7A) is an anti-avoidance or 'integrity' provision, directed to ensuring that disguised or informal distributions of company profits to shareholders or their associates should be included in the assessable income of the shareholders or associates. A private company may be taken to pay a dividend to an entity at the end of one of the private companies years of income under subsection 109D(1) of the ITAA 1936 where: (a) the private company makes a loan to the entity during the current year; and (b) the loan is not fully repaid before the lodgment day for the current year; and (c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and (d) either: (i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or (ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time. A loan is defined in subsection 109D(3) of the ITAA 1936. The section extends the definition of the term 'loan' beyond its ordinary meaning to include advances of money, provision of credit, provision of other forms of financial accommodation and any transaction which effects a loan of money. A beneficiary can become presently entitled to an amount from a trust pursuant to a direct term of the relevant trust deed, or as a result of the trustee of the trust exercising a power under a trust deed to make the beneficiary so entitled (usually by resolution). In situations where the funds to which the beneficiary is made presently entitled continue to be held on trust for that beneficiary until such time as the beneficiary calls for payment, the entitlement is commonly referred to as a UPE. In Taxation Ruling TR 2010/3, references to a 'subsisting UPE' mean a UPE that has not been satisfied, including by being converted into (or replaced by) an ordinary loan. Paragraph 17 of TR 2010/3 states that a subsisting UPE does not amount to a Division 7A loan specifically: · within the ordinary meaning of a loan; · under paragraph 109D(3)(a) of the ITAA 1936; or · under paragraph 109D(3)(c) of the ITAA 1936. However, a subsisting UPE, in some circumstances, can amount to a loan for the purposes of Division 7A under paragraphs 109D(3)(b) or (d) of the extended definition in section 109D (3) of the ITAA 1936. Paragraphs 19 to 25 of TR 2010/3 provide a detailed explanation of when a private company provides financial accommodation or makes an in substance loan. It follows from paragraph 19 of TR 2010/3 that a beneficiary is taken to provide financial accommodation where the following exist: · the unit holders supply or grant some form of pecuniary aid or favour to the trust; · under a consensual agreement; and · where a principal sum or equivalent is ultimately payable to the unit holders. In the circumstances here, all the UPEs outstanding at 30 June 2011 are in proportion to the number of units held by the Unit Holders. Further, none of the entitlements have been discharged either partially or in full. The unit holders have collectively agreed that all profits are to be retained in the trust for the trust purposes, in this case, to retire trust debt. In doing so, the Unit Holders have collectively agreed to defer receiving their share of the profit for the relevant years in favour of an entitlement to receive a return equal to their respective share of the total funds, on the premise that all future profits (both capital and income) will also be distributed in accordance with the Deed. As such, each of the unit holders will be entitled to receive a return completely commensurate with the funds it is allowing the trustee to use. Therefore in the circumstances here and in accordance with the principles set out in TR2010/3, each of the unit holders has not and is not providing any pecuniary aid or favour to the trustee. Therefore, the retention of profits to retire debt does not constitute provision of financial accommodation and a loan has not been made for Division 7A purposes.

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