PCG 2017/13: Division 7A - PS LA 2010/4 sub-trust arrangements maturing in or after the 2016-17 income year
Document type: Final PCG
Status: Current

1. This Guideline applies to a private company (or trustee [1] ) beneficiary of a trust and sub-trust where the trustee:

Scope: 2. This Guideline only applies where a UPE:

3. Division 7A of Part III of the Income Tax Assessment Act 1936 contains integrity provisions that aim to prevent tax-free distributions of private company profits to shareholders and their associates. 3A. All legislative references in this Guideline are to the Income Tax Assessment Act 1936. 4. Broadly speaking, it does this by deeming a private company to have paid a dividend [6] to a shareholder, or shareholder's associate, if it makes a loan to the shareholder or associate and that loan is not repaid in full or put on complying terms [7] before the private company's lodgment day. [8] 5. For the purposes of Division 7A, a 'loan' includes the provision of credit or any other form of financial accommodation. [9] 6. Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements (now withdrawn) contains the Commissioner's former view of how Division 7A applies where a private company beneficiary has, or had, a present entitlement to an amount of income from an associated trust that is part of the same family group as the private company. 7. Relevantly, TR 2010/3 stated that a UPE that has not been satisfied from a trust to a private company beneficiary in the same family group is the provision of financial accommodation and therefore a 'loan' where: 7A. On 13 July 2022, the Commissioner issued Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?. This Determination describes when a private company beneficiary made presently entitled to income of a trust provides financial accommodation. It replaces both TR 2010/3 and PS LA 2010/4 in respect of trust entitlements arising on or after 1 July 2022. 7B. Taxpayers will be able to continue to rely on both TR 2010/3 and PS LA 2010/4 for trust entitlements arising on or before 30 June 2022. Administrative guidance in PS LA 2010/4 8. PS LA 2010/4 provides guidance on the administrative aspects of TR 2010/3, including where the UPE funds remain intermingled with funds of the trust but are claimed to be held on sub-trust for the sole benefit of the private company beneficiary. 9. For arrangements in respect of which it continues to apply, PS LA 2010/4 states that the Commissioner will consider that the UPE funds in the sub-trust are held for the sole benefit of the private company beneficiary if they are lent to the main trust under either a 7-year interest-only loan or under a 10-year interest-only loan with the principal of the respective loan repayable at the end of the 7-year interest-only loan (investment Option 1) or at the end of the 10-year interest-only loan (investment Option 2). [11] 10. A trustee adopting either investment Option 1 or investment Option 2 must document the terms of the investment agreement and the investment agreement must be legally binding. The terms of the investment must include the obligation to repay the principal of the loan at the end of the term. [12] Obligation to repay the principal of the loan, entered into under either investment Option 1 or investment Option 2, is not met at the end of the loan term in the relevant income year 11. Those trustees who adopted investment Option 1 or investment Option 2 will, under the terms of the investment agreement, be obligated to repay the principal of the loan in the 2016-17 or a subsequent income year, whichever is applicable. PS LA 2010/4 makes it clear that to comply with either investment Option 1 or investment Option 2, the trustee must actually repay the principal of the loan at the end of the loan term and meet this term of the investment agreement. [15] 12. The Commissioner maintains the clear expectation that this term of the respective investment agreements be met and that the principal of the loan, entered into under either investment Option 1 or investment Option 2, must be repaid at the end of the loan term. 13. If the trustee fails to meet this term of the investment agreement, when an investment Option 1 or Option 2 matures, any unpaid principal of the loan will be treated by the Commissioner as the provision of financial accommodation and therefore a Division 7A loan. 14. If all, or part, of the principal of the loan is not repaid on or before the date of maturity, the Commissioner will accept that a 7-year loan on complying terms in accordance with section 109N may be put in place between the sub-trust and the private company beneficiary prior to the private company's lodgment day. This will provide a further period for the amount to be repaid with periodic payments of both principal and interest. 15. However, if such a 7-year loan on complying terms in accordance with section 109N is not put in place between the sub-trust and the private company beneficiary prior to the private company's lodgment day, a deemed dividend will arise at the end of the income year in which the loan matures (to the extent that it remains unpaid). 16. The following tables outline the key dates of which the relevant parties to sub-trust arrangements under this Guideline (where the investment Option 1 or Option 2 is not repaid by the relevant due date) must take note. The following table outlines the key dates that the relevant parties must note where the investment Option 1 is not repaid by the due date in the relevant income year. Table 1: investment Option 1 not repaid on maturity The following table outlines the key dates that the relevant parties must note where the investment Option 2 is not repaid by the due date in the relevant income year. Table 2: investment Option 2 not repaid on maturity 17. [Omitted.] 18. The Commissioner will not accept that the rolling over of all or part of either the investment Option 1 or the investment Option 2 that is not repaid into a further investment option described in PS LA 2010/4 will prevent the provision of financial accommodation to which Division 7A may apply. Consequently, the approach in PS LA 2010/4 will cease in respect of existing (original) sub-trust arrangements at the time either the investment Option 1 or the investment Option 2 matures. 19. 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 [16] and deem a dividend in the income year in which the provision of financial accommodation originally arose. Application of section 109R to complying loans entered into after maturity of sub-trust arrangements 20. Section 109R can apply in some circumstances to not treat a payment as a repayment of a loan for Division 7A purposes.




Division 7A - PS LA 2010/4 sub-trust arrangements maturing in or after the 2016-17 income year: This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws applicable to sub-trust arrangements entered into in respect of trust entitlements arising prior to 1 July 2022. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. Our view in Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'? differs from the views in Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements and the administrative approach in Law Administration Practice Statement PS LA 2010/4 Division 7A: trust entitlements. TR 2010/3 and PS LA 2010/4 have been withdrawn but will continue to apply to trust entitlements arising before 1 July 2022. TD 2022/11 applies to trust entitlements arising on or after 1 July 2022.

What this Guideline is about | When this Guideline applies | Background - Division 7A and UPEs | Private company becomes presently entitled to an amount from an associated trust on ... | The trustee must put the UPE on a sub-trust using investment Option 1 by ... [a] | Liability arises to pay interest to the trustee of the sub-trust on ... [b] | Repayment of principal of the loan and final interest must be made by this date. Failure to repay the principal by this date amounts to the provision of financial accommodation and therefore a Division 7A loan. | The trustee of the sub-trust must enter into a 7-year complying loan agreement before the private company's lodgment day. [c] Failure to put a loan agreement in place before this date results in a deemed dividend. [d] | Liability to make the first minimum yearly repayment to private company under the 7-year complying loan arises on ... | The trustee must put the UPE on a sub-trust using investment Option 2 by...a | 21. The Commissioner will not seek to apply section 109R to the principal of a loan under a sub-trust arrangement that is not repaid and is the subject of a 7-year loan on complying terms under section 109N in accordance with this Guideline. Commissioner of Taxation 19 July 2017 | Other updates made to style of the Guideline that do not otherwise affect the content or principles of the Guideline. | Content updates to paragraphs 1, 2, 4, 13, 15, 17, 18, 19 and 21. | Added paragraphs 7A and 7B. | Timelines in a table format have been added at paragraph 16. | Additional timelines added at paragraphs 16 and 17. | Various other amendments made to layout and style of Guideline. | Paragraphs 1, 2, 11, 13 and 16. | These amendments extend the application of this Guideline to sub-trust arrangements maturing in the 2019-20 income year. | Paragraphs 1, 2, 11, 13 and 16. Additional timeline added at paragraph 16. | These amendments extend the application of this Guideline to sub-trust arrangements maturing in the 2018-19 income year. | Related Rulings/Determinations: TR 2010/3 TD 2022/D1

Related rulings and determinations: PS LA 2010/4 | TD 2022/11 | TR 2010/3
Legislative references: ITAA 1936 109D ITAA 1936 109D(3) ITAA 1936 109D(6) ITAA 1936 109N ITAA 1936 109R
Other references: PS LA 2010/4