CLEANING UP THE DIV 7A

LOANS AND UPE MESS

Chris Wookey, CTA

Deloitte Private

1997 Div 7A Genesis

2009 The Great Flood

2010 TR 2010/3 & PSLA 2010/4

UPEs subject to new rules

2011 PSLA 2010/4 revised

UPEs placed on terms

The journey

2

2011 + 7 = 2018

3

November 2014 BoT report recommendations

Will it last?

4

Balance reduction

schedule

75% by end of year 3

55% by end of year 5

25% by end of year 8

0% by end of year 10

Div 7A changes “will draw on a number of

recommendations” from the BoT report – NB: not all

“targeted amendments” – keeping the bulk of the rules?

“appropriate transitional arrangements”

“single compliant loan duration of ten years” – 25 years?

Self-correction mechanism

Safe harbour rules (use of assets)

Technical amendments

Effective from 1 July 2018 – too late for 2010 UPEs?!

2016 Budget announcements

5

Meanwhile in the real world…

6

Option 0

Option 1 Option 3

Option 2

Dividends

Trust balance sheet liabilities:

UPE – Corporate Beneficiary Pty Ltd <2009

UPE – Corporate Beneficiary Pty Ltd 2010

UPE – Corporate Beneficiary Pty Ltd 2011

UPE – Corporate Beneficiary Pty Ltd 2012

UPE – Corporate Beneficiary Pty Ltd 2013

UPE – Corporate Beneficiary Pty Ltd 2014

UPE – Corporate Beneficiary Pty Ltd 2015

Debit loans/trust entitlements receivable each year

Interest calculations on daily balance

Interest payments by deadline

What mess?

7

Option 0 trap

8

T2

T1

CB

$

DistributionOpt 0

Restructuring a unit trust

9

FT1 FT2

Unit Trust

FT1 FT2

Unit Trust

Co

122-A

FT1 FT2

Unit Trust

Co

Unit Trust

FT1 FT2

Co

12

4-N

Restructuring others

10

FT1 FT2

FT1 FT2

Co

12

2-B

FT1

FT1

Co

12

2-A

or 328-G

SB restructure

rollover?

122-A rollco balance sheet

11

$m $m

Debtors 1.0

Stock 1.0

Fixed assets 2.0

Goodwill 4.0

8.0

Overdraft 1.0

Loans 3.0

Share capital 4.0

8.0

Treatment

upon release?

PS para 56:

The payment of the principal funds invested in the main trust (that is,

the funds representing the UPE) and annual return to the private

company must be such that if those payments had instead been

repayments of a Division 7A loan made by a private company, they

would not be disregarded by section 109R.

Cash

Set off

In specie transfer

(Re)payment

12

Forgive the UPE

Deemed dividend

Commercial debt forgiveness?

Deduction or capital loss for company?

Refinance

External lender

Related party

Same

New

Alternatives to payment

13

Perpetual motion “washing machine”

14

Trust

Co

Owes UPE

NewUPE

CB declares and credits dividend

Set off against UPE

Refinance to 25-year s109N loan

15

Trust

Co

Owes UPE

18 year secured 109N loan

Refreshed UPE – same trust

16

Trust

CB2New UPE

CB1

Dividend set off

against UPEOwes UPE

Refreshed UPE – 2nd trust

17

T 2

CB2New UPE

CB1

Dividend.

$ receivable assigned

to T2 in satisfaction

T 1

Owes UPE

New s109N loan

Refreshed UPE – 2nd trust ver.2

18

T 2

CB2New UPE

T1 receivable assigned

in satisfaction

CB1

Dividend.

$ receivable assigned

to T2 in satisfaction

T 1

Owes UPE

New s109N loan

Non-payment consequences

19

Ordinary loans

Familiar statutory outcomes

UPE interest

Subdiv EA exposure

S-TrtTrtCB

Principal/loan

Unpaid interest Unpaid distribution

Corpus

Non-payment of UPE principal

20

S-TrtTrtCB

Owes UPE

Corpus entitlement

Subtrust does not

insist on payment

Actions attributed to…

Financial accommodation?

Pecuniary assistance? 109D loan?

Same controlling

mind

Complexity and artificiality

“Dealing with complexity is an inefficient and unnecessary

waste of time, attention and mental energy. There is

never any justification for things being complex when they

could be simple.” - Edward de Bono

Thank you

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© Chris Wookey 2016

Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax

Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and

opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries

in making any decisions concerning their own interests.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, their

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