Company Tax
6. Deemed Dividends & Trusts
Last updated: 10 Jul 2015
- If you are using a trust with a private company as one of its beneficiaries to run the business extra care must be taken. Complex rules apply when trusts with private company beneficiaries make payments to shareholders and their associates in the beneficiary companies.
- Division 7A applies where a trust that owes an unpaid present entitlement or ‘UPE’ (which is an amount declared by the trustee to be paid to beneficiaries but not actually paid) to a private company beneficiary makes a loan to a shareholder or an associate of a shareholder of the company.
- If the company has a UPE from a trust the Commissioner may consider that there is an actual loan from the company to which Division 7A applies and therefore decide it is a deemed dividend.
- Under a 2010 tax ruling the Commissioner determined Division 7A applies and it is considered to be a deemed dividend even where:
- a UPE does not involve an actual loan; but
- the company acquiesces in the use of the UPE by the trustee for the purposes of the trust; and
- that purpose was not for the sole benefit of the company.
- A 2010 Practice Statement provides self-correcting options if a loan is deemed to arise under an earlier 2010 Practice Statement relating to sub-trusts and specific income-producing asset options.
- If the funds are held by the trustee for the benefit of the private company beneficiary by being held on a sub-trust and the funds are used for the sole benefit of the private company beneficiary then no loan will be deemed to exist.
- Indications of a sub-trust include:
- the amount representing the UPE is set aside separately in the accounts of the main trust as being held on trust for the private company beneficiary;
- separate accounts are prepared for the sub-trust or a separate bank account is opened in the name of the trustee as trustee for the private company beneficiary in respect of the funds within the sub-trust;
- the trustee of the sub-trust invests the funds representing the UPE in the main trust on commercial terms pursuant to a power as trustee to do so; and
- all the benefits from the investment flow back to the sub-trust and the private company beneficiary.
- A trustee can invest the UPE funds for the sole benefit of the private company beneficiary in a specific investment such as:
- an interest bearing account; or
- in the acquisition of an interest in an income producing asset.
- An income producing asset is one which is held with the intention of generating:
- assessable income; or
- capital gains; and
- the income or gains arise on an arms-length basis.
- If you have a trust with private company beneficiaries involved in your business it is essential to seek legal advice before commencing business.
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