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Division 7A – Where to from now for Trusts creating sub-trusts for corporate beneficiaries? – Income Tax

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Other than complying legacy sub-trusts created prior to 1 July
2022, it is highly arguable that creating new sub-trusts between
Trusts and companies is not sensible.

If you wish to pay your income or capital to a corporate
beneficiary of the Trust then you should preferably pay it out to
the company and therefore delete the creation of a sub-trust or
alternatively enter into a complying Division 7A loan agreement.
You may also create a separate sub-trust for an asset that is not
used by the Trust.

Legacy sub-trusts can continue but note the Option 1 and Option
2 arrangements set out in PSLA 2010 / 4 are now withdrawn as of 1
July 2022.

The use of a corporate beneficiary by a Trust is still very much
possible, however retaining the monies in the Trust has been
problematical since 2010 and the ability to retain any distribution
made after 1 July 2022 in the Trust that is used for the benefit of
the Trust in any way is now considered to be financial
accommodation by the ATO.

Going forward, for a sub-trust of a Trust for the benefit of a
company created after 1 July 2022 you will need to invest the funds
in a specific income-producing asset or investment which is not
used by the Trust in any way otherwise it will be
considered to be financial accommodation according
to TD 2022/1. This will include where a commercial interest rate is
paid by the Trust on the sub-trust as if the money or sub-trust
asset is used by the Trust for itself then it is considered to be
financial accommodation.

The ATO released in February TD 2022/D1 Income tax: Division 7A:
when will an unpaid present entitlement or amount held on sub-trust
become the provision of ‘financial accommodation’? and it
set out a number of examples that are self-explanatory relating to
the ATO’s proposed new approach to Div 7A and unpaid present
entitlements (UPEs).

Following the February 2022 release of Draft TD 2022/D1 the ATO
has now withdrawn TR 2010/3, its previous ruling on the matter. The
withdrawn Ruling treated a UPE that was not called for by a
corporate beneficiary as a Div 7A loan unless the funds were held
on sub-trust for the beneficiary’s sole benefit.

Further Practice Statement PS LA 2010/4 withdrawn on 1 July 2022
outlined 3 safe harbour investment options to prevent a Div 7A loan

Option 1: invest the funds on an interest-only 7-year loan at
the Div 7A benchmark interest rate;

Option 2: invest the funds on an interest only 10-year loan at a
prescribed interest rate; or

Option 3: invest the funds in a specific income-producing asset
or investment.

A key component of the ATO’s revised approach (which will
apply to present entitlements created after 30 June 2022) is that a
Div 7A loan can arise if a sub-trust fund is on commercial terms,
with a return paid to the fund (i.e. Options 1 and 2 will no longer
be acceptable).

The ATO confirmed that taxpayers can continue to rely on the
withdrawn documents in respect of trust entitlements conferred
before 1 July 2022, even if the sub-trust or a further complying
loan is put in place after 30 June 2022.

Pointon Partners has extensive experience with assisting clients
with matters that are being investigated or queried by the Taxation
Office. If the ATO is querying an existing sub-trust arrangement we
are happy to assist.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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