Division 7A – Quarterly Roadshow Business Services Discussion

Division 7A – Quarterly Roadshow Business Services Discussion
Roelof van der Merwe National Tax Director February / March 2013

What we will cover today:
Division 7A overview Different situations where Division 7A can apply Interposed entities UPE issue Timelines What to do When to do it

Introduction

Risk awareness & identification of issues
Why do you need to know about Division 7A? Practical problem affecting the SME sector Accessing company funds for personal use Accessing company funds for investing through a trust Nexia risk management perspective Timely training – must take action before lodgement day See timelines – what to do & when to do it ATO 2013 Compliance Program From awareness to compliance Post implementation review ATO 2013 Compliance Program 100 letter & phone based verification activities planned for 2013 In past, was awareness, now it will be compliance 2011: 141 audits raised $29 million Division 7A loans reported: 5,400 in 2006; 8,000 in 2010 Risk awareness & identification of issues

Before Division 7A (or predecessor)
What is Division 7A? Applies to private companies Prevents tax-free distribution of profits (loan, payment, debt forgiveness) to shareholders or associates of shareholders Deems distribution to be an unfranked dividend Before Division 7A (or predecessor) After Division 7A Company Company Loan, Payment or Debt forgiveness Tax-free distribution Deemed unfranked dividend Shareholder / Associate of Shareholder

Deemed dividend limited to distributable surplus
What is distributable surplus? Mainly Net Assets (assets less present legal obligations & provisions for depreciation & leave) Determined by reference to accounting records Net assets can therefore be changed by revaluation 109Y deals with distributable surplus TD 2009/5: Power to adjust value of company’s assets should only be done where there has been deliberate, significant understatement of value of the assets (or overstatement of liability/provision) to circumvent the operation of Division 7A When can income tax obligations be a present legal obligation for distributable surplus purposes? (TD 2010/10) Present legal obligation Amount of unpaid PAYG installment that is payable on 30 June Amount of tax due and payable on 30 June even though tax is only due on the lodgement day Amount of tax payable under an amended assessment (referable to the distributable surplus relating to the year of amendment) Amount of tax that remain unpaid at the end of each income year (e.g. if don’t pay 2009 outstanding amount by 2010) – this means 2009 outstanding amount will also be 2010 outstanding amount Distributable surplus Overstate a liability / provision Distributable surplus Revalue Goodwill downwards ATO can assign own value if significantly overvalue liabilities/undervalue assets (TD 2009/5)

To be safe, do things before lodgement day
Take action before lodgement day Lodgement day is earlier of: Due date for lodgement of company / trust tax return Actual date of lodgement Tip: ATO’s extension for due date of lodgement does not extend lodgement day Actual date (20 April 2013) Due date (15 May 2013) Actual date (20 June 2013) Division 7A requires things to be done Before lodgement day On/by lodgement day To be safe, do things before lodgement day

How can you solve a Division 7A problem?
Do certain things by certain dates Lodgement day (e.g. Compliant loan agreement, investment agreement, pay sub trust return) Year end (e.g. Pay (cash / set-off) principal & interest, accrue sub trust return ) Roll the dice & ask Commissioner to exercise his discretion (Section 109RB, TR 2010/8, PSLA 2011/29) Threshold question: Was there an honest mistake / inadvertent omission? Commissioner then looks at other factors (e.g. Corrective action) to determine if will exercise his discretion Building Company Owner and COT [2012] AATA 755 Accountant – faulty loan agreement – terms of loan not specified No standard application form Building Company Owner Honest mistake / inadvertent omission Factors: Division 7A had not previously applied Taxpayer had made repayments towards loan (even though terms of loan not specified) – corrective action

How do you make a loan Division 7A compliant?
Put in place prior to company’s lodgement day So time to act if discover mistake after 30 June Requirements (s 109N & TD 2008/8) Signed agreement in writing Names of parties Interest rate ≥ benchmark interest rate Term of loan ≤ 25 / 7 years When agreement was signed/executed Use of facility agreement? Agreement that automatically picks up any loans made during the year that have not been repaid and makes them Division 7A compliant Lawyer must draw up a loan agreement (accountant cannot do it by himself) Facility agreement Agreement that governs the terms on which loans may be made by company in the future

Unpaid interest is no new loan
What happens if you make a loan Division 7A compliant? Must make minimum yearly repayments (MYR) by year end Principal & interest Fail to make MYR Put complying loan agreement in place 30 June 2010 1st MYR (interest & principal) repayment Loan ATO ID 2011/8 Deemed dividend in 2010 equal to amount of MYR shortfall No new loan of unpaid interest under 109N agreement Building Company Owner Honest mistake / inadvertent omission Factors: Division 7A had not previously applied Taxpayer had made repayments towards loan (even though terms of loan not specified) – corrective action 30 June 2009 Company lodgement date (e.g. 15 May 2010) Unpaid interest is no new loan Interest that has not been paid can only be treated as a deemed dividend once

Division 7A Situation 1 2 loans, both dividends per 109D
2 Loans not made compliant Analysis: 109D dividend on 30 June 2012 because no repayment or complying loan by company lodgement date Proportion of dividend to each shareholder is limited to distributable surplus (see 109Y(3) proportions) Company A $100 Distributable surplus Total Division 7A Deemed dividend (to man & woman) = $100 No complying loan No repayment of principal $500 of Loans $100 Loan $400 Loan 10 May 2012 15 May 2012 30 June 2012 Company lodgement date (e.g. 15 May 2013) Total deemed dividends from Company A limited to distributable surplus (109Y(1)) $20 deemed dividend $80 deemed dividend Proportional dividends (109Y(3)) Man dividend = 100/500 x 100 = $20 Woman dividend = 400/500 x 100 = $80

Division 7A Situation 2 2 loans, both dividends per 109E
Division 7A Situation 1 2 loans, both dividends per 109D 2 Loans made compliant Analysis: No 109D dividend on 30 June 2012 because both loans put on complying terms (actually amalgamated as one loan of $500) 109E dividend on 30 June 2013 equal to shortfall in MYR (but limited to distributable surplus) Fail to make MYR Company A $100 Distributable surplus Put complying loan agreement in place 30 June 2013 1st MYR (interest & principal) repayment $500 of Loans $100 compliant loan $400 compliant loan 10 May 2012 15 May 2012 30 June 2012 Company lodgement date (e.g. 15 May 2013) Analysis No deemed dividend in 2012 (year loan was made) because put on complying terms But deemed dividend in 2013 equal to MYR shortfall 100/500 x shortfall in MYR 400/500 x shortfall in MYR

Division 7A Situation 3 2 loans, 1 made compliant, other not
Division 7A Situation 1 2 loans, both dividends per 109D Division 7A Situation 3 2 loans, 1 made compliant, other not Division 7A Situation 2 2 loans, both dividends per 109E 2 Loans and only 1 made compliant Analysis: 109D dividend of $100 on 30 June 2012 for $400 non-compliant loan 109E dividend of shortfall in MYR on 30 June 2013 for $100 compliant loan Fail to make MYR on $100 loan $400 Loan = non-compliant Company A $100 Loan = compliant Put complying loan agreement in place for $100 loan 30 June 2013 1st MYR (interest & principal) repayment Total = $500 of Loans $100 Distributable surplus $100 compliant loan $400 loan 30 June 2012 Company lodgement date (e.g. 15 May 2013) 10 May 2012 15 May 2012 Exposure on $400 loan Amount of dividend is $ (because distributable surplus is $100) Exposure on $100 compliant loan if don’t make MYR Amount of dividend is shortfall in MYR (and limited to distributable surplus in 2013 year)

How can you make a repayment?
Company A Cash Shareholder pays MYR in cash Dividend / Credit loan set-off If agreement between company & shareholder Director’s meeting minute stating that declared dividend can be set off against what shareholder owes the company (e.g. MYR) Compliant Loan Pays MYR in cash Building Company Owner Honest mistake / inadvertent omission Factors: Division 7A had not previously applied Taxpayer had made repayments towards loan (even though terms of loan not specified) – corrective action Company A Compliant Loan Declares dividend *Can’t take out new loan to repay MYR

Circumstances where Division 7A can apply
Direct loan Indirect loan Loans involving guarantee Use of company assets (from 1 July 2009) UPE & loan (Subdivision EA) UPE, interposed trust & loan (from 1 July 2009) UPE is either a loan or an UPE (from 16 December 2009)

Division 7A Baby Steps

Direct Loans Company A Company B Trust B
What to look for: Debit loans in books of company Action before lodgement day: Repay loan Division 7A compliant loan Company A Amount of dividend limited to distributable surplus Taken to be a deemed dividend at 30 June Loan Loan Loan Company B Trust B Division 7A takes precedence over FBT if loan or forgiveness of loan FBT takes precedence over Division 7A if payment

The payment of a sponsorship can be a deemed dividend
Company A Sponsorship at arm’s length Pays Sponsorship 10 May 2012 Sponsorship not at arm’s length Convert payment to complying loan before lodgement date Shareholder’s son

Indirect Loans Company A Company B Trust B What to look for:
Debit loans in books of company Debit loans between companies Action before lodgement day: Repay loan Division 7A compliant loan Company A Loan If make loan between interposed entity (Company B) and individual Division 7A compliant, notional loan between Company A and individual will also be Division 7A compliant. Deemed Loan Company B Distributable surplus = 0 Loan Loan Trust B

Company A is in effect making the loan
Indirect loan in practice (ATO ID 2011/104) Company A is in effect making the loan Company A $800k distributable surplus 2 $100k dividend Deemed dividend Company B $0 distributable surplus $100k loan 3 Needs $100k to purchase a new house 1

Company B has bad credit history so Company A guarantees his bank loan
Loans involving guarantee Company B has bad credit history so Company A guarantees his bank loan Company A Bank Guarantee loan Loan Company B $0 distributable surplus Notional payment to the extent of the loan from Company B Loan Shareholder of Company A

Shareholder/associate
Use of company property – from 1 July 2009 From 1 July 2009 Amount of deemed dividend: Arm’s length amount that would have been paid for use MINUS Actual consideration paid Private Company Actual use / exclusive right to use company yacht = payment Action to avoid deemed dividend: Market value payment to company for use Convert payment to loan & make loan Division 7A compliant Shareholder/associate

Use of company property will not be a payment if…
Use of asset is minor benefit for FBT purposes (s58P of FBT Act) (e.g. Infrequent & irregular hiring out of trailers to shareholders for less than $300) Shareholder/associate would have been entitled to a once-off deduction (e.g. Providing floorspace in a shopping mall for free to a shareholder to conduct its book-selling business) Dwelling provided to the shareholder/associate is connected to business premises (e.g. Farmhouse on farm & bakery shop) Asset provided for use was main dwelling of shareholder/associate & acquired before 1 July 2009 Minor benefit Trailer hired out to shareholder (not employee) for $250 – this would have been minor benefit (as less than $300) had it been subject to FBT Otherwise deductible Shareholder uses floor space in a shopping mall owned by his company for no consideration to run a gift wrapping service If shareholder had paid for the use of the floor space it would have been deductible

Jack & Jill lives in a house on the land for free
Case Study: Use of company property Dwelling connected to business premises Jack Jill Farm Company Use of dwelling is not payment because connected to business premises (farmland) Source: Thomson Q&A Number [432] (Number 2) Company satisfies COT because at all times since house was purchased, there have been persons controlling more than 50% of the shares (e.g. On death of husband S deems COT to be satisfied because widow received husband’s shares as a beneficiary of her husband’s estate) Owns farm land Trust Runs the farming business on the farm land Jack & Jill lives in a house on the land for free

Husband & wife use house as family home for free
Case Study: Use of company property Main residence Husband Wife Use of dwelling is not payment because use of family home that was acquired before 1 July 2009 Private Company Source: Thomson Q&A Number [432] (Number 2) Company satisfies COT because at all times since house was purchased, there have been persons controlling more than 50% of the shares (e.g. On death of husband S deems COT to be satisfied because widow received husband’s shares as a beneficiary of her husband’s estate) Bought a house in 1995 Husband & wife use house as family home for free

Toddler Steps - Trust Loans

Common business structure & UPEs
This loan can later be used for offset of MYR/Return on investment agreement 1 UPE = Dr balance 2 UPE = Cr balance $100 distribution Trust Company $70 UPE $30 is loaned/paid to company to pay its tax & used to offset: as a partial offset of beneficiary’s entitlement to $100) $70 Cash retained in trust for working capital purposes Future obligation to pay the corporate beneficiary 3 4 $70 UPE = amount of net income of trust estate to which beneficiary is presently entitled, but has not yet been paid to beneficiary

Through trust loan, UPE is extracted from trust
Loans from trusts (Subdivision EA) Action before lodgement day: Repay loan Division 7A compliant loan UPE Pay out Trust A Company A UPE Through trust loan, UPE is extracted from trust Loan Loan Loan Company B Trust B

No deemed dividend if interpose trust
Strategy before 1 July 2009 An interposed trust breaks UPE chain (pre 1 July 2009) Trust A Trust B Company A UPE UPE Loan Loan No deemed dividend if interpose trust Trust B

Teenager Steps Trusts Loans from 1 July 2009

Now there is a deemed dividend if interpose trust
Post 1 July 2009 interposed entity changes An interposed trust does not break the UPE chain (from 1 July 2009) Trust A Trust B Company A UPE UPE Loan Loan Now there is a deemed dividend if interpose trust Trust C

Post 1 July 2009: Analyse whole structure
Originally $1,000 UPE of which $900 has been paid Amount of dividend? Trust A Trust B Trust C Company A $800 UPE $1,000 UPE $100 UPE Distributable surplus = $300 $50 UPE $500 Loan $50 Compliant Loan Trust D $150 Loan

Post 1 July 2009: Interposed entity complications
Originally $1,000 UPE of which $900 has been paid Amount of dividend? Company B $1,000 Loan Trust C Company A $1,000 Loan $100 UPE Distributable surplus = $100 Distributable surplus = 0 $50 Compliant Loan Deemed loan (notional indirect loan) Subdivision EA

There is NO cookie cutter approach
What should you do when you have post July 2009 loans? There is NO cookie cutter approach What you do depends on the facts of the case Break the chain Pay out Loan/UPE (cashflow – target smallest) Make loan Division 7A compliant But beware of other Division 7A consequences Map out the structure

Option 1 – Make Trust C loan compliant
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan $100 Loan Trust D Compliant Loan $200 Loan Solve the immediate problem of Trust C loans, but other exposures

Option 2 – Pay out UPE between Trust C & Trust B
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve the immediate problem of Trust C loans, but other exposures Cash flow consequences – big outlay immediately for pay out

Option 3 – Convert UPE between Trust B & Trust C into a Division 7A compliant loan
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve the immediate problem of Trust C loans, but other exposures Cash flow consequences – must make MYR each year

Option 4 – Pay out UPE between Trust B & Trust D
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve the immediate problem Trust D loans, but other exposures Cash flow consequences – big outlay immediately for pay out

Option 5 – Convert UPE between Trust B & Trust D into a Division 7A compliant loan
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan Compliant Loan $100 Loan Trust D $200 Loan Solve the immediate problem of Trust D loans, but other exposures Cash flow consequences – must make MYR each year

Option 6 – Pay out UPE between Trust B & Trust A
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve the immediate problem of Trust C & Trust D loans, but other exposures Cash flow consequences – big outlay immediately for pay out

Option 7 – Convert UPE between Trust B & Trust A into a Division 7A compliant loan
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve the immediate problem of Trust C & Trust D loans, but other exposures Cash flow consequences – must make MYR each year

Option 8 – Make Trust A loan compliant
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $8,000 UPE $700 UPE $400 UPE $400 UPE Compliant Loan $50 Loan $100 Loan Trust D $200 Loan Solve the immediate problem of Trust A loans, but other exposures remain

Option 9 – Pay out UPE between Trust A & Company
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $700 UPE $400 UPE $8,000 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve all Subdivision EA problems Cash flow consequences – big outlay immediately for pay out

Option 10 – Convert UPE between Trust A & Company into a Division 7A compliant loan
($1,000-$300) ($1,000-$600) ($9,000-$1,000) Trust C Trust B Trust A Company A $700 UPE $400 UPE $8,000 UPE $400 UPE $50 Loan $100 Loan Trust D $200 Loan Solve all Subdivision EA problems Cash flow consequences – must make MYR each year

A UPE can now either be a UPE or a loan
Adult Steps TR 2010/3 and PS LA 2010/4 A UPE can now either be a UPE or a loan

UPE = converted to Loan (if described as loan in accounts)
UPEs can be Division 7A loans after 16 December 2009 UPE = converted to Loan (if described as loan in accounts) Draft: TR 2009/D8 on 16 December 2009 Final: TR 2010/3 and PSLA 2010/4 on 2 June 2010 UPE Div 7A Loan / UPE 16 December 2009 Become a Div 7A loan If do noting Remain a UPE Always Remain a UPE If put on sub trust

Trustee power under deed
Section 2 Loan – Pre & Post UPEs How do you describe a UPE in your accounts? Loan (3 options below) ATO believes that faulty journal entries can change UPE to a loan Trust Private Company $70 UPE Credit loan / Credit UPE? Debit loan / Debit UPE? Pays out TR 2010/3 Express loan Loan agreement Trust resolution Other documents Trust pays out UPE & company makes loan to trust of amount of UPE Set-off by mere journal entries Company describes UPE amount as asset (debit loan) Trust describes UPE amount as liability (credit loan) Implied loan Done through book entries Trustee credits UPE to loan account held in name of corporate beneficiary & company acquiesces Trustee power under deed *Admin concession for automatic self-correction if mislabeled UPE as a loan was only available till 31 December 2011

Type of UPE (assume UPE relates to 2012 year)
16 December 2009 & different kinds of UPEs Type of UPE (assume UPE relates to 2012 year) Explanation Pre 16 December 2009 UPE – Company A Quarantine these UPEs as they remain UPEs 2012 UPE – Company A UPE on day of trust distribution (30 June 2012) 2012 UPE (sub trust) – Company A UPE when put in place sub trust (trust lodgement day e.g. 15 May 2013) 2012 UPE (no sub trust) – Company A UPE becomes loan for Division 7A purposes only (trust lodgement day e.g. 15 May 2013) 2012 UPE (Division 7A loan) – Company A* UPE that is a loan for Division 7A purposes is put on Division 7A compliant terms* * Put on compliant terms on company lodgement day for 2013, but deemed to be compliant from 1 July 2013

Financial accommodation OR In substance loan
Section 3 loan – Post UPEs UPE = Division 7A Loan – If you do nothing UPE funds used in the trust business UPE funds not used for sole benefit of corporate beneficiary Loan (1) Monetary Aid If you do nothing Does not call for payment of UPE Acquiesces that UPE funds are used for trust purposes (and not for company purposes) Financial accommodation OR In substance loan Trust Company A $70 UPE (2) Ultimately payable Trust entries: UPE = Division 7A loan Dr Trust distribution Cr 2012 UPE (no sub trust) – Company A DO NOT CALL THIS A LOAN

UPE funds are held for sole benefit of company (and thus not a loan)
Section 3 loan - Post UPEs UPE = remains a UPE – if put funds on sub trust UPE UPE funds set aside on sub-trust for the use of the company Trust Company A $70 UPE Return Invest UPE funds are held for sole benefit of company (and thus not a loan) Sub Trust In effect have sub trust in main trust even if trust deed does not mention it Trust entries: UPE = UPE Dr Trust Distributions Cr 2012 UPE (sub trust) – Company A

What are the formalities for a sub trust arrangement?

Funds held for sole benefit of company
How do you evidence that a sub-trust exists? How do you evidence a sub-trust? (holding funds for sole benefit of company) Trustee resolution can specify it “Funds are set aside (in a sub trust) for sole benefit of the company” OR (recommend and) If no trustee resolution, look at the following factors: UPE funds set aside separately in accounts of main trust as being held on sub trust for company; or Separate accounts are prepared for sub trust; or Separate bank account for funds in sub trust AND Trust Invest Return Sub Trust Funds held for sole benefit of company Must have legally binding investment agreement (if use options 1 or 2)

What are the different investment options?
PSLA 2010/4 Investment options: 7 year investment 10 year investment Income producing asset investment Sub-trust invest the funds in an income-producing asset When dispose of asset, can either re-invest the principal in another asset or make a 7/10 year investment Cannot swap investment options chosen before investment is paid out to company Trust Interest paid yearly at lodgment day of main trust Balloon principal repayment at end (or sooner) Invest Return Sub Trust

How do you document an investment agreement?
Investment agreement can form part of tax return working papers Option 1 & 2 investment agreement: Details of the 7/10 year investment option (e.g. Amount of UPE, start & end date of the investment) Obligation (not discretion): on trustee to pay return to sub-trust on sub-trust to repay principal amount no later than end of investment period (so can be earlier than 7/10 years) Not necessary to create separate trust deed for sub-trust or for sub trust to keep its own accounts Option 3 investment agreement: Sub-trust must prepare its own accounts showing the investment Sub-trust must lodge a tax return Trust Invest Return Sub Trust

Does payment of return require a cash outflow?
What happens when funds are on sub trust? Trust Private Company $70 UPE 1 2 3 Invest funds by making a 7/10 year investment (Balloon principal repayment at end of 7/10 years – but can make it sooner) 2013 Required return*: 7.05% for 7 years 10.00% for 10 years Sub-trust must actually pay return on investment by lodgement day of main trust Actually pay return to trust = pay in cash & payment via set off [Tax Council TIA, 30 June – more problems, June 2011) Benchmark interest rates (7 year option): % % % Prescribed interest rate % % Sub Trust Does payment of return require a cash outflow?

Must actually pay return
Payment of return can be through cash or set-off Private Company Originally made loans to enable company to: Pay company tax Pay dividend Sub Trust Cash payment Set-off Must actually pay return (Cannot pay money to company and then company lends it back) Actually pay return to trust = pay in cash & payment via set off [Tax Council TIA, 30 June – more problems, June 2011) Benchmark interest rates (7 year option): % % % Prescribed interest rate % % Accounting entries of Trust 1 Dr Return expense Cr Bank Sub trust pays return in cash Sub trust sets off return against an amount owing from the company to the trust 2 Dr Return expense Cr Debit loan to company Sub trust not allowed to increase an outstanding debt / liability owing to the company (e.g. not allowed to credit a Credit loan to the company as payment of the return

How do you choose whether you want a loan or a UPE?

What are the different options for managing UPEs?
What actions can you take if you have post 16 December 2009 UPEs? Pay down UPE to company Create loan agreement between company and trust Hold funds on sub trust Distribute to non-corporate beneficiary Income splitting Restructure – get rid of trust – do you qualify for rollover?

How do you decide which option to choose?
Compliant loan 7/25 years interest & principal repayments Subtrust option 7/10 year “interest” only repayments Balloon principal payment at end How will the trust repay the balloon payment at the end? If pay out UPE to corporate beneficiary Do you have enough money to do this? Transfer assets in specie? Trust satisfied UPE by giving company farming equipment Company leases out equipment to market rental to use in business Cash Flow Rollover relief if roll over to wholly owned company? Licensing the business to a trading company? (to avoid paying stamp duty) Stamp duty consequences? Getting rid of the trust?

By 2013 Company lodgement date (e.g. 31 March 2014)
You have a 30 June 2012 distribution Now what? You have to decide how you want to treat the UPE by the 2012 trust lodgement date If do nothing UPE will convert to a Division 7A loan on the trust 2012 lodgement date (e.g. 15 May 2013) To avoid a deemed dividend for the 2013 income year, must: Put complying loan agreement in place Pay out the loan by company lodgement day 2. Decide to put UPE on sub-trust by trust 2012 lodgement date (e.g. 15 May 2013) By 2013 Company lodgement date (e.g. 31 March 2014) Different circumstances depending on what action you take on the trust 2012 lodgement date (e.g. 15 March 2013)

What are the compliance costs of the different options (sub trust or compliant loan)?
Is all the compliance worth it? Use timelines to see when to: Choose an option Put investment agreement / Division 7A loan agreement in place Record & pay return (for investment agreement) and interest & principal (for Division 7A loan agreement) Is interest deductible to the trust?

Timeline – UPE remains a UPE:
30 June 2012 UPE placed on sub trust On 30 June 2012, Trustee appoints $70 to Company Trust Private Company $70 UPE Dr Trust distribution $70 Cr UPE (sub trust) - Company $70 Dr UPE (sub trust) –Trust $70 Cr Trust Distribution $70 UPE remains a UPE No deemed dividend for 2013 year UPE comes into existence Trust choose to set fund aside on sub-trust UPE set aside from the funds of main trust Pay first return 30 June 15 May 30 June 15 May Distribution Trust lodgement date End of year Trust lodgement date

Timeline – UPE becomes a loan:
30 June 2012 UPE & no sub trust On 30 June 2012, Trustee appoints $70 to Company Trust Private Company $70 UPE Dr Trust distribution $70 Cr UPE (no sub trust) - Company $70 Dr UPE (no sub trust) - Trust $70 Cr Trust Distribution $70 Loan comes into existence No deemed dividend for 2013 year UPE comes into existence Trust does not set funds aside UPE remained intermingled with funds of trust Put complying loan agreement in place 30 June 15 May 30 June 31 March Distribution Trust lodgement date End of year Company lodgement date

Post 16 December 2009 Case Studies

How do you manage your UPEs?
4 Possible options you may have for your UPEs: Leave as is Convert all UPEs to loans Convert UPE closest to Company to a loan Convert UPE not closest to Company to a loan Trust B Trust A Company A $2,500 UPE $2,500 UPE

Option 1: Leave as is Exposure if Trust B or Trust A makes a loan (Subdivision EA) Trust B Trust A Company A $2,500 UPE $2,500 UPE Loan Loan

Option 2: Convert all UPEs to loans
No exposure if Trust B or Trust A makes a loan Exposure on loan from Company A to Trust A $2,500 Loan $2,500 Loan Trust B Trust A Company A $2,500 UPE $2,500 UPE Loan Loan

Option 3: Convert only UPE closest to company to a loan
No exposure if Trust B or Trust A makes a loan Exposure on loan from Company A to Trust A $2,500 Loan Trust B Trust A Company A $2,500 UPE $2,500 UPE Loan Loan

Option 4: Convert only UPE not closest to company to a loan
Exposure if Trust A makes a loan (Subdivision EA) Exposure on loan from Trust A to Trust B (Subdivision EA) $2,500 Loan Trust B Trust A Company A $2,500 UPE $2,500 UPE Loan Loan

Compliance cost of converting the Post UPE to a loan?
What if you have Pre & Post UPEs? Compliance cost of converting the Post UPE to a loan? $1,000 Pre UPE $200 Post UPE $950 Pre UPE $100 Post UPE Trust B Trust A Company A $100 Pre UPE $50 Post UPE Loan Trust C Loan

You’ve had the training Now you have 5 minutes to solve this!
Trust 2 Trust 1 Company A Loan $200 UPE $100 UPE $100 UPE $250 UPE Trust 3 Trust 4 Trust 5 Loan $50 UPE $40 UPE $700 UPE Loan $150 UPE Trust 6 Trust 7 $300 UPE

Conclusion

Key Take Aways Have to consider individual facts & circumstances
No one-size fits all solution Need to decide by certain dates what actions to take Complying loan agreements Investment agreements

What to look for in the financial statements

Company Financials – What to look for?
Do the following Explanation Work out distributable surplus of company Deemed dividend limited to distributable surplus If no distributable surplus – check for indirect loans Identify company’s receivables (debit loans) Determine loans made in current year Determine if balance outstanding from prior years Identify company’s payables (credit loans) To determine potential for set offs Identify company’s debit loans to other companies To determine if there is an indirect loan to another company with zero distributable surplus Determine if a trust has a UPE owing to a company Look at company’s unpaid present entitlements / beneficiary trust entitlements Determine which UPEs are Pre and which are Post Determine if company has made payments to shareholders / associates (e.g. was there any drawings?) So that you can convert these payments to compliant loans before lodgement day Determine if assets have been used by shareholders/associates From 1 July 2009 this will qualify as a payment Determine if loans have been forgiven in the year (e.g. statute barred) Examine profit & loss to determine

Trust Financials – What to look for?
Do the following Explanation Does the trust have a corporate beneficiary in the chain Division 7A only applies if the trust has a corporate beneficiary somewhere in the chain Determine if the trust has an UPE outstanding to another entity Look at trust’s unpaid present entitlements / unpaid beneficiary entitlements (will be credit balance) Determine which UPEs are Pre and which are Post Determine if another trust has a UPE owing to this trust Look at the trust’s assets Identify trust’s receivables (debit loans) Determine loans made in current year Determine if balance outstanding from prior years Identify trust’s payables (credit loans) To determine potential for set offs Determine if trust has made payments to shareholders / associates So that you can convert these payments to compliant loans before lodgement day (if have UPE with company) Determine if loans have been forgiven in the year (e.g. statute barred) Examine profit & loss to determine

Timelines: When to do what

Company lodgement date
UPEs: Checklist of what to do in 2013 Company lodgement date Trust lodgement date Year End e.g. 31 March 2013 Put complying loan agreement in place for 2011 UPE converting to a loan e.g. 15 May 2013 Put investment agreement in place for 2012 UPE put on sub trust Pay 2012 return to company for 2011 UPE put on sub trust Pay 2012 return to company for 2010 UPE put on sub trust 30 June 2013 Record 2013 return (from trust lodgement date to 30 June 2013) for 2012 UPE put on sub trust in journals Record 2013 return (for whole year) for 2011 UPE put on sub trust in journals Make 1st interest & principal repayment for 2011 UPE that converted to a loan Make 2nd interest & principal repayment for 2010 UPE that converted to a loan Record 2013 return (for whole year) for 2010 UPE put on sub trust in journals

30 June 2012 Timelines Actual loan UPE becomes a loan UPE on sub trust

30 June 2012: Actual loan Put complying loan agreement in place
Final interest & principal repayment 1st interest & principal repayment 2nd interest & principal repayment 3rd interest & principal repayment Loan Video is played 30 June 2013 30 June 2014 30 June 2015 30 June 2019 or 30 June 2037 30 June 2012 Company lodgement date (e.g. 31 March 2013) 2013 interest

30 June 2012: UPE becomes a Division 7A loan
Becomes Loan Final interest & principal repayment No Trustee resolution to put UPE on sub trust Put complying loan agreement in place 1st interest & principal repayment Distribution Video is played 30 June 2012 Trust lodgement date (e.g. 15 May 2013) 30 June 2013 Company lodgement date (e.g. 31 March 2014) 30 June 2014 30 June 2020 or 30 June 2038 2014 interest

30 June 2012: UPE remains a UPE Remains a UPE
Record 2013 return in journals Balloon principal repayment & final return Trustee resolution to put UPE on sub trust & investment agreement Pay 2013 return to company Record 2014 return in journals Distribution Video is played Trust lodgement date (e.g. 15 May 2013) Trust lodgement date (e.g. 15 May 2014) 30 June 2012 30 June 2013 30 June 2014 14 May 2020/2023 2013 interest 2014 interest

30 June 2011: Actual loan Final interest & principal repayment
Put complying loan agreement in place 1st interest & principal repayment 2nd interest & principal repayment Loan Video is played 30 June 2011 Company lodgement date (e.g. 31 March 2012) 30 June 2012 30 June 2013 30 June 2018 or 30 June 2036 2012 interest 2013 interest

1st interest & principal repayment Becomes Loan 1st interest & principal repayment Final interest & principal repayment Put complying loan agreement in place No Trustee resolution to put UPE on sub trust Distribution Video is played 30 June 2011 Trust lodgement date (e.g. 15 May 2012) 30 June 2012 Company lodgement date (e.g. 31 March 2013) 30 June 2013 30 June 2019 or 30 June 2037 2013 interest

Trustee resolution to put UPE on sub trust & investment agreement Record 2012 return in journals Pay 2012 return to company Record 2013 return in journals Balloon principal & final return repayment Distribution Video is played Trust lodgement date (e.g. 15 May 2012) Trust lodgement date (e.g. 15 May 2013) 30 June 2011 30 June 2012 30 June 2013 14 May 2019/2022 2012 interest 2013 interest

30 June 2010: Actual loan 3rd interest & principal repayment
Final interest & principal repayment Put complying loan agreement in place 1st interest & principal repayment 2nd interest & principal repayment Loan Video is played 30 June 2010 Company lodgement date (e.g. 31 March 2011) 30 June 2011 30 June 2012 30 June 2013 30 June 2017 or 30 June 2035 2011 interest 2012 interest 2013 interest

Becomes Loan Put complying loan agreement in place 2nd interest & principal repayment Final interest & principal repayment No Trustee resolution to put UPE on sub trust 1st interest & principal repayment Distribution Video is played Company lodgement date (e.g. 31 March 2012) 30 June 2018 or 30 June 2036 30 June 2010 30 June 2011 30 June 2012 30 June 2013 2012 interest 2013 interest

Put investment agreement in place Record 2012 return in journals Trustee resolution to put UPE on sub trust Pay 2012 return to company Record 2013 return in journals Distribution Video is played Trust lodgement date (e.g. 15 May 2012) Trust lodgement date (e.g. 15 May 2013) 30 June 2010 30 June 2011 30 June 2012 30 June 2013 2012 interest 2013 interest

Division 7A – Quarterly Roadshow Business Services Discussion

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Division 7A – Quarterly Roadshow Business Services Discussion

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Presentation on theme: "Division 7A – Quarterly Roadshow Business Services Discussion"— Presentation transcript:

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About project

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