ATO's updated view on sub-trust arrangements

The Australian Taxation Office (ATO) have recently finalised tax determination (TD) 2022/11 which will impact the use of sub-trust arrangements going forward.

As a background, sub-trust arrangements have been used as a method of managing Division 7A issues which arise from unpaid present entitlements (UPEs) - i.e. Trust distributions made to company which are not paid across in “cash”.

Under sub-trust arrangements, during a period of either 7 or 10 years, the Trust makes interest only payments to a company each year and at the end of the term of the arrangement, the UPE can then normally be converted to a complying Division 7A loan agreement. Once a complying loan agreement has been set up, the Trust would then be required to make interest and capital repayments each year to a company over a 7-year period (unless the loan has been secured).

Sub-trust arrangements have been popular for some in the past because it gave taxpayers the option to defer the tax payable as a result of the application of Division 7A. However, going forward, as a result of the ATO’s new determination, sub-trusts will no longer be practicable. The change in the ATO’s views will apply to trust entitlements arising on or after 1 July 2022.

Prior to finalising the determination, there were other changes suggested which could have impacted on the timing to enter into Division 7A complying loan agreements and broadly, that would have been dependant on how Trust distribution resolutions have been drafted. It appears the ATO have listened during the consultation process, and have not gone ahead with those changes given the added layers of complexity it would have added.

More information

If you would like to find out more or require assistance, please contact your local Moore Australia?advisor.