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How Div 7A changes the game for companies and trusts


The ATO’s final guidance on Division 7A heralds the end of sub-trust arrangements for unpaid present entitlements.

By Robyn Jacobson 15 minute read

Pathway to now

Since 2010, the ATO has issued the following primary guidance materials on the application of Division 7A to unpaid present entitlements (UPEs):

  • Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements (withdrawn)
  • Law Administration Practice Statement PS LA 2010/4 Division 7A: trust entitlements (PS LA) (withdrawn)
  • Practical Compliance Guideline PCG 2017/13 Division 7A – PS LA 2010/4 sub-trust arrangements maturing in or after the 2016–17 income year (PCG) (updated on 7 June 2022)
  • TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of “financial accommodation”?

The original guidance, in the form of TR 2010/3 and PS LA 2010/4 (2010 products), was withdrawn with effect from 1 July 2022 and has been replaced by TD 2022/11 (the Determination) which was finalised on 13 July 2022.


The Determination describes when a private company (company) provides financial accommodation within the meaning of section 109D(3) of the Income Tax Assessment Act 1936 where that company is made presently entitled to a share of the income of a trust (trust income) and either:

  • that entitlement remains unpaid (a UPE); or
  • the trustee sets aside an amount from the main trust and holds it on a new separate trust (sub-trust) for the company.

Where a company provides financial accommodation to its shareholder or their associate (shareholder/associate), the company is taken to make a loan for Division 7A purposes. This means that the shareholder/associate will need to manage the loan on complying terms, necessitating a written loan agreement, annual repayments of principal and interest and a maximum seven-year term (unless secured by a mortgage, in which case the term is extended to 25 years).

Importantly, the Commissioner has made it clear that the Determination applies only to trust entitlements arising on or after 1 July 2022 and does not apply to:

  • UPEs that arose before 16 December 2009; or
  • sub-trust arrangements conducted in accordance with the PS LA in respect of trust entitlements arising before 1 July 2022, even though those sub-trust arrangements may commence after 30 June 2022.

This grandfathering is consistent with the 2010 products and provides welcome certainty to taxpayers.

What does the Determination say?

The Determination explains that a company with a UPE will provide financial accommodation to the trustee where the company:

  • has knowledge of an amount that it can demand immediate payment of from the trustee;
  • consents to the trustee retaining the amount and continuing to use the funds for trust purposes; and
  • does not demand payment of the amount.

This will need to be managed as a complying Division 7A loan otherwise a deemed dividend will arise for the trustee.

The Determination further explains that a company will also provide financial accommodation to the shareholder/associate where:

  • the company is made presently entitled to an amount of trust income;
  • that amount is set aside by the trustee and held on sub-trust; and
  • the company consents to those funds being used by the shareholder/associate.

This will similarly need to be managed as a complying Division 7A loan otherwise a deemed dividend will arise for the shareholder/associate.

However, a company will not provide financial accommodation where:

  • the company is made presently entitled to an amount of trust income;
  • that amount is set aside by the trustee and held on sub-trust for the company’s sole benefit; and
  • the funds are not used by the shareholder/associate.

Does the UPE continue to exist?

The Commissioner’s view is that a UPE that results in the provision of financial accommodation should be treated as a loan, rather than a UPE. This is limited to its characterisation for Division 7A purposes and does not change the character of the amount for trust law purposes.

The Commissioner goes on to explain that the trustee setting aside an amount on sub-trust discharges the trustee’s obligation to pay the entitlement to trust income. This means that the UPE is satisfied by the holding of the amount on sub-trust. Previously the UPE remained a UPE even when held on sub-trust. However, the sub-trust arrangement will generally still attract Division 7A unless the funds are set aside and held on sub-trust for the sole benefit of the company.

So where does this leave Subdivisions EA and EB? Crucially, these provisions have no application where there is no UPE. The Determination articulates that Subdivisions EA and EB have limited application moving forward given the ATO’s view that most UPEs and amounts held on sub-trust give rise to a Division 7A loan.

Subdivisions EA and EB will have residuary application where:

  • the UPE arose before 16 December 2009;
  • the UPE arose on or after 16 December 2009 but on or before 30 June 2022 and is held on sub-trust in accordance with Option 1 or Option 2 of the withdrawn PS LA; or
  • the UPE arises on or after 1 July 2022 but does not constitute the provision of financial accommodation (this will be rare).

Other key aspects of the determination

Timing of financial accommodation

Following successful consultation, which included feedback provided by the Tax Institute, the ATO has sensibly agreed that financial accommodation will typically be provided in the income year following the one in which the entitlement arises. Accordingly, the earliest that financial accommodation could be provided under the ATO’s new guidance is, generally, during the 2023-24 income year in respect of entitlements arising during the 2022-23 income year.

This will be the case whether the entitlement is expressed as:

  • a fixed amount from the trust income;
  • a percentage of trust income, or some other part of trust income identified in a calculable manner; or
  • a combination of fixed and calculable amounts.

How do you evidence a sub-trust, and does it have to lodge a tax return?

The ATO’s view on evidencing the existence of a sub-trust is set out at Issue No. 7.1 of the Public advice and guidance compendium (Compendium) accompanying the Determination. The ATO explains that the existence of a sub-trust depends on the trust deed and the trustee’s exercise of power in each particular case.

The ATO also considers that most sub-trusts will be a “Transparent Trust” as described in PS LA 2000/2 which relieves certain trustees from the requirement to furnish a tax return. If the sub-trust is a Transparent Trust, income derived by the sub-trustee in that capacity will be included by the company in its assessable income.

What about existing sub-trust arrangements?

Legacy sub-trust arrangements set up in accordance with the 2010 products, involving entitlements arising prior to the 2022–23 income year, can continue until maturity and remain eligible for managing any unpaid principal on maturity as a complying Division 7A loan. This allows a further period for the amount to be repaid with periodic payments of both principal and interest.

This outcome is thanks to a recent update to PCG 2017/13 that ensures the PCG continues to apply to:

  • sub-trust arrangements maturing in or after the 2016–17 income year that have been dealt with in accordance with either Option 1 or Option 2 of the PS LA; and
  • UPEs arising on or before 30 June 2022.

This means that the position taken in the PCG applies to any legacy sub-trust arrangements created in respect of UPEs arising from the 2009–10 to 2021–22 income years (inclusive). This is sensible and provides certainty to taxpayers with existing arrangements.

Is there any merit in sub-trust arrangements for entitlements arising on or after 1 July 2022?

In short, no. The interest-only loan feature was the primary commercial incentive that appealed to private groups wanting to delay payment of the underlying trust entitlement. As interest-only loans are no longer an option, sub-trust arrangements for UPEs arising on or after 1 July 2022 have been made redundant by the Determination from a tax perspective.

Final comment

The ATO has landed on its final position on the application of Division 7A to UPEs and sub-trust arrangements, and it will be important for practitioners to consider how the final guidance impacts client arrangements. Despite the settled ATO guidance, debate lingers over the merit in progressing legislative change to Division 7A, following a decade of proposals, consultation and inaction from the government. This is why constructive and robust consultation preceding any legislative amendments to Division 7A is essential.

Robyn Jacobson is the senior advocate at the Tax Institute.


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