Dentons pushes for transitional protections with proposed Division 7A measure

The proposed measure follows the recent High Court decision in Bendel, which held that a corporate beneficiary's unpaid present entitlement to trust income was not a loan for the purposes of Division 7A of the Income Tax Assessment Act 1936.

In a recent submission, Dentons said the unenacted measure from the 2018–19 federal budget would reverse this by bringing UPEs within Division 7A

The law firm explained that if this revised measure was enacted, a corporate beneficiary's outstanding UPE would be treated as a deemed loan from the trust.

"Where a company rollover then transfers the trust’s assets to a new corporate entity, two Division 7A risks [would] arise," it said.

"Firstly, if the UPE is not assumed by or repaid to the new structure, the outstanding amount may be treated as forgiven, triggering a deemed dividend under section 109F.

"Secondly, if the trust itself is wound up or its assets are transferred such that the deemed loan can no longer be serviced on complying terms, the corporate beneficiary may be taken to have received a Division 7A benefit in the year of the rollover."

Dentons warned in the submission that neither risk is addressed by the proposed rollover relief.

The law firm urged the government to extend the rollover relief period by at least three, and preferably five, years from the date the enabling legislation receives Royal Assent, rather than expiring on 30 June 2030.

It also said that the rollover relief legislation should expressly address outstanding UPEs at the time of the restructure and that the ATO should issue guidance on this interaction before the rollover period commences.

The submission said it was critical that transitional protection be put in place for arrangements that relied on TR 2010/3, TD 2022/11, or Bendel itself pending enactment.

"Transitional protection is critical. For over fifteen years, the ATO maintained as its published administrative position that UPEs from trusts to corporate beneficiaries constituted loans for Division 7A purposes," it said.

"Many trustees and their advisers relied on that position and structured UPEs on complying sub-trust or loan arrangements accordingly. If the revised Budget measure applies from Royal Assent without transitional protection, those who incurred costs and restructured their affairs in good-faith reliance on the ATO’s published guidance will be in a worse position than those who did nothing.

"We submit that the revised measure must include transitional rules protecting arrangements put in place in reliance on Taxation Ruling TR 2010/3 and Taxation Determination TD 2022/11 prior to Bendel; and arrangements left outstanding in reliance on Bendel itself pending enactment of the revised measure."

The law firm also called for the ATO to issue interim guidance as a matter of priority.

"Taxpayers are currently operating in a state of uncertainty whilst the operation of case law, the revised Budget measure and the review of the ATO’s Interim Decision Impact Statement, leaves open the economic consequences of UPE arrangements going forward," it said.

"At a minimum, the ATO should confirm its current administrative approach to UPEs pending enactment of the revised measure, whether voluntary compliance with the pre-Bendel position will be expected, and how existing sub-trust arrangements should be treated in the interim."