Following on from our previous Riposte, the ATO has updated its list of issues/transactions which attract its attention to include unpaid present entitlement (UPE) unitisation arrangements adopted by private groups.
Whilst limited information is provided, it appears that the ATO is targeting arrangements that seek to avoid obligations under Division 7A and have the following features:
- a unit trust has an UPE owing to a beneficiary (for example, a company);
- the trust issues additional units to the company beneficiary equal to the value of the outstanding UPE. There is a set-off of the subscription proceeds owing by the beneficiary against the UPE owed to the beneficiary that results in the UPE being extinguished; and
- the trust then makes payments or loans to other entities within the private group using the funds related to the initial UPE (which is now extinguished).
The above arrangement results in a beneficiary (i.e. the company) being taxable on the distribution and the cash related to that taxable distribution being paid or lent to another entity within the private group.
Given the outcomes of a UPE unitisation type arrangement, the ATO considers that such arrangements could attract the application of Division 7A ITAA36, section 100A ITAA36 (dealing with reimbursement arrangements) or Part IVA ITAA36. The ATO does not provide any further particulars as to how these provisions apply.
We expect that it is the case that the ATO has a specific style of transaction in mind, however the generic nature of the ‘features’ could lead to a wide net being cast. For example, what degree of connectivity is required between the issue of additional units in the unit trust and the payments or loans made by the unit trust before the ATO has concerns?
Although the warning has been made via the “issues that attract our attention” section of the ATO website (as opposed to a Taxpayer Alert), this should not detract from the fact that the ATO are targeting these type of arrangements. Given the potential adverse tax outcomes from undertaking these types of arrangements, private groups should be considering whether they have potentially undertaken a UPE unitisation arrangement and taking appropriate action.