On 15 August 2018, the ATO released an updated version of Practical Guidance Guideline PCG 2017/13 (Guideline) which deals with unpaid present entitlements under sub-trust arrangements in Division 7A of the Income Tax Assessment Act 1936.
The Guideline applies to a private company (or trustee) beneficiary of a trust and sub-trust where the trustee has (in accordance with Option 1 of Practice Statement PS LA 2010/4):
- validly placed funds representing an unpaid present entitlement under a sub-trust arrangement before 30 June 2012 on a 7-year interest only loan with the main trust and
- does not repay the principal of the loan when it matures in the 2017, 2018 or 2019 income years.
The original form of the Guideline issued in July 2017, applied to arrangements of this nature that mature in the 2017 or 2018 income years. The updated Guideline extends the scope to cover loans that mature in the 2019 income year.
Broadly, where the loan is not repaid in full or put on complying terms before the company’s lodgement day, any unpaid principal of the loan will be treated by the Commissioner as the provision of financial accommodation and therefore a Division 7A loan giving rise to a deemed dividend at the end of the income year in which the loan matures.