The Federal Government has mentioned Division 7a and unpaid beneficiary loan accounts in the last couple of budgets and now the ATO have released a Practical Compliance Guideline (PCG 2017/13) which outlines the implications of sub trust arrangements ceasing in the 2017 or 2018 financial years.
If we go back a couple of steps, the Federal Government following the Bamford case a few years ago now stated that they were going to re-write the trust tax law as it was getting all too confusing even for tax accountants and tax lawyers let alone the general business owner! This hasn’t been done, but they did add in a couple of small changes in relation streaming of capital gains and dividends form trusts. They also totally confused everyone with the unpaid loan account issue and Division 7a by introducing what we call “EA” and “EB” loans and sub trusts.
In the 2016 and 2017 Federal budgets, the Government stated they were going to introduce the Board of Taxation recommended approach in relation to loan account issues and Division 7a. Again we haven’t seen the legislation for this but the general terms seem to be 10 year loans, with prescribed maximum balances by the end of years 3, 5, 8 and 10 with the RBA small business overdraft rate for the interest rate. The only problem with this recommendation is that it seems to include all the quarantined pre 1997 and pre 2009 loans which haven’t been written off for most clients. In some cases these are going to be quite large and will now be drawn into the net to deal with. We will hopefully see more detail once legislation has been drafted.
Under the current sub trust rules taxpayers had the option of 7 year or 10 year loans to pay off yearly unpaid entitlements. These 7 year loans as outlined by the ATO are coming to the conclusion of their term and payment of these loans should be done by 30 June 2018. The ATO state in PCG that if the trustee of the trust fails to repay the loan it will be a deemed dividend. The ATO have stated they will accept for the 7 year sub trust loans to be rolled into a further 7 year complying loan agreement to allow further time for the trustees to pay back the unpaid entitlement. Note though, the interest in this complying loan agreement is not tax deductible.
Trustees have some decisions to make in the next 12 months in relation to these loans. Hopefully we get confirmation soon on the Board of Taxation changes so we can plan adequately for clients – however on recent Government experience this is not likely!