Division7A and Unpaid Present Entitlements
The 2016 Federal Budget heralded the Government’s intention to make targeted improvements to the operation and administration of Division 7A of the ITAA 1936. Two years later, no legislation has been forthcoming, but an additional measure to deal with Unpaid Present Entitlements (UPEs) has been announced.
UPEs arise where a related private company is entitled to a share of trust income as a beneficiary, but has not been paid that amount.
Division 7A is an integrity rule that requires both cash and non-cash benefits provided by private companies to related taxpayers to be taxed as dividends unless structured as Division 7A complying loans.
From 1 July 2019, UPEs will fall within the scope of Division 7A rather than the current concessional treatment allowed under the ATO’s practice statements. This concessional treatment defers the payment of UPE itself to the end of the term of the agreement, rather than an annual repayment obligation that is required under Division 7A. Annual interest repayments are required under both arrangements.
Where UPEs have not been paid due to the funds being re-invested in income generating assets or businesses, this change is likely to have a real cash flow impact due to the change in timing of principal repayments.
Any measure aimed at simplifying an already complex area of tax legislation is always welcomed. However, continual delays in releasing any details on these reforms, means that uncertainty increases for private companies and their associated entities. Given that the changes will result in real cash flow adjustments, taxpayers need to understand these changes early to enable them to plan and adjust cash flow projections accordingly.