The Australian Tax Office (ATO) regularly releases “rulings” which set out the way in which it plans to interpret the law on taxation matters.  Sometimes these rulings create a situation where a client’s affairs have been structured in accordance with the letter of the law, but then a ruling will change the landscape and advisors have to work out how to make the client’s affairs compliant – not dissimilar to when legal cases affect the interpretation of the law.  This is what has happened in relation to unpaid present entitlements (“UPE”) since the ATO’s December 2009 ruling. 

A UPE refers to the situation where a private company has received a distribution of profits according to the financial statements of a trust, but the physical monies have not been paid across. The ruling addresses the situation where such monies remain unpaid.

As the ATO sees it, the trustee is using the income, for effectively no cost, for trust purposes (effectively the family group behind the trust) and not for the benefit of its real owner.  Accordingly this triggers Division 7A of the Income Tax Assessment Act 1936. This Division was added to the Act in 1998 to ensure that private companies were not able to make tax free distributions of profits to shareholders (or their associates) in the form of payments such as gifts or loans.

Many business owners have been caught up in this change. Fortunately PCM Tax Consulting has developed strategies to ensure our affected clients are compliant in the new landscape. 

We should stress that of the clients who have been identified as being in danger, were horrified to learn that the potential tax liability was calculated in the tens of thousands and in some cases, hundreds of thousands of dollars!

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