Overview INTERPOSED ENTITIES TIPS AND TRAPS. Interposed Entities payments & loans. Fiona Dillon FTIA Australian Tax Office

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1 INTERPOSED ENTITIES TIPS AND TRAPS Fiona Dillon FTIA Australian Tax Office Commonwealth of Australia 2012 Disclaimer: The material and opinions in this paper are those of the author and not those of The Tax Institute. The Tax Institute did not review the contents of this presentation and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests. Overview INTERPOSED ENTITIES TIPS & TRAPS Entities payments & loans s and loans through interposed entities s Unpaid present the ATO view Subdivision EA the basic case Chains of section 109XI Changes on the horizon Shareholder / Associate Target 1

2 Target Applies to payments and loans by a private company to an entity through one or more interposed entities Involves a reasonable person test If section 109T applies, the Commissioner is to determine the amount of the deemed payment or loan pursuant to sections 109V or 109W Administrative difficulties deemed payment / notional loan TD 2011/D7 issued in draft on 15 June 2011 Deemed circumstances from the operation of the interposed entity provisions (including section 109T) can give rise to deemed dividends notwithstanding the exclusion rules in Subdivision D TD is expected to be finalised shortly. Fact sheet on the reasonable person s test Being developed in conjunction with the Division 7A working group. Loan on s109n Complying terms deemed payment / notional loan Target What amount? 2

3 s unpaid In response to these administrative difficulties: 1) TD 2011/16 issued on 15 June 2011 Lists the relevant factors that will be taken into account in determining the amount of deemed payment or loan Relevant factors include: (a) Amounts loaned or paid to the entities involved (b) Whether any part of the amounts represented arm s length consideration (c) Whether any actual loans were repaid or put on complying terms (d) Whether any actual payments were converted into loans and repaid or put on complying terms (e) Whether any actual loans were made in the ordinary course of the private company s business on usual terms (f) Whether the arrangement reflects genuine transactions. Loan Shareholder / Associate / debt forgiveness s unpaid present TR 2010/3 issued on 2 June 2010 Section 2 loans: Covers ordinary private company loan to trust Can be made: By loan agreement (either express or implied); or By trustee exercising a power under the trust deed Applies to loans before and after 16 December 2009 Div 7A has always applied to ordinary loans s unpaid present Section 3 loans: of private company may also be loan to trust within extended definition in subsection 109D(3) Prospective application Not all s are Section 3 loans 3

4 s unpaid present PS LA 2010/4 issued 14 October 2010, republished July 2011 Outlines the Commissioner s administrative approach Section 2 loans: Self corrective options were available provided conditions are met - note that the time limit to self correct has now lapsed Taxpayer may still make an application to the Commissioner to exercise his discretion under section 109RB s unpaid present Section 3 loans: s arising from 16 December 2009 that are put on a sub-trust for the sole benefit of the private company are not Div 7A loans Investment options: Option 1 7 year interest only loan at benchmark rate Option 2 10 year interest only loan at overdraft rate Option 3 specific asset Taxpayer may choose an alternative investment option s unpaid present Fact sheet issued on 23 June 2011 Developed to address common administrative issues raised by practitioners and taxpayers Available on s unpaid present Test case Commissioner has agreed to fund a suitable case to test the view expressed in TR 2010/3 Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Superannuation Fund [2012] AATA 61 in the context of super provisions held that a can amount to the provision of financial accommodation 4

5 s unpaid present Things to watch out for: to trust s 2010 s not placed on a sub-trust action needed by 2011 company lodgment date 2011 s: hold for company s sole benefit by 2011 trust lodgment date; or take action by 2012 company lodgement date Section 2 loan self corrective options lapsed, consider applying to Commissioner under section 109RB s Subdivision EA Where a company has a to trust income, Division 7A is triggered (via Subdivision EA) where the trust makes payments or loans to, or forgives debts of, shareholders or s of that company. Subdivision EA will not apply if the is treated as a loan by the Commissioner This means Subdivision EA can still apply if is held on sub-trust for sole benefit of private company (and not treated as a loan for Division 7A purposes) s Subdivision EA Loan subject to Division 7A SUBJECT TO DIVISION 7A / Debt forgiveness s chains of Prior to 1 July 2009, Subdivision EA could be avoided by interposing an entity between a private company and the trust making the payments or loans to, or forgiving the debts of, the shareholder or of a shareholder of the private company Section 109XI now applies to payments made, loans made, and debts forgiven on or after 1 July

6 s chains of Before 1 July 2009 Subdivision EA does not apply s chains of After 30 June 2009 Subdivision EA may apply Target / Debt forgiveness Target / Debt forgiveness Deemed (Section 109XI) s chains of Section 109XI deems the private company to be or become entitled to an amount from the Target when conditions are satisfied Subsection 109XI(4) states that the amount the private company is taken to be or become entitled is to be determined by the Commissioner Very little guidance in the legislation on what is relevant s chains of TD 2011/15 issued on 15 June 2011 Lists the relevant factors which the Commissioner will consider when determining the amount of entitlement for purposes of subsection 109XI(4) The relevant factors taken into account are those existing immediately before the lodgment date of the target trust s return for the year in which the transaction takes place 6

7 s chains of Relevant factors include: Extent which the in chain remain unpaid immediately before the lodgment date Amounts already included in the assessable income of a shareholder or under Subdivision EA as a result of the same entitlement Amount of the entitlement which the Commissioner belies represented arm s length consideration payable to the company Amount of deemed entitlement capped to lowest entitlement in chain that remains unpaid at trust s lodgement date (or less). s chains of Things to watch out for: 1. Historical s (including pre-1 July 2009) in a chain of trust can trigger operation of Subdivision EA where there is a current year payment, loan or debt forgiveness s chains of Things to watch out for: 2. Interaction between section 109XI, section 109D and section 109T trust to trust Deemed (Section 109XI) (placed on a sub-trust) (placed on a sub-trust) Target Loan Subdivision EA may apply to the loan by Target to the shareholder/ Chains of (not placed on a sub-trust) (placed on a sub-trust) Target Loan Loan (per TR 2010/3) Section 109XG? Subdivision EA will apply to loan from to Target 7

8 s changes on the horizon Current practice ees may be assessed at top marginal rate if some income remains undistributed s often a result of incentive to ensure all trust income is distributed Modernisation of the taxation of trust income Government welcomes comments on alternative approaches to taxing trustees You can the project team at: trust_rewrite@treasury.gov.au Commonwealth of Australia 2012 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General s Department, Robert Garran Offices, National Circuit, Barton ACT 2600 or posted at Disclaimer: This presentation represents laws and policies at the time it was presented. Persons should make appropriate inquiries, check the law for currency, and seek independent advice before acting in reliance on it. 8