2.1. Will the Commissioner treat the relevant balance as a UPE of BurgerCorp or a loan to the MacTrust?

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1 20 June 2010 provided with compliments 1 The questions Black Angus Pty Ltd, as the Trustee of the MacTrust Number 1 Trust (the MacTrust ) wants three questions answered in the context of the range of recent developments in relation to division 7A, in particular the Commissioner s view that he can deem, and will deem, some unpaid present entitlements to be loans: Will the Commissioner treat the amount of $4,164,291 (the relevant balance ), which comprises part of amount of $7,537,539 shown as a current liability in the Balance Sheet of the MacTrust and as a current asset in the Balance Sheet of the corporate beneficiary BurgerCorp of Australasia Pty Ltd ( BurgerCorp ): as an unpaid present entitlement ( UPE ) of BurgerCorp; or as a loan by BurgerCorp to the MacTrust? Will the MacTrust s loan of a unit located in Sydney ( Sydney unit ) to an associate of BurgerCorp be caught as a payment within division 7A? What steps should the Trustee take to ensure that a distribution made before 30 June 2010 is not taken by the ATO to be a loan by BurgerCorp back to the MacTrust? 2 The response to the questions The responses to the questions are provided on the basis that the Trustee: is aware that a Court may not uphold the Commissioner s position on when an UPE becomes a loan as it is articulated in recent publications including TR 2010/3; wants the protection afforded taxpayers who acting in accordance with the Commissioner s position as set out in the public ruling within TR 2010/3; is not willing to contest the Commissioner s position articulated in TR 2010/13; of the documents and oral explanations provided by the Trustee. The Trustee s oral instructions are noted in the reasons Will the Commissioner treat the relevant balance as a UPE of BurgerCorp or a loan to the MacTrust? Type 1 loan - Loan as the result of express agreement The Commissioner must conclude that the relevant balance does not reflect a loan made by BurgerCorp to the MacTrust as the result of an express agreement there being none of: a relevant trust resolution; any other document to that effect; or any provision in the deed for the MacTrust that deems the relevant balance or any part of it to be a loan to the trust. Type 1 loan - Loan as the result of implied agreement (including by acquiescence) The Commissioner could conclude that the relevant balance reflects a loan as the result of an implied loan agreement: see TR 2010/3 paragraphs 10 and 11, but under the terms of the draft Practice i 2010 Tax Matrix Pty Ltd Z:\XXXX-Refile\T1007 ~ Worked Analysis To UPE & Division 7A Issues - Version Doc

2 2 Statement PSLA 3362 has no basis to do so: see TR 2010/3 paragraph 12 and PS LA 3362 paragraphs 21 and 22. Type 2 loan - Loan as the result Trustee s exercise of power under the deed The Commissioner could conclude that there is an implied loan as a result of the Trustee exercising a power under the deed: see TR 2010/3 paragraphs 13, 14 within the public ruling and also 77 and 79 which do not form part of the public ruling and PS LA 3362 paragraphs 25 and 26. If the Commissioner accepts the information contained in the financial accounts provided by the trustee as determinative of the character of the relevant balance he will not conclude that a loan exists as the result of the Trustee s exercise of power under the terms of the deed. PS LA 3362 notes that a loan will exist where the financial accounts of the trust have recorded the amount as a loan but does not specify what comprises financial accounts : see PS LA 3362 paragraphs 25 and 26. If the Commissioner should call for the underlying ledgers the Commissioner s conclusion would depend on the background to the $14,090 shortfall in the amount of the relevant balance that ordinarily would have been expected to have accumulated at the end of 2009: See PS LA 3362 example 2 at paragraphs Is the relevant balance a subsisting UPE? There is the possibility, as a result of the uncertainty as to the reasons for $14,090 shortfall, and also the uncertainty as to what the Commissioner means by financial accounts that the Commissioner, would conclude, on an audit, that the relevant balance, or part of it, is an ordinary loan. In the absence of reaching that conclusion the Commissioner will conclude: that the relevant balance is a subsisting UPE that existed at or prior to 16 December 2009; will not deem the relevant balance to be a loan: see subsection 3 of TR 2010/ Will the MacTrust s loan of a house to an associate of BurgerCorp be caught as a payment within division 7A? If the relevant balance reflects an ordinary loan If the Commissioner considers BurgerCorp to have made an ordinary loan (as the result Trustee s exercise of power under the deed) to the MacTrust consideration of section 109T is required but no consideration of subdivision EA is required: see PS LA paragraphs Section 109T contains a purpose test. The test, set out paragraph 109T(1)(b), one of the three conjunctive paragraphs is an objective test. It is unlikely that a reasonable person, aware of all the circumstances, could conclude that the loan BurgerCorp made was made solely or mainly as part of an arrangement involving a payment to the target entity. One of the circumstances that would be relevant is the Commissioner s u-turn on what constitutes a loan. PS LA 3362 is silent on the operation of 109T.

3 3 If the relevant balance reflects a subsisting UPE If the Commissioner considers BurgerCorp to have a subsisting UPE rather than a loan: consideration of subdivision EA is required but no consideration of section 109T is required; under section 109XA(1) if the MacTrust provides a Sydney unit to a shareholder of BurgerCorp or an associate of BurgerCorp (the recipient ), with effect from 1 July 2009, it will have made a payment under the expanded definition of that expression while BurgerCorp has a UPE to the net income of the MacTrust; if that payment discharges to any extent a UPE of the recipient that is attributable to an unrealised gain an amount will be included in the assessable income of the recipient; the amount to be included in the assessable income of the recipient will be determined as the difference between: the amount parties dealing at arm s length would have paid for the provision of the Sydney unit; any amount actually paid. PS LA 3362 is silent on the operation of subdivision EA in these circumstances What steps should the Trustee take to ensure that a distribution made before 30 June 2010 is not taken by the ATO to be a loan by BurgerCorp back to the MacTrust? In order to make distributions of the net income of the Trust estate for the current year ending 30 June 2010 Black Angus Pty Ltd: prior to June 30: should resolve to set aside a proportion of the net income of the Trust Fund for BurgerCorp; should prepare a form of resolution which omits all reference to the words pay or apply ; as a matter of prudence, should consider citing the clause (eg clause 4(a)) under which it appoints the net income of the Trust Fund within the body of the resolution; in the records of the MacTrust and also the records of BurgerCorp: should ensure that the headings of the relevant ledgers properly reflect UPEs rather than loan accounts; should establish new sub-accounts for the 2010 distribution so as to reflect that distribution as being held on a separate trust; should avoid reflecting the relevant balance and or any future distribution as being a liability of the Trust Fund; should avoid reflecting the relevant balance and or any future distribution as being a loan account asset of BurgerCorp; should avoid aggregating the 2010 distribution with the relevant balance; should establish any distribution as a separate trust fund and not as part of the MacTrust; should quarantine the relevant balance in similar fashion to the quarantining of pre 97 loan accounts balances some years ago if possible after reconstructing the separate annual UPE s; should transfer the relevant balance or its component parts to a separate trust fund;

4 4 in each subsequent year that an UPE exists should show part of the income of Trust Fund as being derived on separate trust solely for BurgerCorp before making any distribution of the net income of the Trust Fund: see the three methodologies discussed in PS LA 3362 for achieving this; going forward should avoid paying or applying amounts from the balance of any separate trust for or on behalf of BurgerCorp; going forward should ensure that a beneficiary entitlement account is never overdrawn; going forward in the interests of consistency: should make changes to the clients accounting package to ensure that the client s ledgers for MacTrust and BurgerCorp accord with the above recommendations; should ensure that any regular drawings of a beneficiary are debited to a beneficiary loan account and that after the distribution is made to the beneficiary: the beneficiary entitlement account is debited an amount equal to the balance of the beneficiary s loan account to reduce it to zero; the beneficiary loan account is credited the amount necessary to reduce it to zero; could usefully adopt similar procedures for all distributions to all beneficiaries; To the extent that the relevant balance may an appropriation of the annual distributions to a liability account in MacTrust it would be appropriate for the trustee to transfer the balance of that liability account to an equity account or to show the relevant balance as a separate trust. Appropriate notes should be used to clarify what was done. 3 The consideration 3.1. The recent developments The recent developments include the following: the Federal Court decision in Forrest v Commissioner of Taxation; the High Court decision in Bamford v Commissioner of Taxation; the Commissioner s decision impact statement dealing with the Bamford decision; the release of TR 2010/3 - the final version of the controversial TR 2009/D8; the release of PS LA 3362; the amendments to division 7A that deem the provision of an asset by a company to be a payment for the purposes of division 7A and which are contained in the Taxation Laws Amendment (2010 Measures No. 2 ) Bill presently before the Senate; the release of TR 2010/D3 dealing with the application of section 109RB with particular reference to loans and UPEs Documents provided The trustee has provided the following documents: The deed for the MacTrust; The Financial statements for the MacTrust for the 2009 financial year; The Financial statements for BurgerCorp for the 2009 financial year;

5 5 A trial balance as at 30 June 2009 for the MacTrust. 4 Evidence The MacTrust The MacTrust: in 1993 purchased the Sydney unit which is now quite valuable and which it provides for the private use of beneficiaries of the trust who are also associates or associates of the shareholders of BurgerCorp; prior to 2009 reflected the Sydney unit in its financial statements as being negatively geared. Distributions before vesting day The Deed for the MacTrust: provides at clause 4(a) 4(a) The Trustees may determine with respect to the net income of the Trust Fund (i) to pay apply or set aside the same for any one or more of the General Beneficiaries living (b) a determination to pay apply or set aside any sum to or for the benefit any beneficiary may be effectually made by placing such amount to the credit of such beneficiary in the books of the Trust Fund does not deem an UPE that arises on the exercise of a power under clause 4(a) to be a loan; further sub-clauses within clause 4 deal with how the trustee is to act in any of the following situations: the aggregate of the amounts the trustee distributes under clause 4(a) are in excess of the net income of the Trust Fund: clause 4(b)(ii); the trustee accumulates some part of the net income of the Trust Fund: clause 4(c). does not require the Trustee to hold the amount of the net income of the Trust Fund appointed for a nominated object under clause 4(a) on a separate trust for the nominated object whereas under clauses 4(d) and 4(e) the Trustee is required to hold an aliquot share, of so much of the net income of the Trust Fund as is neither distributed nor accumulated, on a separate trust for each of the default beneficiaries. at clause 7 provides as follows: 7. The Trustees may in their absolute discretion notwithstanding anything to the contrary herein contained or provided: (c) subject to clause 11 hereof at any time or times and from time to time pay or apply to or for the benefit of any beneficiary the whole or any part of the capital or income to which he is either absolutely or

6 6 net income of the Trust Fund The expression net income of the Trust Fund : contingently entitled in such manner and subject to such terms and conditions as they shall think fit and without limiting the generality of the foregoing for the maintenance education or benefit of such beneficiary; is not defined in the deed; is a net amount rather than a gross amount; and does not include a reference to a taxation concept. The financial statements of the MacTrust As at 30 June 2009 the financial statements of The MacTrust reflect: in the Profit & Loss Statement Net Income of $474,148 (presumably the amount determined to be the net income of the Trust Fund ); in the Balance Sheet: in aggregate an amount equal to the Net Income as being distributed to three beneficiaries, one of which was BurgerCorp; distribution to BurgerCorp of an amount of $277,062. The relevant balance is reflected in the Balance Sheet as part of a Current Liability totaling $7,537,539. Note 6 explains that the relevant balance is a Trust Beneficiaries UPE of BurgerCorp. The note also lists UPEs of three other beneficiaries. Trustee resolutions The trustee has not provided me with copies of the trustee s resolutions for the Accounting Periods in which the relevant balance accrued but instructs that: in each of those resolutions the trustee resolved to set aside an amount of the Net Income for BurgerCorp rather than to pay apply or set aside an amount of the Net Income for BurgerCorp; recent resolutions are reflected in the general ledger for the trust: as UPEs; as a current liability of the Trust Fund rather than as separate fixed trusts or in aggregate, a single separate fixed trust; resolutions creating present entitlements to the net income of the Trust Fund for years earlier than 2008 are reflected in the General Ledger for the MacTrust (in those years) as beneficiary loan accounts, an outcome that possibly reflected the then limitations of the accounting software. The characters of the ledgers The Trustee has not provided instructions as to: the headings on the ledger accounts from which the summary positions reflected on the various Balance Sheets and Profit & Loss Statements; or

7 7 the character or type of those ledger accounts. The summary headings extracted in the generation of the relevant Financial Statements, which might or might not reflect ledger headings, may allow the Commissioner to draw the conclusion, depending on the software used and the configuration of that software, that each of the UPEs is recorded in a loan account ledger which in turn would impact on any conclusions reached in relation to a Type 2 Section 2 loan BurgerCorp The Trustee instructs that the relevant balance is shown in BurgerCorp accounts as an asset ledger account which is headed trust distribution receivable. BurgerCorpCorp s Profit & Loss Statement for the year ended 30 June 2009 discloses that its Total Income includes a distribution of $277,062 made by the MacTrust to BurgerCorp. The Balance Sheet of BurgerCorp reveals that: the amount of $277,062 forms part of a total receivable of $4,164,241 which Note 5 explains as Trust Beneficiaries UPE ; the Trust Beneficiaries UPE increased between 30 June 2008 and 30 June 2009 by only $262,972 ($4,164,241 - $3,901,269) rather than the amount of $277,062. In ordinary circumstances it could have been expected that the relevant balance as at the end of 2008 for the 2009 year would have grown by an amount equal to the amount of the 2009 distribution to BurgerCorp. The difference between the two amounts is $14,090 ($277,062 $262,972). Elsewhere in this discussion this amount is referred to as the shortfall. 5 Discussion and Reasons To the extent that the following discussion relies on statements made by the Commissioner in PS LA 3362 (currently in draft form) the Trustee should be aware that the practice statement is not a public ruling and offers no protection in relation to penalty. the net income of the Trust Fund After the Bamford decision understanding the scope of clause 4(a) and thus what net income of the Trust Fund that the trustee can appoint under that clause (the distributable amounts) is critical. Some guidance as to what is meant by the expression net income of the Trust Fund can be found at (2) of Trusts and Estates: Taxation and Practice. B Marks 2 nd Edition and also later at where the author explains the need for the Trustee to include as part of its identification of the net income of the Trust Estate the relevant reasons. The discussion in these sections points out the degree of flexibility that the trustee has in determining the distributable amount. A consequence of that flexibility is the need to determine the measure or recipe for the distributable amount with a degree of care and to do so on or before 30 June (in the case of the MacTrust). The measure or recipe may be reflected by wording in the resolution such as the trustee resolved that the net income of the Trust Fund for the financial year ending 20XX will be the amount equal to income according to ordinary concepts less all expenses (including decline in value calculated in

8 8 accordance with the Commissioner s schedule of effective life of an asset but excluding any amounts that would be deductions under division 43). If the recipe for the distributable amount is determined prior to 30 June, preferably by written resolution, the quantification of the distributable amount can follow many months later at the time of preparing the tax return. TR 2010/3 The Commissioner considers an ordinary loan (or section 2 loan) can be one of two types of loan which can arise in one of three ways: Type 1 loan arises as the result of agreement: Loan as the result of express agreement; Loan as the result of implied agreement (including by acquiescence); Type 2 - Loan arises as the result Trustee s exercise of power under the deed It is sufficient for present purposes to note that TR 2010/3: concludes that if a balance represents an ordinary loan, whether as the result of an express agreement or by a set off arrangement or as the result of an implied agreement (which can arise through acquiescence) then the relevant balance will not reflect a UPE; distinguishes between balances; that arise before 16 December 2009; and that arise after 16 December If there is a loan within the ordinary meaning then whether the loan arose before or after 16 December is irrelevant. A subsisting UPE: means that a UPE that has not been satisfied, including by being converted into (or replaced by an ordinary loan): see TR 2010/3 paragraph 3 and note that this definition is carried into PSLA is not of itself a loan: see TR 2010/3 paragraph 7. In the language of the ruling, if the relevant balance does not reflect an ordinary loan it will constitute a subsisting UPE. If there is a subsisting UPE Section 3 of TR 2010/3 sets out the Commissioner s view that subsisting UPE s will be treated as loans by the corporate beneficiary back to the trust unless certain measures are implemented. The part of TR 2010/3 that is a public ruling, and thus able to be relied upon states: at paragraph 7 (within section 2) - that a subsisting UPE is not an ordinary loan; at paragraph 16 - that section 3 does not apply to taxpayers in respect of all or any part of a UPE that arose before 16 December 2009; at paragraph 28 which appears after section 3 - that section 3 does not apply to UPE s arising before 16 December Given that paragraph 16 is within section 3 of TR 2010/3 and states that section 3 does not apply to balances arising before 16 December it is difficult to see how this exception can be said to work for

9 9 UPEs that arise before that date. That difficulty is compounded because the three statements address different things: paragraph 16 addresses parts of UPE s as well as entire UPE s whereas paragraph 28 and paragraph 7 address only entire UPE s. If the relevant balance reflects a subsisting UPE as at 16 December 2009 the Commissioner will not deem the relevant balance to be a loan. However, the Trustee by its subsequent activities might cause the relevant balance, even though currently reflecting a UPE, to reflect an ordinary loan. Future distributions of the net income of the Trust Fund A distribution under clause 4(a) is not held, under the terms of the Deed, on a separate trust. (A trust that settled under clause 4(d) for a default beneficiary will be separate trust and thus a fixed trust for the beneficiary. The deed provides no power to the trustee to pay or apply the funds representing that fixed trust on behalf of the default beneficiary. This distinction in the outcomes possible for an appointment of the net income of the Trust Fund under clause 4(a) on the one hand and for amounts falling within the ambit of clause 4(d) on the other hand (see above) is critical in view of the Commissioner s intended approach to subsisting UPE s created after 16 December The Commissioner s approach in TR 2010/3 ensures that different outcomes apply to amounts appointed under clause 4(a) after 16 December 2009 on the one hand which will be deemed to be loans at the end of the year after the financial year in which they are created, whereas amounts within the ambit of clause 4(d) will remain as UPE s. This difficulty can be overcome by careful drafting of the distribution resolution so that any distribution made in accordance with the power conferred by clause 4(a) sets aside an amount for BurgerCorp. At paragraph 81 of TR 2010/3, which does not form part of the Public Ruling, the Commissioner states that a separate trust can be established by a the use of the words set aside by the trustee in making its resolution. Although it is not expressly stated by the ruling it is apparent that the appropriate and consistent accounting treatments should be applied in relation to such a resolution. Logically it seems that care in this area will also impact on the characterization of amounts standing to the credit of other beneficiaries in the context of the operation of section 109T and sub-division EA Has BurgerCorp made an ordinary loan to the MacTrust? Type 1 (Section 2) loan - Loan as the result of express agreement The Trustee instructed that: there were no written loan agreements as to any part or the whole of the relevant balance; there are no trust resolutions whereby the trustee agrees to enter into a loan of an amount that reflects the relevant balance or to repay such a loan; there are sufficient accounting recordings to reconstruct the relevant balance on an annual basis. The Commissioner must conclude that the relevant balance does not reflect a loan made by BurgerCorp to the MacTrust as the result of an express agreement there being none of: a relevant trust resolution;

10 10 any other document to that effect; or any provision in the deed for the MacTrust that deems the relevant balance or any part of it to be a loan to the trust. Type 1 (Section 2) loan - Loan as the result of implied agreement (including by acquiescence) As MacTrust and BurgCorp are controlled by the same person(s) the Commissioner could conclude that the relevant balance reflects a loan as the result of an implied loan agreement, the loan agreement being implied through acquiescence: see TR 2010/3 paragraphs 10 and 11 and PS LA paragraph 21. Even though there is some uncertainty as to the nature and character of the underlying ledger in which the relevant balance is reflected in MacTrust the Commissioner has no basis to do so: see TR 2010/3 paragraph 12 and PS LA 3362 paragraphs 21 and 22. Example 1 of PS LA 3362 addresses a situation where a loan of this type is considered. Type 2 (Section 2) loan - Loan as the result Trustee s exercise of power under the deed The Commissioner could conclude that: there is an implied loan as a result of the Trustee exercising a power under the deed: see TR 2010/3 paragraphs 13 and 14 and PS LA 3362 paragraphs 25 and 26; or there is loan in relation to part only of the relevant balance, $14,090, or the whole of the relevant balance. Whether the Commissioner would reach either conclusion will depend on the background to the $14,090 shortfall in the amount of the relevant balance that ordinarily would have been expected at the end of 2009: See PS LA 3362 example 2 at paragraphs Clarification of what the PS LA considers to be the financial accounts of the trust would resolve this issue for the MacTrust. In the absence of that clarification the ledgers, working papers and resolutions will all be critical to the characterisation of the relevant balance as a loan or subsisting UPE (see below). The issue of apportionment (or disaggregation) of the relevant balance into its components so as to quarantine any loan to part only of the relevant balance is not addressed in TR 2010/13 or in PS LA To reach either conclusion the Commissioner would need to conclude that the shortfall represented the crediting of $14,090 to BurgerCorpCorp s loan account. The financial statements provided by the Trustee do not provide sufficient detail to reach a conclusion on apportionment or tainting and the ledgers, working papers and resolutions would be be essential if the issue becomes relevant. What evidence would be required to conclude that there was no loan? In the unlikely event the Commissioner initially considers that part or all of the $14,090 was paid or applied pursuant to the terms of the Trust Deed for or on behalf of BurgerCorp the evidentiary material that would allow the Commissioner to take part only of the relevant balance to be an actual loan includes: a contemporaneous trustee resolution to that effect;

11 11 appropriate ledgers and ledger entries; separate annual loan sub-accounts and separate annual entitlement sub accounts; and a division 7A loan agreement for the amount of $14,090 and for each other similar amount. Currently the ledgers in which the UPEs are reflected are summarised in the financial statements of MacTrust as current liabilities of the Trust Fund, rather than as separate trust funds. Care should be taken with the headings on the ledgers, and the characterisation or type of the relevant ledgers employed, to ensure that they do not support an argument that the underlying balances in the ledgers reflect balances loan account, such as might be made out if the ledger heading was BurgerCorpCorp s loan account or similar. Although accounting records can be helpful they are not determinative and may be either helpful or a hindrance Amendments to Division 7A The Taxation Laws Amendment (2010 Measures Number 2) Bill proposes to make amendments to Division 7A (reflecting announcements made in the 2009 Budget) by amending the non commercial loan rules to ensure that an amount may be included in the assessable income of a shareholder (or their associate) if a private company provides company assets for private use. The accompanying EM specifically lists holiday houses, an apt description for the Sydney unit. Payment by a company The proposed amendments to Division 7A treat arrangements where a private company provides an asset to a shareholder (or their associate) for their use as a payment for the purposes of Division 7A. Following consultation the Assistant Treasurer announced changes to the measure via Press Release No. 051 of 14 September 2009 to include an exception for the use of certain residences, specifically main residences that were purchased prior to 1 July On my instructions the Sydney unit could not be classed as a main residence so that the exception does not offer a safe harbour. The extension of the definition of payment As the definition of payment is to be extended for the purposes of the entire division 7A the extended definition of payment will also apply for the purposes of: the UPE provisions within subdivision EA when the relevant balance is an UPE; section 109T which deals with a payment or loan made through an interposed entity when the relevant balance is a loan or a deemed loan. If the relevant balance reflects an UPE? If, as seems the more likely outcome after the resolution of the issues surrounding the shortfall, the relevant balance reflects an UPE: it is necessary to consider the operation of sub-division EA; it is not necessary to consider the operation of section 109T. If the relevant balance reflects a UPE to net income of the MacTrust estate : see section 109XB(1) sub-division EA, includes as a dividend, a payment made by a trust to a shareholder (or associate of

12 12 the shareholder) in a private company that is or that becomes presently entitled to an amount from the. The section only operates in circumstances where the payment is attributable to an unrealised gain of the trust: section 109XA(1)(b). The Commissioner accepts that the trustee can attribute the payment to any source. On my construction of the financial statements provided by the trustee it is not necessary for me to further consider whether any payment by the MacTrust would be attributable to an unrealised gain. If the relevant balance reflects a loan? If, the Commissioner concludes the Trustee paid or applied any part of the relevant balance, pursuant to the terms of the Deed, for or on behalf of BurgerCorp, the Commissioner will take BurgerCorp to have made an ordinary loan to the MacTrust: see TR 2010/3 paragraphs 13. If the relevant balance or part of it reflects an actual loan (type 2 - section 2 loan) and that will depend on the resolution of the issues surrounding the $14,090 shortfall: it is not necessary to consider the operation of sub-division EA; once the expanded definition of payment is introduced it will necessary to consider the operation of section 109T (from 1 July 2009). If the results of that investigation do not support a conclusion that the trustee paid or applied the amount of $14,090 on behalf of the trustee pursuant to the terms of the Deed there would be no basis for the Commissioner to deem a loan to have been made. If Burgercorp is taken to have made a type 2 section 2 loan to MacTrust the section 109T must be considered. Section 109Tcatches any loans made by BurgerCorp to an interposed entity, MacTrust, where that interposed entity, MacTrust, makes a payment to a shareholder or associate of the shareholder (the recipient ) in BurgerCorp. Although the Ruling and PS LA 3362 make no reference to such a factual situation it seems more likely than not, given the tenor of those documents, that the Commissioner would consider the reference to a target entity being paid an amount by an interposed entity ( the MacTrust ) catches situations where the recipient is taken to receive a payment. With effect from 1 July 2009 once the proposed expanded definition of payment is enacted, section 109T in conjunction with section 109V could treat BurgerCorp as having paid a dividend, to the shareholder or associate to whom the Sydney unit is provided, on the basis that: BurgerCorp made a loan to an interposed entity, the MacTrust; and MacTrust made a payment to a target entity, the shareholder (or associate) in BurgerCorp; the dividend will be taken to be paid when the MacTrust provides the Sydney unit to a shareholder (or associate) of BurgerCorp: see proposed section 109CA(2) in Taxation Laws Amendment (Measures No 2) Bill 2010; the amount of any dividend will be determined by the difference between: the amount that would have been paid by parties dealing at arm s length for the use of the Sydney unit: see proposed section 109CA(10)(a); and any consideration actually given: see proposed section 109CA(10)(b).

13 13 On the Trustee s current instructions there may be an evidentiary basis, such as the reconstructed sub-accounts, that would limit the Commissioner s to treating only a small part of the relevant balance as a loan. There is a strong likelihood that such a loan may have triggered a dividend many years ago. The reason for the existence of the $14,090 difference needs to be identified and addressed. 18 June 2010 ooo