Just trying to get my head around the tax office ruling on UPE's. In my case I have a hybrid unit trust where I borrowed money back in 2005 and purchased units in the trust. The trust then purchase a property and leased it out. The trust had no borrowings that was all in my name.
I saw the problem coming with regards to UPE's back in 2008 because I also have an SMSF that controls another unit trust 100% and had UPE's. In ensuring that the UPE's in that unit trust were sorted out before 30/06/2009 I sent an email to my accountant alerting him to the fact that I did not want to have UPE's in the hybrid trust either.
When my tax return for the hybrid trust was done for 2008/2009 my accountant had $100,000 in UPE's. The profit flows directly back to me not to a corporate trustee. This "profit was offset by my loan that was used to initially purchase the units. So in effect the profit was declared but no money actually came out of the hybrid as this was used by the trust.
My question is that profit… My solution was to purchase more units in the hybrid trust to soak up the UPE's. Am I on the right tract? As there is no bucket company and the profit was declared in my personal return do I have a problem with the hybrid unit trust showing $100,000 UPE's? Does the division 7A effect me ?
My understanding is that Div7A only applies to companies and that it was recently amended so that it applied to corporate trustees. Not sure if it applies to individuals.
If you have a company as trustee than it probably applies. Even if you were to buy more units you would need to get the money to do so, so it would be either a loan or a distribution from the trust. If it is a loan then you will need a loan agreement and if it is an unsecured loan then the max term is 7 years (can probably just enter a new loan then). Maybe you could use the units as security and increase the term to 30 years.
If you keep making money then the tax problem will keep getting bigger. Maybe a bucket company is needed
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
If the trust owes you money (ie – a credit balance in the trust accounts) then you don't have a problem.
It's only if you have a corporate beneficiary and the company has a UPE in the accounts of the trust. If you give a distribution to the company, this will have to be covered by a loan agreement, and interest paid to the company under the Div7A rules.
It's a stupid, non-sensical rule that the ATO have implemented because they don't like trusts. They can't get rid of trusts, seeing as they have been around for about 900 years, so they are trying to get rid of them by stealth.
Terryw & Dan42;
Thank you for responses.
Terryw;
In the detailed balance sheet under current Liabilities/Financial Liabilities/ Unsecurred/ it has Unpaid present entitlements and then my name. The Hybrid trust does have a corporate trustee but the profit flows back to me directly i.e. 100% of the fixed income units all flow back as well as 75% of the capital units. I have losses from other business ventures so it balances out nicely. I am forever indebited to my solicitor who talked me out of a Hybrid discretionary Trust when I see how the ATO has been attacking them. So from what you have outlined Terryw why couldn't I just convert those into more units ? You say why? My past experience with loans is its messy and I'm taking money out of one pocket and putting it in another.Dan42;
With regards to UPE's this shows clearly that we have individuals in the ATO and treasury who do not understand that small business is the engine room of the economy. I just wish someone with a lot of money would take them on and spank them all the way to the high court like Dame Murdoch did in 2008. I think that case cost the ATO $400 million once they paid their and her legal fee's.There is justice but your pockets have to be very deep.
Unpaid present entitlements are monies that have been distributed to you but haven't been paid. So this is essentially a loan. If you were to go bankrupt, for example, they would be payable to your bankruptcy trustee – so it is probably not a good idea to have too much outstanding.
Your probably could buy more units in the trust – but I am not sure how this would work as you would be diluting the value of the other units already issued.
Why not just take the money – have the trust pay it to yourself and then gift it to a discretionary trust – possibly your trust doesn't have the cash available to do so??
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Your correct Terryw the trust doesn't have the cash and as far as diluting the other units the value of the property has increased 150% in 5 years. More to the point we bought well . As for diluting the value of the other units we started with $1 units and the accountant has not bothered to revalue them even though I have made him aware of the significant change in value.
I agree with you about not being a good idea to have any UPE's. I think I will just go with revaluing the units. The property initially was geared up to the max so I wasn't worried about creditors coming after me initially there was nothing to gain in sueing us.
Being a hybrid unit trust also meant it wasn't great for asset protection once the property value went up. Thanks for your take on my quandry.
L.R.
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