Australia: Taxpayers and advisers take note: it will soon be time to pay-out UPEs or convert them to Division 7A complying loans to avoid paying deemed dividends


In Practice Statement 2010/4, the Commissioner set out three safe harbour investment options that taxpayers could avail themselves of to ensure an Unpaid Present Entitlement (UPE) of a company from a trust, did not attract the application of Division 7A. These options involved having the UPE funds invested under a documented agreement between the main trust and the sub-trust in one of three ways:

  • on an interest only 7-year loan (Option 1 loan);
  • on an interest only 10-year loan (Option 2 loan); or
  • in a specific income producing asset or investment (Option 3 investment).

In brief

Seven-year Option 1 loans are approaching their maturity date, and so, either:

  • loan principal for Option 1 loans will soon need to be repaid; or
  • alternatively, Option 1 loans may be converted into Division 7A complying loans to allow funds to be retained by the trust for an additional 7 years; or else

the unpaid principal will be deemed to be a dividend.

The Commissioner's Treatment of Unpaid Present Entitlements

UPEs are distributions that have been declared by a trustee but not paid out to the beneficiary. For many years it was common for family discretionary trusts to make corporate beneficiaries presently entitled to trust income without paying out the entitlement so that the funds could be kept for use by the trust, or applied for the benefit of other beneficiaries, while paying tax at the corporate tax rate, rather than the higher rate of tax applying to trusts and non-corporate beneficiaries.

In a much criticised Tax Ruling (being TR 2010/3), the Commissioner, concerned that UPEs were being used by family groups to gain a tax advantage, decided to depart from previous practice by determining that a UPE owed to a corporate beneficiary is a loan back to the trust under Division 7A of the Income Tax Assessment Act 1997 (ITAA97). That Division deems purportedly tax-free distributions from a private company to a shareholder or their associate (such as loans) to be assessable, unfranked dividends in certain circumstances.

The Commissioner, however, provided a lifeline to taxpayers affected by the changed position on UPEs, by stating in the same Tax Ruling that taxpayers could avoid the application of Division 7A if the trustee holds the UPE funds on sub-trust for the sole benefit of the private company beneficiary.1 Those funds could still be used as working capital by the main trust, as long as the funds were invested back into the main trust on commercial terms under a legally binding investment agreement between the main trust and the sub-trust and the benefits from the investment were completely repatriated to the private company beneficiary. Three safe harbour options, outlined above, were created to ensure taxpayers could avail themselves of the administrative treatment set out in TR 2010/3.

To avoid unfairly prejudicing companies with UPEs arising before the Commissioner changed his position, the Commissioner also stated that UPEs that arose prior to 16 December 2009 would not be treated as loans to which Division 7A would apply.2 However, under proposed changes to Division 7A revealed in the 2016-17 Budget, and which are expected to commence from 1 July 2018, all (pre- and post-2009) UPEs must be rearranged into new complying 10-year loans or be caught under Division 7A.

What this means for taxpayers

Option 1 loans are approaching their maturity date after which time the safe harbour relief from Division 7A will expire.

The loan principal for Option 1 loans entered into in the 2010-11 income year (for UPEs created between 16 December 2009 and 30 June 2010) must be repaid by 30 June 2018, otherwise the unpaid loan principal will be treated as a non-complying Division 7A loan and assessable to tax as an unfranked deemed dividend under 109D.

Additional 7 years relief available for Option 1 loan agreements

Option 1 loans cannot be rolled into an Option 2 loans or 3 investments (or vice versa): PS LA 2010/4.

Practical Compliance Guideline 2017/13, however, which was released on 19 July 2017, may provide some relief to taxpayers. In it, the Commissioner maintains that a trustee must repay the principal of the loan at the end of the loan term.

However, the Commissioner also states that a 7-year Division 7A compliant loan under s 109N ITAA 1936 between the sub-trust and the private company beneficiary may be put in place prior to the private company's lodgement day to allow a further period of 7 years for the principal to be repaid. If a taxpayer elects to enter into a Division 7A compliant loan, periodic payments of both principal and interest will need to be made.

Note, however, that if the Commissioner determines that there was never an intention at the end of the term of the 7-year Option 1 loan to repay the principal of the loan, the Commissioner may infer that the arrangement was a sham and deem it a dividend in the income year in which it arose.

What needs to be done

If you are a tax adviser, you need to check which clients have Option 1 loans in place and make sure they are aware that such loans may need to be completely repaid by 30 June 2018.

The impending repayment of these loans may pose significant cash flow problems for family groups and require urgent consideration. You may need to consider converting the Option 1 investment into a Division 7A compliant loan by the private company's lodgement day (e.g. 15 May 2019) to extend the term of the loan for an additional 7 years.

Note, however, that the 30 June 2018 repayment date dovetails with the commencement date of the proposed changes to Division 7A outlined above, which may ultimately supplant the administrative treatment set out in PCG 2017/13 with the conversion of all UPES into 10-year Division 7A complying loans.

According to the Commissioner, some private companies entered into sub-trust arrangements in the 2010 income year, in which case the principal of the loan would have been due for repayment in the 2016-17 income year. Tax advisers and their clients should check that there are no sub-trusts that were created in the 2009-10 income year for which any outstanding loan principal repayments are now overdue.

For taxpayers and advisers who are still unaware that UPEs created after 16 December 2009 are treated as loans under Division 7A, they may need to seek to have the Commissioner exercise his discretion under s 109RB to disregard non-compliance with Division 7A as a result of "honest mistake or inadvertent omission", as it is likely the Commissioner will soon start taking compliance action in this area. The first and only case so far involving an application under s 109RB was covered in our earlier article here: .


1 TR 2010/3 also states that trustees have the alternative options of simply paying out the UPE or entering into a Division 7A compliant loan in accordance with s 109N ITAA 1936.

2 Note, however, if a private company beneficiary releases a trustee from paying a pre-16 December 2009 UPE, it may, depending on the circumstances, be deemed a dividend by the Commissioner under s 109C of Division 7A, which broadly deems a financial benefit provided by a private company to a shareholder or their associate to be a dividend (TD 2015/20). Further, even if a UPE is not caught under Division 7A, there is still a risk that the Commissioner will argue that the UPE constitutes a reimbursement agreement under s 100A of ITAA 1936, which means, subject to the relevant exceptions, the beneficiary's entitlement is disregarded and the trustee is taxed at the top marginal rate under s 99A ITAA 1936. A reimbursement agreement arises where a third party receives the benefit of a trust distribution instead of the beneficiary that was presently entitled to the distribution. In a fact sheet issued on 3 April 2014, the Commissioner indicated that he will generally not consider whether s 100A applies to a UPE to a corporate beneficiary if the retained funds are used as working capital of the trust and, for post-16 December 2009 UPEs, a Division 7A complying loan or investment agreement is in place.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Jonathan B Slade
Similar Articles
Relevancy Powered by MondaqAI
Moore Stephens
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Moore Stephens
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions