ATO attention targeting Unpaid Present Entitlements

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Unpaid Present Entitlements are trust distributions to a beneficiary that haven’t actually been paid, and so appear as still owed to the beneficiary in the financial records of the trust.

The ATO has alerted us that it will now be carefully scrutinising these scenarios: 

  • Parents with low marginal tax rates routinely gift money to financially independent children on higher marginal rates; 
  • Beneficiaries receive trust distributions (which are calculated so as not to exceed tax brackets) with the beneficiary then gifting those distributions back to the trust; 
  • Trust distributions paid to adult children, who then use that money to repay purported loans owing to their parents in respect of education and other expenses incurred when the children were minors (particularly if the trust has purportedly leant to parents amounts that correspond to the distributions made to their children). 

For more information on the ATO and Trust Distributions, click here!

Unpaid Present Entitlements and draft Taxation Ruling TR 2022/D1 

In July 2022, the ATO finalised and released Taxation Determination TD 2022/11. This is in the context of increased ATO attention targeting Unpaid Present Entitlements – including draft Taxation Ruling TR 2022/D1 and Practical Compliance Guideline PCG 2022/D1 – and the ongoing and indefinite saga of the long-promised Division 7A amendments.  

The ATO’s concern, as set out in TR 2022/D1, is that beneficiaries’ present entitlements to trust income are often part of arrangements which cannot be explained by ordinary or commercial dealings and which are intended to reduce another person’s tax liability. 

Let’s keep it in the family… or not

Although the finalised ruling is still pending, the ATO’s direction is apparent. Variations in marginal tax rates between children and adults may cause complications when the parties want to enter into an intra-family loan. These can be tricky arrangements, notwithstanding the ATO’s meddling. Therefore, over coming weeks, Aintree Group Legal will take a closer look at some issues that can arise when lending within the family, including some of the UPE-related estate planning challenges that can arise. 

If you have any questions or concerns, feel free to contact Aintree Group Legal via email at legal@aintreegroup.com.au or by calling 03 9851 7999.