In February this year, the ATO released TD 2022/D1 – Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation’?
The draft determination describes when a private company provides financial accommodation where it is made presently entitled to the income of a trust and either:
- That entitlement remains unpaid (an unpaid present entitlement (UPE)), or
- The trustee sets aside an amount from the main trust fund (main trust) and holds it on a new separate trust (sub-trust) for the exclusive benefit of the private company beneficiary.
Speaking at the Tax Institute’s Superannuation Intensive, SuperGuardian education manager Tim Miller explained that while this draft ruling does not directly relate to SMSFs, the content and context of TD 2022/D1 lends itself to the way the ATO thinks about trust distributions.
Mr Miller noted that ATO issued SMSFR 2009/4 back in 2009, which dealt with pre-2009 trust distributions and the definition of an in-house asset.
“I think our industry does take some liberties with the payment of distributions from a trust, particularly a related trust to an SMSF from a timing point of view,” said Mr Miller.
“Whilst the definition of an in-house asset [is set out in] that 2009/4 and it talks about loans versus additional investments and things like that, I think we need to be mindful of what this recent tax determination says.”
TD 2022/D1 outlines that once a distribution is determined from an accounting point of view, it really needs to be paid immediately, he stressed.
“We don’t want to get SMSFs in the space of creating a financial accommodation, particularly in a 13.22C arrangement where you may effectively end up having a loan on the books and therefore being in breach of those provisions,” he warned.
