Monday, August 16, 2010

Unpaid present entitlements (UPE) & the election

Last week, the National Institute of Accountants (NIA) sought to turn the UPE issue into an election topic.

An extract from the Weekly Tax Bulletin released on Friday is set out below.

It highlights, as many have, that the changed approach by the ATO effectively renders the specific provisions under Division 7A in relation to UPEs irrelevant.

Until next week.

The NIA has called on both political parties "to show their small business credentials and intervene to put a stop" to the ATO's changed view of the treatment of unpaid entitlements to corporate beneficiaries. The NIA said that Taxation Ruling TR 2010/3 now confirms the ATO view that unpaid present entitlements (UPE) to corporate beneficiaries will be treated as loans and potentially deeming them as unfranked dividends.

NIA chief executive officer Andrew Conway said this new approach puts an end to a 12 year long standard practice of not treating unpaid entitlements to corporate beneficiaries as loans. "For the majority of cases the use of such funds by the trust is solely for business working capital related purposes. We have been reminded that the mischief which the ATO is trying to address is where these funds are used for private purposes within the trust," he said.

The NIA says there is strong evidence to indicate that it was never the intention of Div 7A to extend to UPEs and that "this latest change of heart by the ATO has no legislative basis". The ruling contradicts the underlying policy intent of Div 7A, the NIA said.