Triple-pronged approach to Div 7A puts ‘crazy’ demand on accountants
The anti-avoidance law leaves tax professionals in the awkward position of explaining multiple interpretations to clients, says EY director.
Accountants must deal with three separate interpretations of the anti-avoidance law in Division 7A and clients fail to understand why, says EY director of private tax Tracey Dunn.
Ms Dunn said it was crazy that accountants were forced to explain three different approaches to the same legislation.
“Division 7A contains anti-avoidance provisions – it’s there to prevent shareholders accessing tax-free profits from companies,” said Ms Dunn, who will address the topic today at the Accounting Business Expo in Melbourne.
“Before 16 December 2009 if there were distributions made by a trust to a corporate beneficiary the trust wasn’t technically under an obligation to pay that money.”
“So sometimes the funds representing that distribution could be retained within the trust and sometimes it made its way out to beneficiaries, and to tax the beneficiaries who received those funds it was difficult interpreting the legislation.”
“In December 2009 the ATO published guidance that said where a trust made the distribution to a corporate beneficiary post 16 December that division 7A could apply but the commissioner would allow trustees to place these unpaid present entitlements (UPEs) under sub-trust arrangements, and there was an option one or option two.”
The interest-only sub-trusts were either seven or 10 years which provided flexibility and still allowed trustees the ability to distribute funds to a corporate beneficiary.
Ms Dunn said transitional guidance from the ATO meant that the sub-trust arrangements once they matured in certain instances could give the trust an additional seven years to pay the money to the corporate beneficiary.
“We have this seven-year option one sub-trust arrangement that ended up having a 14-year repayment term and the 10-year sub-trust arrangement that ended up having a 17-year repayment term and a lot of flexibility,” she said.
“So the new guidance TD 2022/11 says we’ve [the ATO] changed our interpretation of the law and we now believe that when a trust makes a distribution to a corporate beneficiary, and the trustee and the directors of the beneficiary are the same, so it’s the same controlling mind, that where the corporate beneficiary doesn’t demand payment of that UPE in full immediately, that it’s financial accommodation for the purposes of Division 7A, and unless it’s paid in full, or placed under a complaint Division 7A loan agreement, there’ll be a deemed dividend to the trust.”
Ms Dunn said this meant clients now required three different approaches when making distributions to corporate beneficiaries. The first for those before December 2009, a second for those between 16 December 2009 and 30 June 2022, and a third from 1 July 2022.
But there had been no change in the law.
“It becomes very difficult from an adviser’s perspective to have a conversation with the client to say the way we’ve done things in the past or the way that we’ve advised you in the past has changed,” she said.
“And they say has the law changed? And the answer is no.”
She also said to make Division 7A rulings clearer for clients and advisers there either needed to be government reform or case law.
“We either need case law, and nobody wants to put their hand up to be a test case, or we need legislative amendment,” said Ms Dunn.
“In between we have this confusion, but we have to have conversations with people and try and explain three completely different approaches to the same goal.”
“It wasn’t raised in the last budget, and there has been nothing issued, I’ve seen nothing from the Treasurer from the Assistant Treasurer on the current government’s intention to go down the path of Division 7A reform.”
Ms Dunn will be discussing the topic further at the Accounting Business Expo today and also on two separate panels, one today and one on 15 March.
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