This edition of ‘The Assessment’ is a short one simply reminding readers of the ATO’s administrative option for relevant taxpayers to self-correct accounts (in the trust and/or the private company) where Unpaid Present Entitlements (UPEs) have been incorrectly classified as loans.
We have included below the relevant extract from the ATO’s Practice Statement PS LA 2010/4, reminding that the corrective action needs to be undertaken on or before 31 December 2011.
Extract from PS LA 2010/4:
Self corrective options – Applicable until 31 December 2011
30. During the consultation process for this practice statement, the ATO received feedback that some small businesses may have been incorrectly classifying UPEs as loans in their accounts or alternatively were not aware that Division 7A can potentially apply to ordinary loans (as opposed to UPEs) between a private company and an associated trust.
31. In recognition of the genuine concerns of small business and their willingness to comply, the ATO has introduced two self corrective administrative options for taxpayers. Provided certain conditions are met, these options allow taxpayers to:
- self correct accounts where a UPE has been misclassified as a loan
- operate on the basis that the Commissioner would exercise his discretion under section 109RB to disregard a deemed dividend.
A private company or trust may be able to correct their accounts where a UPE has been misclassified as a loan
32. Whether an amount is a UPE or an actual (Section two) loan is a question of fact. However, the ATO will accept that an amount is not a loan but a UPE where all the following conditions have been met:
(a) the financial accounts of the trust and / or the private company have incorrectly classified the amount, which is in fact a UPE, as a loan from the private company to the trust
(b) with the exception of the financial accounts and their underlying working papers, including the journal entries, accounting ledgers and / or trial balance, all available evidence supports the view that the amount is in fact a UPE
(c) the private company has never included that amount in calculating the amount of loan reported at Label 8N of the private company’s income tax return (label marked ‘loans to shareholders and their associates’)
(d) the trust has not paid or credited any interest on or in respect of that amount
(e) the loan account in which the amount is included is entirely comprised of amounts correlating to UPEs and repayments of such UPEs between the trust and the private company (that is, its balance is not affected by any unrelated transactions)
(f) on or before 31 December 2011 , the financial accounts of all relevant entities are amended or restated to properly classify the amount as a UPE
(g) on or before 31 December 2011 , the trustee of or public officer of the trust, or public officer of the company, (as is relevant) signs and dates a declaration setting out all of the above conditions listed in this paragraph in the context of the amount and declaring them to be true and correct.
Where this is the case, irrespective of the turnover of the entity, the ATO will not treat the amount as a Section two loan for Division 7A purposes.
Disclaimer
‘The Assessment’ is intended to provide general information or comments on the particular topic. The content is not intended to exhaustively deal with all issues relating to that topic. As the content is general in nature, they are not to be used, relied or acted upon without seeking further professional advice. Webb Martin Consulting accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.
