Asset protection and succession planning management for UPEs and loans

The management of unpaid present entitlements (UPEs) and loans in trusts for estate succession, asset protection and relationship breakdown planning and structuring, is extremely complex and may be ineffective or result in unintended tax consequences.

Legislative amendments to Division 7A ITAA 1936 effective 1 July 2019 and the Federal Commissioner of Taxation’s anti-avoidance rules and anti-double taxation overlap rules to otherwise commercial transactions has created uncertainty regarding common UPE management practices.

Ron Jorgensen, CTA
At the 51st Western Australia State Convention in August, Ron Jorgensen, CTA, (Thomson Geer) presented the session ‘Asset Protection and Succession Planning Management of UPEs’, excerpted in this post.

Ron’s session discussed selected estate succession, asset protection and relationship breakdown planning methodologies, specific anti-avoidance rules and common inter vivos and testamentary UPE and loans management practices.

His presentation also looked at how these issues may be affected post 1 July 2019, and covered:
  1. creation and discharge and satisfaction of UPE and loans; and 
  2. asset revaluation reserve UPE distributions and loans; and 
  3. financier or intra-group refinancing or redrawing UPEs and loans; and 
  4. bi-partite and tri-partite setting off of UPEs and loans; and 
  5. transferring and bequeathing UPEs and loans; and 
  6. releasing, forgiving and writing off UPEs and loans; and 
  7. restructuring control of trusts with UPEs and loans; and 
  8. unitising UPEs; and 
  9. disclaiming UPEs; and 
  10. entrenching and equalising future UPEs.
As Ron noted in the paper presented at the Convention “Balancing the competing objectives of estate succession, asset protection and relationship breakdown planning and structuring in the circumstance of a specific testator is complex requiring professional judgement and, often, compromises.”

The 2016 & 2018 Federal Budget Div 7A Amendments

The historic estate succession planning practice of transacting in quarantined pre-4 December 1997 loans and pre-16 December 2009 UPEs is likely to be unavailable from 1 July 2019 under the proposed amendments by the Board of Taxation (BOT) and in the 2016 & 2018 Federal Budget. 


In November 2014, the Board of Taxation issued the BOT Report regarding proposed reforms to Div 7A. 1 The BOT Report proposes:

1. treatment of UPEs as loans for Div 7A purposes; 2

2. an Amortisation Model for UPE and loans;3 and

3. safe harbour valuation methodologies for applying Div 7A to the value of using private company assets;4

4. self-corrective action.

The 2016 Federal Budget 5 announced amendments to Div 7A from 1 July 2018 (deferred to 1 July 2019), which will fundamentally change the estate succession planning strategies of Div 7A loans and UPEs.

Ron’s paper notes that, interestingly, the announcement did not explicitly confirm that unpaid present entitlements to a corporate beneficiary would be subject to Div 7A as the BOT Report recommended.

The 2018 Federal Budget announced deferral of the implementation of the Div 7A measures until 1 July 2019 and explicitly stated that unpaid present entitlements to corporate beneficiaries would be subject to Div 7A.6


Ron's paper points out that it would appear that of the BOT Report recommendations, the common ‘Rule of 78 Loan’ approach, transition rules which bring quarantined pre-4 December 1997 loans and pre-16 December 2009 UPEs into Div 7A and self-corrective action recommendations of the BOT will likely be adopted.

Providing an overview of estate succession planning, asset protection planning and relationship breakdown planning strategies, his paper also provides an overview of Div 7A deemed dividends.


Looking in detail at the 2016 & 2018 Federal Budget Div 7A Amendments mentioned above, the paper also provides an overview of Sec. 245 Commercial Debt Forgiveness, of Sec. 100A Reimbursement Agreements, and of Capital Gain Tax. Finally, it looks at example UPE Issues, looking at the ten areas enumerated above.

Ron's paper is available to view here.

In October, Ron will present the session ‘Division 7A’ at the VIC 6th Annual Tax Forum in Melbourne.

This upcoming session will cover the proposed amendments to Div 7A, announced as part of the 2016–17 Federal Budget, which will fundamentally change the management of Div 7A loans and unpaid present entitlements.

The ATO’s recent views on specific anti-avoidance rules such as s. 109T and anti-overlap rules such as ss. 109ZC and 109ZCA and otherwise commercial transactions have created uncertainty regarding Div 7A management practices and structuring. Following the Board of Taxation’s recommendations in 2014, there is also uncertainty regarding the future treatment of quarantined loans and UPEs beyond 1 July 2019.

Ron’s session at the Forum will use practical examples to discuss the effective management of Div 7A loans and UPEs in preparation for the proposed amendments. Find out more about it and the rest of the 6th Annual Victorian Tax Forum program on our website.

Ron Jorgensen, CTA, is a Partner at Thomson Geer Lawyers. Principally consulting on Commonwealth and state tax laws, tax dispute resolution and compliance enforcements, he specialises in trusts and trust disputes, succession and asset protection, business and investment structuring and tax-sensitive commercial and property transactions.

An Accredited Specialist in Tax Law, Ron is a Senior Fellow, University of Melbourne Master of Laws program, a member of the Law Institute of Victoria, a Chartered Tax Adviser (CTA) with The Tax Institute and a highly respected technical writer and presenter.

1 Board of Taxation, ‘Post Implementation Review of Division 7A of Part III of the Income Tax Assessment Act 1936’, 25 March 2014
2 BOT Report Ch. 7.
3 BOT Report at Ch. 6.
4 BOT Report at Ch. 4.
5 2016 Federal Budget Paper No. 2 (3 May 2016), page 42; Budget Tax Fact Sheet 04
6 2018 Federal Budget Paper No. 2 (8 May 2018).

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