Legal Tip 161: Avoiding Unpaid Present Entitlements (UPEs)

Discussion in 'Legal Issues' started by Terry_w, 3rd Jul, 2017.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yes
     
  2. datto

    datto Well-Known Member

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    Any idea, ball park figure, of how much an accountant/lawyer would charge to set up a trust/bucket company/holding trust etc, the whole shebang?
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Depends. Many factors are involved.
     
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  4. goponcho

    goponcho Active Member

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    Question
    - Say we have a beneficiary with no income at all, so ideally would like to distribute a reasonable amount each year. If we are sure that the issues listed with UPE are covered for [eg death of beneficiary as we will be paid out from their estate and debt wont be called upon] then is it okay to build up a moderate UPE?
    - but the safer option is still to transfer the money, then gift it back (with a deed of gift)? Is this not dodgy somehow from a ATO POV as the money goes back & forth? If not, would definitely be a better option! Would a deed to forgive better as then would not need to transfer funds?

    Thanks!
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    UPEs and s100A BOTH may have a place and specific tax advice is a good start. s100A can be invoked if a person is made entitled and then someone else is to benefit. Top marginal tax assessed to the trustee is the consequence.

    A deed of forgiveness is a dangerous approach in many instances. A round robin may be futile if the person later challenges that arrangement. Legal advice ?

    s100A involves a issue many fail (incl some tax advisers) to consider. It governs what is called a "reimbursement agreement"....And what is agreed can be very intangible. The underlined is a very broad view. It can occur when a UPE, loan or other arrangement involving trust entitlement is seemingly compliant BUT then some other use of the trust assets (eg money) occurs. s100A is often used where a trust owns a holiday house for example and other family use the home (for free) that is also let on Airbnb for example. Its an anti-avoidance rule - One of several.

    Reimbursement agreement
    A reimbursement agreement generally involves making someone presently entitled to trust income in circumstances where both:

    • someone other than the presently entitled beneficiary actually benefits from that income, and
    • at least one party enters into the agreement for purposes that include getting a tax benefit.
    'Benefit' includes the payment or loan of money, the transfer of property, the provision of services or other benefits; or the release, abandonment, failure to demand payment, or postponed payment, of a debt.
     
    Last edited: 17th Jun, 2021
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  6. thydzik

    thydzik Well-Known Member

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    To remove a UPE, which of either a Deed of Gift or a Deed of Loan Forgiveness would be more appropriate?
     
  7. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It is not what the document is called that is important but the contents. A UPE is a debt but not a loan and you can't really gift something you don't have
     
  8. thydzik

    thydzik Well-Known Member

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    interesting,
    I would have thought the deed of loan forgiveness is more for a commercial loan, which the UPE isn't.
    But you can gift a debt, so this makes me think a deed of gift would be more suitable?
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You can assign a debt. I don't know about gifting. A deed of debt forgiveness is what you prob need.
     
  10. thydzik

    thydzik Well-Known Member

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  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I would be quite wary of the CGT and other tax implications. Pieces of paper in themselves dont address tax issues.
     
  12. mr_alex

    mr_alex Well-Known Member

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  13. goponcho

    goponcho Active Member

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    Thanks guys. Wasnt aware of s100A but will look into it - seems like it might apply in distributing and then re-gifting back potentially.

    The deed of loan forgiveness seems a good option potentially. Thanks for the links with the templates to start to think about it
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    there are exceptions for ordinary family dealings, but recently the ATO has been taking a hard arsed approach.
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    They are probably only part of the documents or contain traps.
     
  16. trustissues

    trustissues Well-Known Member

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    What if there is not enough cash in the trust's bank account to pay the money?

    E.g.

    I gift a family trust 100k, the trust buys 100k in an ETF (AMIT).

    The ETF distributes 2k a year but the full attributed amount is 4k on the AMMA.

    The corporate trustee resolves to distribute the entire taxable income to me, which would be the 4k but they only have 2k cash.

    This would leave 2k UPE unable to be paid unless every year the trust sells down some ETFs for cash (which would create other tax complications).

    What would you do in this situation? What would be the best way to zero out UPE without actually paying out the money?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    It doesn't matter what I would do but what the beneficiary and trustee would do.
    The trustee may accept a further gift of cash which they could pay out the UPE. The UPE could be left as is. The UPE could be converted to a loan. The debt could be forgiven by the beneficiary
    etc
    something which legal advice should be sought on.
     
  18. trustissues

    trustissues Well-Known Member

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    So basically I could gift 2k to the trust each year, which would mean the trust has 4k to distribute back yearly?

    [/QUOTE]

    It seemed like you and Paul weren't big fans of this option due to some risks/complications with sect 100A.
     
  19. Trainee

    Trainee Well-Known Member

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    Is a forgiven debt taxable income?
     
  20. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    You are confusing a entitlement to net trust income and cash. One is a legal entitlement and the other is a physical asset. The trustee could be required to sell assets if a beneficiary demand a entitlement.
     

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