Trust has a UPE to a Bucket Company and Loan to an Individual

Nigel has a good year and makes a $200k profit from his construction business which he operates through a discretionary trust. The trust makes a resolution prior to 30th June to distribute all the profits to Nigel Bucket Co Pty Ltd so he can enjoy a tax rate of 27.5%

Nigel thinks he is extra smart as he draws those funds out of the trust and puts it into his home loan offset account where the interest isn't tax deductible.

Nigel isn't concerned as he was told that this "Division 7a thingy" only affects companies. "I'm smart...i used my trust instead"

The accounts show the amount as an Unpaid Present Entitlement (a "UPE"). Nigel finds out during an audit that he wasn't so smart after all.

Check your accounts. Do a tax risk review.

 

There is also a common misunderstanding that money can be taken from a company, parked in an offset account and then repaid at the end of the year, then reborrowed again.

There was a poster on the forum who said his accountant said this was fine.

 

Section 109R would say otherwise

INCOME TAX ASSESSMENT ACT 1936 - SECT 109R Some payments relating to loans not taken into account

 

Yes, they will be shocked to get taxed on the money borrow - multiple times potentially

 

What about in a scenario where a discretionary trust makes a $200k profit and the trust makes a resolution prior to 30th June to distribute all profits to Nigel personally. The Balance Sheet of the Financial Statement shows Loans to Related Parties of $200k therefore it is recorded as a UPE. But Nigel actually gets the $200k distribution a few months later around October to December (a month or so after the trust tax return and financials gets done by the accountant).

This happens every year therefore the Balance Sheet of the discretionary trust shows Loans to Related Parties increasing every year, but in fact a distribution to Nigel happens towards the end of the calendar year.

Does this become an issue in any way? Does the accountant need to be notified every year that in fact the money is distributed so he/she can correct the financial statement for the next year? Do financial statements ever get sent to the ato by accountants when lodging or only the trust tax return gets sent?

 

A loan is not a UPE. Different things.

 

No. If the distribution is paid even by accounting to credit an entitlement by it's due date that is not an unpaid amount