Do you understand your structure?

PRESENTED BY ACCOUNTING & SUPER

Whether you have a company or a trust (or both) ask yourself, do you understand theconcept of why you have that structure, and what it means for you now, and in the future.

All too often we, as accountants, come across new clients with legacy issues, some more than others, where the client may have a limited understanding of the burden of the legacy.

An example of this legacy is unpaid present entitlements and the ugly head of Division 7A. An ‘unpaid present entitlement’ (or UPE) is a trust distribution made as decided by the trustee but has not yet been paid out. The UPE occurs when the trustee allows a beneficiary (who could be a company or individual), to be entitled to some or all of the trust income for a particular income year; but does not pay the money.

The trust continues to hold the money on trust for that beneficiary until the beneficiary makes a call on the payment. So each year the trustee decides, do we distribute the income to our beneficiaries, or do we accumulate (keep the income)?

The trustee will almost always distribute because of the high tax consequences of holding the profit in the trust. If you are a beneficiary to a trust and receive a trust distribution, you will pay tax on this distribution at your marginal tax rate, however, if you have a corporate beneficiary (a company) you know that the charge on this distribution will be at a flat rate of either 27.5% or 30%.

Should the trust physically pay this distribution? Yes, it should. However, often the trust may be unable to as the cash flow is needed to keep funding the activities of the trust. The result of this becomes a UPE. Now, if you distribute this to a company to achieve the lower tax outcome (say 30% versus your marginal tax rate of 47%), you must realise that eventually, the distribution is taxed at the individual level.

That distributed income physically BELONGS to the company and eventually needs to be accounted for and acknowledged. If you don’t, you have an issue, and it’s called Division 7A. This company has paid tax on income, but it does not have the use of the actual cash. Someone else does, and typically it could be the trust or another individual beneficiary.

As per the ATO, Division 7A can apply when a private company provides a payment or benefit to a shareholder or associate through another entity, or if a trust has allocated income to a private company but has not actually paid it, and the trust has provided a payment or benefit to the company’s shareholder or their associate. This concept is intended to prevent profits or assets provided to shareholders or their associates tax-free.

So what is the issue? Extra tax, additional and sometimes unplanned, unnecessary interest charges, and of course, death. So next time your accountant mentions the term UPE, be sure to ask: what do we do to minimise our risk, our exposure to additional tax and what will happen if I or a key person in this structure passes away. Just be aware of these legacy issues and the consequences they can carry.

Karen Quagliata

The name, ‘Accounting and Super’ defines exactly what we do. Our firm is boutique style, meaning we only deal in a specific space, and that is small to medium enterprise and self-managed superannuation. We are a highly experienced team of accountants and aim to deliver quality, personalised service to our clients.

Accounting & Super Townsville Office Level 1, 54 Denham Street Ayr Office 132a Young Street www.accountingandsuper.com

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