Division 7A Mess Up Series – Part One: Don’t touch those pre-09 UPEs or pre-97 Loans & the Debt Forgiveness Error

Published on 25 February 2020
Categories: Accounting

As a brief preamble, a loan a company made to shareholders or associates before 4 December 1997 (“pre-97 Loan”) and an unpaid present entitlement from a trust to a company made before 16 December 2009 (“pre-09 UPE”) are typically ‘quarantined’ from the ATO’s Division 7A compliance action.

In simple terms, if your company has either a pre-09 UPE or a pre-97 Loan owing to it and this is left alone – no debits – then there is usually nothing to worry about (at least for now – more on this below). This is because the ‘quarantined’ status usually continues to apply when you do nothing.

On the otherhand, if a pre-09 UPE or a pre-97 Loan is touched – a debit (increase) – or is forgiven (written off as a bad debt), you could be in for a world of pain.

Of particular note is debt forgiveness. If for example, your company was owed $500,000 from your family trust and the company wrote-off the loan/UPE you could be looking at an otherwise avoidable tax liability of $200,000+. Furthermore you could now find yourself incapable of accessing benefits of franking credits. Hence a world of pain!

Writing off a loan or unpaid present entitlement, whether pre or post the aforementioned dates, is almost always a terrible idea. We’ve unfortunately seen such things happen when people come to us from other accountants. If caught early enough, it may be possible to rectify before that huge tax bill comes from the ATO.

Before concluding this Part One of our Division 7A Mess Up series, we mentioned above that at least for now there is usually nothing to worry about if you have left your pre-09 UPE and pre-97 Loan alone. The at least for now inclusion is because every once in a while the ATO talk about bringing these within their compliance action and therefore its good to keep in mind that although right now there may not be an issue, that could conceivably change at any moment.

Be sure to check out Part Two: The All-Too-Often Overlooked Hurdle with Division 7A Sub-trusts.

Finally, if you’ve encountered any of these issues or are concerned about how your accountant has handled your Division 7A compliance, then give either Mike Beer or Ben Paul a call to obtain the specialist Division 7A help you need.