Forgive Family Trust UPEs – Unpaid Present Entitlements

Deed of Debt Forgiveness Book Cover
  • Deed of Debt Forgiveness

  • $185 includes GST

ATO claims there is no longer ‘love’ between a Family Trust and a beneficiary

The ATO released Draft Taxation Determination 2019/D9. This is over 7 months since it withdrew ATO ID 2003/589 on 6 February 2019.

In TD 2019/D9, the ATO now takes the view that the exclusion for debts forgiven for natural love and affection are only between human beings – not companies or trusts.

The ATO’s new view is that “the creditor cannot be a company or an individual acting in the capacity of a trustee”.

As part of the explanation of the ATO’s view, it notes that “the notion of forgiveness is confined by the use of ‘natural love and affection’. That term serves to identify the motivation for forgiveness. The required connection between that motivation and forgiveness is only satisfied when the creditor feels natural love and affection.” It is a human trait. While you can love your car and your dog, perhaps you cannot love your company and your trust! The ATO has made its way into your home and now into your bedroom. The ATO now claims to know your inner thoughts.

TD 2019/D9 turns on its head the ATO’s old interpretation of section 245-40(e) ITAA 1997.

Have a read of section 245-40(e). There is no requirement that a creditor is a natural person. The only reason for forgiveness is ‘natural love and affection’.

However, the ATO does not “devote compliance resources to debt forgiven prior to 6 February 2019″. However, Deeds of Debt forgiveness for companies and trust after that date may well be legal, but incur the wrath of the ATO. Tread carefully. Family Court decisions since 6 February 2019 may have to be reconsidered if there was forgiveness of debt.

Note the ATO’s position is that neither a trust nor a company, as the creditor, can express ‘feelings’ such as ‘love’ and ‘affection’. It may still be possible for a human being, such as a beneficiary to forgive a debt to a company, or, as is more usually a family trust. We will see what the ATO has in store for us, in due course.

Forgive Family Trust UPEs with a Deed of Debt Forgiveness

Your Family Trust distributes $30,000 to your daughter each year for 10 years. Your Family Trust pays the tax of $2,000 per year on behalf of your daughter. Therefore, there is an ‘Unpaid Present Entitlement’ (like a debt). Your Family Trust owes your daughter $280,000. An ‘Unpaid Present Entitlement’ is the money that the Family Trust owes the beneficiary. You must get her to forgive Family Trust UPEs regularly.

Your daughter, of course, never gets any of this money. You just used her low marginal tax rates to pay less tax. Your accountant reminds you that your daughter (or her ex-husband or trustee in bankruptcy) can now ask for that money. After all, it is her money.forgive Family Trust UPEs

To get rid of the debt she signs a Deed of Debt Forgiveness. Get her to sign the same Deed of Debt Forgiveness each financial year. Therefore, if your daughter goes bankrupt, feral, divorces or dies your Family Trust owes her nothing.

Have a son? Have other children? Distributed to yourself? Build a separate Deed of Debt Forgiveness for each of you.

How does a Deed of Debt Forgiveness forgive a Family Trust UPE?

The Borrower owes you money. In the Deed of Debt Forgiveness, you forgive the debt for ‘love and affection’. The debt has gone. The borrower no longer owes the lender any money.

Tax when you forgive a family trust unpaid present entitlementforgive Family Trust UPEs unpaid present entitlement deed of debt forgiveness

Issues when you forgive Family Trust UPEs:

* is a deduction for the release of debt available?
* do the commercial debt forgiveness penalties apply?
* any FBT?

Up until the ATO changed its mind with TD 2019/D9 the answer to all questions is ‘no’. See the Sample to read our letter of advice.

Commercial Debt Forgiveness and ‘love and affection’

Division 245 ITAA 1997 sets out the tax for a debtor. This is when a commercial debt is forgiven.

However, when you forgive Family Trust UPEs for ‘natural love and affection’ the commercial debt rules don’t apply (section 245-40). Our Deed of Debt Forgiveness is drafted by us on that basis.

When do Reimbursement Agreement rules apply to forgive Family Trust UPEs?

We do not use Reimbursement Agreements to forgive Family Trust UPEs. They don’t work. See the Sample above to read our letter of advice on this.

What happens when you die with UPEs?

The case McCarthy v Saltwood Pty Ltd [2020] TASSC 19 is a Tasmanian Supreme Court decision. It is a dispute between a beneficiary and the trustee of a discretionary trust. It arises from a dead beneficiary loan account.

It highlights the poor habits of some clients. Make sure that trustee resolutions and director minutes are legal prepared. Journal entries are a waste of time. This is especially if the journal entries mean little if there is no legal basis for the transaction they are purported to evidence.

McCarthy v Saltwood Pty Ltd [2020] TASSC 19

Saltwood Pty Ltd is the trustee of the McCarthy Family Trust. The Family Trust carries out farming. The same Family Trust also owns the farming land. To own both the trading business and the land in the same trust is poor asset protection.

John McCarthy runs the farm and controls the Family Trust. John is married to Eunice McCarthy. They have 6 children.

John dies.

Farmer John’s promise to his son Andrew

Andrew, a son, works on the farm all his life. Andrew claims his Dad said:

When I die, Andrew, you take over the farming business and get part of the farming property.

Family trust loan accounts form part of a dead person’s estate

John ran the farm. John controlled the family trust accounts.

John distributes the family trust profits to himself and his wife and Eunice. But, as is usually the case, the family trust does not actually pay the money to John and his wife. Instead, a type of loan called an ‘unpaid present entitlement is created. This results in a joint ‘loan’ account. The family trust owes money to John and his wife. 

On John’s death, Eunice claims that John’s share of the loan passed to her. This is under John’s Will. Like a car or a house, a UPE is an asset of the deceased estate.

Annual Family Trust distributions done by journal entry are deficient

The family trust, now controlled by Andrew, rejects Eunice’s claim. The family trust disputes the ‘loan’ balance on the family trust financial statements. The family trust claims that income distributions made to John and Eunice were invalid. This is because there was no annual family trust distribution statement. Therefore, the annual trust distribution meetings did not satisfy the requirements. This is under the Trustee company’s constitution.

Warning: do not use journal entries for family trust distributions. Instead, get legally prepared family trust distribution statements.

Journal entries are not Deeds of Debt Forgiveness

John’s accountant quickly puts together some journal entries after John dies. The Court looks at the accountant’s journal entry for $791,698.

This reduces the money that the family trust owes Eunice. The journal entry claims that Eunice had forgiven the loan account.

The accountant claims the forgiving of $791,698 by Eunice allows the transfer of the farmland from the family trust to Andrew. But in effect, the accountant has aided and abetted an attempted theft of $791,698 from Eunice. Smells like elder abuse.

The accountant correctly notes that family trust assets do not form part of John’s estate. The accountant’s journal entries made the loan accounts to other beneficiaries “disappear and seem to be absorbed into the joint loan account of [Eunice] and John”. The Court sees no legal basis for such transactions. 

The Court holds that the trust income distributions are valid. The family trust must pay the ‘loan’ amount owing to Eunice. Andrew seemed a little shocked by this. Andrew hoped to inherit the farming operations on this father’s death. This is without the debt.

Andrew is a trusting fool. The accountant while a good servant to his dead master, stuffed it up.

Journal entries are not evidence of a transaction

What makes a journal entry effective? There must be a legal basis for the transaction. This requires documents and deeds that support that legal basis. 

Stamp Duty on a Deed of Debt Forgiveness?

You do not need to lodge this document in the ACT, WA, VIC, NSW, TAS, NT, QLD or SA. There is no duty payable in those States.

How do I record forgiveness of debt in the accounts?

When you forgive Family Trust UPEs there is neither income nor a taxable capital gain. They have no tax consequences. The forgiven amount ends up in the trust corpus. For the accounts, to be true and useful, the accounts should reflect this. The letter of advice provides the Journal Entries.

See also

Update the Family Trust for Bamford streaming only:

legal consolidated

Or, update Bamford streaming PLUS update the rest of the Deed:

Or update for Bamford streaming PLUS the Deed PLUS update the Appointor & Trustee:

Or just update the Trustee:

Or just update the Appointor:

To set up a new Family Trust Deed:

To prepare the Annual Trust Distribution Minutes:

To deal with Division 7A (loan or UPE from your company to the Family Trust):

Or, to forgive the ‘loan account’ and UPEs (loans from humans to Family Trust):

Change the name of your Family Trust:

To wind up and vest the Family Trust, when you no longer want it:

Telephone us for legal advice on building this document.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJDFamily Trust Distribution Statement
Legal Consolidated Barristers and Solicitors
National Australian law firm

Toll free: 1800 141 612
Mobile: 0477 796 959
Email: [email protected]
Skype: brettkennethdavies


Forgive Family Trust UPEs – Unpaid Present Entitlements

ATO claims there is no longer ‘love’ between a Family Trust and a beneficiary The ATO released Draft Taxation Determination 2019/D9. This is over 7 months since it withdrew ATO ID 2003/589 on 6 February 2019. In TD 2019/D9, the ATO now takes the view that the exclusion for debts […]