UPE-Division 7A Offset Agreement
The UPE-Division 7A Offset - Deed of Assignment and Agreement for Set-Off(collectively ‘the Documents’) below has been prepared by Thomsons Lawyers as a precedent to assist practitioners in documenting the funding of the Minimum Yearly Repayment (where a UPE owing from a Trust to corporate beneficiary is converted to a complying Division 7A loan from the Company back to the Trust) by way of dividends paid by the relevant corporate beneficiary.
It may be convenient for the Minimum Yearly Repayment (‘MYR’) required under the Division 7A loan to be set-off against the dividend, as this eliminates the requirement for the MYR to be made in cash. The legal effect of setting-off the MYR and the dividend is the same as if each obligation were paid in cash. (Of course, the shareholder will be required to include the dividend in their assessable income, notwithstanding that it is not paid in cash.)
For a set-off to be effective there must be mutual liabilities of amounts presently payable between two parties. There must also be a binding agreement between the parties to use set-off as the method of payment, and it is this agreement that establishes the legal basis for discharging the liabilities so set-off.
Journal entries recording the set-off are merely evidence of the agreement. In the absence of a set-off agreement, journal entries will of themselves be insufficient to effect a set-off. The set-off agreement may be express or implied. The best practice is to record the set-off in a written set-off agreement.
Note also that the setting-off of the MYR against dividends payable by the corporate beneficiary is generally not possible without comprehensive documentation, because the relevant obligations are not mutual (i.e.,without the agreements the amounts are not owing between the same two parties as the MYR is owed by the Trust to the Company and the dividend is owed by the Company to the Shareholder).
TAX WARNING – Do not use NTAA Division 7A Offset Agreement
The NTAA has a similar agreement referred to as the ‘Division 7A offset agreement’. Thatagreement will not be effective in the circumstances described above and therefore must not be used as a proxy for the ‘UPE-Division 7A Offset - Deed of Assignment and Agreement for Set-Off’.
The ‘Division 7A offset agreement’is only to be used where the borrower who is required to make a MYR to the company is the shareholder of that company. In that case, mutual obligations exist once the dividend is declared without the need to convert the dividend payable to a loan and/or to assign to another party.
The Documents should not be used without first obtaining legal advice (including taxation, stamp duty and GST advice).
The Documents assume that:
- A complying Division 7A loan agreement has been entered into between the Trust (as the borrower) and the Company (as the lender).
- The Trust is not a shareholder of the Company;
- The Company has declared (but not paid) a dividend to its shareholder; and
- The amount of the dividend to the shareholder is equal to or greater than the amount of the MYR that the Trust is required to make to the Company under the complying Division 7A loan agreement.
TAX WARNING – Requirement for an unpaid dividend
Do not use the Documents unless there is an unpaid dividend owing by the Company to its shareholder in an amount at least equal to the relevant MYR owing by the Trust to the Company. If there is no such unpaid dividend, the Company would need to declare a dividend (which would then remain unpaid) before these Documents are used.
The purpose of the Documents is to facilitate the use of the dividend to fund the MYR required to be made by the Trust to the Company under the Complying Division 7A loan agreement.
Under the Deed of Assignment, the shareholder agrees with the Company that an amount of the unpaid dividend, being equal to the MYR to be funded by the dividend, is to be treated as a loan receivable ('Receivable'). The shareholder then makes a further loan to the Trust. This further loan is drawn down by way of the shareholder assigning to the Trust their right to the Receivable owing by the Company. The further loan is interest-free unless the Borrower (i.e., Trust) is otherwise notified by the shareholder. The further loan is also unsecured.
The assignment of the Receivable by the shareholder should be CGT-neutral. The shareholder's cost base for the Receivable should be equal to the value of the property given by the shareholder to acquire it, being the right to receive an amount of the Dividend. This should be equal to the capital proceeds received for the assignment, being the value of the Trust's obligation to repay the principal sum of the further loan. As a result, the shareholder should have no capital gain or loss from the assignment of the Receivable.
As a result of these assignments, there will be two mutual and matching obligations as between the Trust and the Company. In particular:
- the Trust will be required to make the MYR to the Company; and
- the Company will be required to pay an equal amount, representing the Receivable, to the Trust.
The Agreement for Set-Off then records a set-off of these mutual obligations. The set-off may then be recorded by way of journal entry.
The Documents relate to the MYR to be funded from a specific dividend. As a result, a separate set of Documents would be required in relation to each annual MYR.
The potential tax consequences of the shareholder making a loan to the Trust should also be considered.
TAX WARNING – Effect of offset
The NTAA takes the view that a set-off has the same legal effect as a flow of actual payments, i.e., actual payment includes 'payment' by effective offset.
However, we note that in paragraph 78 of PSLA 2010/4 the Commissioner refers to a requirement that interest be “actually paid out to the sub-trust”. The NTAA interprets this reference to “actual payment” as being in contradistinction to a mere accrual. Further, paragraph 56 of the PSLA states the following:
“For the avoidance of doubt, the annual return on investment can either be paid in cash or set off against an account owing from the private company to the main trust, but it cannot be paid by crediting it to a liability account owing to the private company from the main trust or sub-trust.” [emphasis added].
© National Tax & Accountants’ Association Ltd: May – July 20131
UPE-Division 7A Offset Agreement
Notwithstanding this, a payment effected by a physical flow of funds removes any doubt as to whether the PSLA has been complied with. It must be noted that the above statement does not contemplate the Shareholder of the Company assigning the Receivable (i.e., the loan owed to it by the Company) to the Trust. This is an additional step undertaken by the Deed of Assignment to ensure that there are mutual obligations in existence between the Trust and Company such that an effective set-off of these obligations can take place, as contemplated by paragraph 56 of the PSLA.
Further, whilst, in the view of the NTAA, Part IVA should have no application in respect to the above offset, its operation cannot be completely ruled out due to the broad application of Part IVA. For this reason, physical payment may be the preferred option.
© National Tax & Accountants’ Association Ltd: May – July 20131
UPE-Division 7A Offset Agreement
Deed of assignment of debt
THIS DEED is made on the date specified in item 1 of the Schedule
BETWEEN / The party specified in item 2 of the Schedule (Shareholder)AND / The party specified in item 3 of the Schedule (Trustee)
RECITALS
- The Shareholder is a member of the company specified in item 4 of the Schedule (Company).
- On the date specified in item 5 of the Schedule, the Company declared a dividend in favour of the Shareholder. Some or all of the dividend has not yet been paid by the Company to the Shareholder.
- The Shareholder and the Company want to treat an amount of the unpaid dividend, being the amount specified in item 6 of the Schedule, as a loan receivable owing by the Company to the Shareholder (Debt).
- The Shareholder then wants to assign that Debt to the Trustee.
- The Trustee wants to accept an assignment of that Debt from the Shareholder.
NOW IT IS COVENANTED AND AGREED as follows:
1. Definitions and interpretation
1.1Definitions
In this deed:
(a)Companymeans the company specified in item 4 of the Schedule.
(b)Debtmeans the amount specified in item 6 of the Schedule owing to the Shareholder by the Company pursuant to clause 2.1.
(c)Purchase Price means an amount equal to the amount of the Debt.
(d)Shareholdermeans the party specified in item 2 of the Schedule.
(e)Trusteemeans party specified in item 3 of the Schedule.
1.2Interpretation
In this deed, unless the context indicates a contrary intention:
(a)a reference to:
(i)the singular includes the plural and vice versa
(ii)an individual or person includes a corporation, partnership, venture, association, authority, trust, state or government
(iii)a party is to a party to this deed and includes that party’s executors, administrators, successors and permitted assignees
(iv)a document including this deed, is to that document as amended, novated, renewed, substituted or supplemented at any time
(v)any legislation is to any amendment, re-enactment, substitution or consolidation of that legislation, and includes any subordinate legislation issued under that legislation
(vi)dollars or $ is to an amount in Australian currency
(vii)time is to time in the capital city of the State of Territory in Australia in which it is signed
(b)where an expression is defined, another part of speech or grammatical form of that expression has a corresponding meaning
(c)any recitals, table of contents and headings in this deed are for convenience only and do not affect interpretation
(d)including and similar expressions are not to be treated as words of limitation
(e)an obligation not to do something includes an obligation not to cause and not to permit it to be done
(f)where consent or approval is required under this deed the requirement will mean the prior written consent or approval
(g)this deed is not to be construed against a party because that party was responsible for the drafting of this deed.
2. Terms of Assignment
2.1The Debt
The Company confirms to the Shareholder that, pursuant to the declaration of a dividend by it on the date specified in item 5 of the Schedule, a dividend of not less than the amount specified in item 6 of the Schedule is now due and payable to the Shareholder (Dividend). The Shareholder and the Company agree that:
(a) an amount of the unpaid dividend, being the amount specified in item 6 of the Schedule, is converted into an unsecured, interest-free loan owing to the Shareholder by the Company and payable on demand (Debt); and
(b) any amount of the unpaid dividend in excess of the amount specified in item 6 of the Schedule is not converted into a loan and retains its character as an unpaid dividend.
2.2Assignment
The Shareholder, as holder of the benefit of the Debt at law and in equity, assigns and transfers to the Trustee all of its right, title, benefit and interest in the Debt, including the right to demand the Debt and the right to receive the Debt when due and payable.
2.3 Consideration
(a) In consideration for the assignment of the Debt by the Shareholder, the Trustee promises to pay to the Shareholder the amount of the Purchase Price. TheShareholder acknowledges that this promise by the Trustee constitutes sufficient consideration for the assignment of the Debt.
(b) The Purchase Price is payable by the Trustee to the Shareholder on demand.
(c) Unless otherwise agreed in writing between the parties, no interest is payable on the outstanding balance of the Purchase Price from time to time.
2.4 Warranties
(a) The Shareholder warrants to the Trustee that the Debt is owing and is enforceable in accordance with its terms.
(b) The Trustee warrants to the Shareholder that the Trustee has the power to accept an assignment of the Debt, and the capacity to pay the Purchase Price to the Shareholder on demand.
2.5 Notice to Debtor
The parties agree to give express notice in writing to the Company of the assignment of the Debt as soon as practicable.
2.6 Payments to Assignor
If any payment is received by the Shareholder on or after the date of this deed on account of the Debt assigned under this deed, the Shareholder must immediately account to the Trustee for those payments.
3. General
3. Entire agreement
In relation to its subject matter this deed:
(a) constitutes the entire agreement between the parties
(b) supersedes any previous representations, understandings or agreements.
3.2 Amendment
This deed may only be amended, supplemented, replaced or novated by a document executed by all the parties.
3.3 Counterparts
This deed may be executed in any number of counterparts and all of those counterparts taken together constitute one and the same document.
3.4 Waiver
Unless specifically stated to the contrary in this deed, a party’s:
(a)failure to enforce or a delay in enforcing any of its rights under this deed does not constitute a waiver of those rights
(b)partial exercise of a right does not preclude any further exercise of that or any other right.
3.5 Severance
If any provision of this deed is held to be prohibited, invalid or unenforceable in any jurisdiction:
(a) that provision is ineffective to the extent of the prohibition, invalidity or unenforceability in that jurisdiction
(b) the validity or enforceability of that provision is not affected in any other jurisdiction
(c) the remaining provisions of this deed are not affected.
3.6 Signatories
Each person who signs this document on behalf of a party declares that that person has no notice of the revocation or suspension of the power under the authority by which the person signs this deed.
3.7 Costs and expenses
Each party must pay its own legal and other costs and expenses in connection with this deed.
3.8 Governing law
This deed is governed by and construed in accordance with the laws of the State or Territory in Australia in which it is signed and the parties irrevocably submit to the jurisdiction of the courts of that State or Territory.
Schedule
1. DATE OF THIS Deed
...... / ...... / ......
2. Shareholder
Name: …………………………………………………………………….……………………
Address: ……………………………………………………………………………………….
3. Trustee
Name: ………………………………………………………….. ACN ………………………
Address: ……………………………………………………………………………………….
As trustee of: ………………………………………………………………………………….
4. Company
Name: ………………………………………………………….. ACN ………………………
Address: ……………………………………………………………………………………….
5. Date on which the dividend was declared
...... / ...... / ......
6. Amount of the UNPAID Dividend CONVERTED INTO A LOAN AND ASSIGNED BY THIS DEED
$ ......
EXECUTED AS A DEED
SIGNED AND SEALED by
THE SHAREHOLDER______
in the presence of: Shareholder
______
Witness
EXECUTED as a DEED by
THE TRUSTEE
in accordance with Section 127 of the
Corporations Act 2001:
______
*Director/*Company Secretary Director
______
Name of *Director/*Company Secretary Name of Director
(BLOCK LETTERS) (BLOCK LETTERS)
*please delete as appropriate
NOTICE OF ASSIGNMENT OF DEBT
DATE: ...... / ...... / ......
TO:Company Name: ………………………………………………….. ACN ………………………
of (address): ………………………...…………………………………………………………….
(Shareholder name): ……………………..…….……………………….………………………..………
of (address): ………………………...………………………………………………..… (Shareholder)
and
(Trustee name): …….…..………………………………………………….. ACN ………………………
of (address): ……………………………….…………...………………………………………………..…
as trustee of: ………………………...……………………………………………………..… (Trustee)
HEREBY GIVE NOTICETO YOU of the following:
The Shareholder, as holder of the debt of $...... owing by you pursuant to the declaration of a dividend by you in favour of the Shareholder on ...... / ...... / ...... and the subsequent conversion of an unpaid amount of that dividend into a loan (Debt), has assigned and transferred to the Trustee all of its right, title, benefit and interest in the Debt, including the right to demand the Debt and the right to receive the Debt when due and payable.
Signed by the Shareholder: / Signed on behalf of the Trustee:______
Shareholder – signature
______
Shareholder – print name / ______
Signature
______
Print name
______
Position held (e.g. director)
AGREEMENT FOR SET-OFF
THIS AGREEMENT is made on the date specified in item 1 of the Schedule
BETWEEN / The party specified in item 2 of the Schedule (Company)AND / The party specified in item 3 of the Schedule (Trustee)
RECITALS
- The Company has made a loan to the Trustee on terms satisfying the requirements of section 109N of the Income Tax Assessment Act 1936 (Div 7A Loan).
- The Trustee wishes to pay theamount specified in item 4 of the Schedule (Set-off Amount) to the Company pursuant to the Trustee's obligations in respect of the Div 7A Loan.
- The Company separately owes a debt to the Trustee in an amount equal to the Set-off Amount, pursuant to the declaration of a dividend by the Company to the shareholder specified in item 5 of the Schedule (Shareholder), the subsequent conversion of an amount of that unpaid dividend into a loan (Receivable) and the assignment by the Shareholder to the Trustee of that Receivable.
- To simplify their arrangements the parties have determined to set-off their respective mutual obligations in the amount of the Set-off Amount on the terms and conditions of this agreement.
NOW IT IS AGREED as follows:
1. Definitions and interpretation
1.1 Definitions
In this agreement:
(a) Company means the party specified in item 2 of the Schedule.
(b) Div 7A Loan means a loan made by the Company to the Trustee on terms satisfying the requirements of section 109N of the Income Tax Assessment Act 1936.
(c) Div 7A Payment means the obligation of the Trustee to make a payment, in the amount equal to the Set-off Amount, to the Company pursuant to the Trustee's obligations in respect of the Div 7A Loan.
(d) Receivable means the debt owing to the Trustee by the Company in the amount of the Set-off Amount pursuant to the declaration of a dividend by the Company to the Shareholder, the conversion of an amount of that unpaid dividend into a loan and the subsequent assignment by the Shareholder to the Trustee of the right to receive repayment of that loan.
(e) Set-off Amount means the amount specified in item 4 of the Schedule.
(f) Shareholder means the person specified in item 5 of the Schedule.
(g) Trustee means the party specified in item 3 of the Schedule.
1.2 Interpretation
In this agreement, unless the context indicates a contrary intention:
(a) a reference to:
(i) the singular includes the plural and vice versa
(ii) an individual or person includes a corporation, partnership, venture, association, authority, trust, state or government
(iii) a party is to a party to this agreement and includes that party’s executors, administrators, successors and permitted assignees
(iv) a document including this agreement, is to that document as amended, novated, renewed, substituted or supplemented at any time
(v) any legislation is to any amendment, re-enactment, substitution or consolidation of that legislation, and includes any subordinate legislation issued under that legislation
(vi) dollars or $ is to an amount in Australian currency
(vii) time is to time in the capital city of the State of Territory in Australia in which it is signed
(b) where an expression is defined, another part of speech or grammatical form of that expression has a corresponding meaning