{"id":13969,"date":"2017-02-09T07:25:51","date_gmt":"2017-02-08T19:55:51","guid":{"rendered":"http:\/\/quantiphy.com.au\/oldbackup\/can-a-upe-be-written-off-and-claimed-as-a-bad-debt\/"},"modified":"2020-11-29T00:19:08","modified_gmt":"2020-11-28T12:49:08","slug":"can-a-upe-be-written-off-and-claimed-as-a-bad-debt","status":"publish","type":"post","link":"https:\/\/quantiphy.com.au\/oldbackup\/can-a-upe-be-written-off-and-claimed-as-a-bad-debt\/","title":{"rendered":"Can a UPE be written off and claimed as a bad debt?"},"content":{"rendered":"

A ‘UPE’ (or ‘unpaid present entitlement’) arises where a trust makes a beneficiary entitled to an amount of the trust’s income (and therefore the beneficiary may have to pay tax on their share of the trust’s taxable income that year), but that amount has not been physically paid to the beneficiary.<\/em><\/p>\n

If the beneficiary never<\/strong> receives payment from the trust, they may want to write their entitlement off as a bad debt, and claim a tax deduction.<\/em><\/p>\n

The ATO has released a Taxation Determination explaining their view that there is no ability<\/strong> to claim a \u2018bad debt\u2019 deduction where a beneficiary of a trust writes off as a bad debt an amount of a UPE.<\/p>\n

This is because of the technical wording of the tax legislation regarding claiming deductions for ‘bad debts’, which requires the debt (e.g., the UPE) to have been previously included in the beneficiary’s taxable income \u2013 however, a beneficiary is not taxed on the UPE itself.\u00a0 Instead, the amount of the UPE is used to calculate the amount to include in their assessable income (and this may be different to the actual amount of the UPE).<\/p>\n

Example<\/strong><\/p>\n

Archie Pty Ltd (\u2018Archie\u2019) is a beneficiary of the Linus Family Trust (\u2018Linus\u2019), which rents out a property.<\/p>\n

In the 2014 income year, Linus\u2019s trust income<\/strong> (made up of net rent) was $25,000, but its net (taxable) income<\/strong> was actually $20,000 (thanks to a ‘capital works deduction’ of $5,000).<\/p>\n

Archie was made presently entitled to 100% of the trust income (i.e., $25,000).\u00a0 As a result, it was also assessed on 100% of the net (taxable) income of the trust (i.e., $20,000).<\/p>\n

The $25,000 was not paid to Archie (i.e., it was recorded as a UPE) and was invested by Linus in a related entity, but during the 2017 income year it was clear the investment had failed and was now worthless.<\/p>\n

Archie was now well aware that Linus was no longer in a position to satisfy the UPE and wrote the $25,000 off as a bad debt.<\/p>\n

Can Archie claim a deduction for the bad debt?<\/strong><\/p>\n

No.\u00a0 While the debt is clearly bad and has been written off as such, no part of Archie\u2019s UPE (of $25,000) was included in its assessable income.\u00a0 Rather, Archie included its share of Linus\u2019s net (taxable) income of the trust (i.e., the $20,000) in its assessable income.<\/p>\n","protected":false},"excerpt":{"rendered":"

A ‘UPE’ (or ‘unpaid present entitlement’) arises where a trust makes a beneficiary entitled to an amount of the trust’s income (and therefore the beneficiary may have to pay tax on their share of the trust’s taxable income that year), but that amount has not been physically paid to the beneficiary. If the beneficiary never…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[],"class_list":["post-13969","post","type-post","status-publish","format-standard","hentry","category-news"],"yoast_head":"\nCan a UPE be written off and claimed as a bad debt? - Quantiphy<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/quantiphy.com.au\/oldbackup\/can-a-upe-be-written-off-and-claimed-as-a-bad-debt\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Can a UPE be written off and claimed as a bad debt? - Quantiphy\" \/>\n<meta property=\"og:description\" content=\"A ‘UPE’ (or ‘unpaid present entitlement’) arises where a trust makes a beneficiary entitled to an amount of the trust’s income (and therefore the beneficiary may have to pay tax on their share of the trust’s taxable income that year), but that amount has not been physically paid to the beneficiary. 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