The Maximum net asset value test and UPEs – finally some guidance from the ATO

On 10 June 2015, the Commissioner of Taxation issued Draft Taxation Ruling TR 2015/D2 (“TR 2015/D2”). The draft ruling explains the Commissioner’s preliminary views on how an unpaid present entitlement (“UPE”) of a beneficiary that is connected with the trust is taken into account for the purposes of the trust’s maximum net asset value test (“MNAVT”).

In a nutshell, where a connected beneficiary has a UPE to income or capital from a trust, the value of the UPE will be included only once in the maximum net asset value calculation of the trust. How it is included depends on the nature of the beneficiary’s entitlement and whether any sub-trusts are involved and is conveniently summarised in the table in paragraph 78 of the ruling which is reproduced below:

The treatment appears to be fair and should ensure that the value of the UPE is not included twice in the trust’s MNAVT calculation.

It is interesting to note that only UPEs to connected beneficiaries are dealt with under TR 2015/D2. However, if the same principles are applied, one would expect that where the UPE is conferred to an entity that is not a connected beneficiary (and no sub-trust is involved), the value of that UPE would effectively not be counted in the trust’s MNAVT. This may provide the taxpayer with some ability to reduce their net asset value position prior to crystallising the capital gain.

Background to the MNAVT

The MNAVT is one of the basic conditions that may need to be satisfied in order for the taxpayer to become eligible for the small business CGT concessions.

An entity satisfies the MNAVT if, just before the relevant CGT event, the net value of the CGT assets of the entity and certain related entities does not exceed $6,000,000.

Broadly, the net value of the CGT assets of an entity is calculated as the sum of the market values of those assets less the sum of the liabilities of the entity that are related to those assets and certain provisions.

How did the Commissioner arrive at this view?

The Commissioner’s view of the term ‘liabilities’ in the context of the MNAVT is explained in TD 2007/14 as having its ordinary meaning and extends to:

“legally enforceable debts due for payment and to presently existing legal or equitable obligations to pay either a sum certain or ascertainable sums”.

The Commissioner explains how the value of the UPE is treated in the context of the MNAVT by considering three main scenarios in TR 2015/D2 (considered below).

Connected beneficiary absolutely entitled (Part A column)

Where the connected beneficiary’s UPE is an absolute entitlement to one or more trust assets, those assets are treated as the connected beneficiary’s assets for the purpose of the MNAVT.

It follows that as the assets represented by the UPE are treated as being held by the connected beneficiary, the trust does not have a presently existing obligation to pay anything to the connected beneficiary in relation that UPE. As such, the value of the UPE will not be included in the net value of the trust as either an asset or a liability.

Connected beneficiary not absolutely entitled, but UPE set aside on sub-trust (Part B column)

When the UPE is held on sub-trust, the property representing the UPE generally no longer forms part of the trust fund of the main trust. The net value of the CGT assets of the sub-trust (which will include the value of the UPE) will therefore be included in the net asset value of the main trust if the sub-trust is connected with the main trust.

The sub-trust is usually connected with the main trust because either:

  • the connected beneficiary is controlled by the main trust (in which case the main trust will also indirectly control the sub-trust ); or
  • the connected beneficiary controls the main trust (in which case the connected beneficiary controls both the sub trust and the main trust and as they are both controlled by the same third entity being the connected beneficiary, the sub-trust is connected with the main trust; or
  • the main trust and the connected beneficiary are controlled by the same third party (in which case the third party is treated as controlling any entity that the connected beneficiary controls (such as the sub-trust). In this situation, both the sub-trust and the main trust are controlled by the same third entity and are therefore connected with one another.

The UPE is not a liability of the sub-trust because it has no presently existing legal or equitable obligation to pay any amount to the connected beneficiary. The obligation is contingent on the connected beneficiary to call for transfer of the property of the sub-trust to them. The funds are simply being held by the sub-trust as trust corpus on trust for the connected beneficiary. This means the sub-trust has no liability in respect of the UPE but as the value of the UPE is part of the sub-trusts funds, it will be a sub-trust asset.

Connected beneficiary not absolutely entitled, no sub-trust (Part C column)

Where a connected beneficiary is not absolutely entitled to any trust asset and the UPE has not been placed on sub-trust, the treatment of the UPE is generally per the Part C column (shown above).

The trustee has an equitable obligation to pay the connected beneficiary an amount of trust income or capital and is thus a liability for the purposes of the MNAVT calculation provided it is in relation to the assets taken into account in this calculation. The UPE liability of the trust results from an appointment of income or capital made under the terms of the trust, of particular trust assets or a particular sum to be paid from trust assets. In a broad sense, it is an entitlement to a relevant share of the trust fund itself; and in this broad sense relates to the trust fund (and therefore the assets of the trust). Accordingly, the value of the funds representing the UPE is included in the trust’s assets and is also a liability of the trust.


In the common scenario of a trust with UPEs, taxpayers and their agents can now move forward with confidence in regards to what to include for MNAVT purposes.

Trusts should carefully consider what UPEs on their balance sheet are taken into account in calculating their maximum net asset value position. UPEs to non-connected beneficiaries* (defined below) that are not absolutely entitled beneficiaries, nor have the property representing the UPE put on sub-trust for their sole benefit would appear to be effectively excluded from the trust’s MNAVT. This is because the value of the assets to which the UPE relate and the corresponding liability cancel each other out in the trust. Although the beneficiary has an asset (being the UPE receivable) it would not appear to be counted in the trusts MNAVT as it is not a connected beneficiary.

* Non connected beneficiaries are, very broadly, those beneficiaries:

  • that together with their affiliates haven’t received at least 40% of the income or capital distributions in the year of the CGT event or the 4 prior income years; and
  • do not control the trustee; and
  • are not affiliates of the trust

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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