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The recent decision on what constitutes a loan creates a dilemma for advisers who would be “brave” to buck the ATO’s position, says one specialist.
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Too soon to back AAT on Div 7A, accountants told
10 November 2023
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The recent AAT decision concerning Division 7A loans creates a dilemma for accountants advising clients but it would be “very brave” to buck the ATO’s tax ruling as case goes to appeal, says one HLB Mann Judd tax director.
Peter Bardos said ATO edicts about the tax implications of unpaid entitlements to companies and what comprised a Div 7A loan had been followed since 2009, but the AAT had taken a different view.
It overturned more than a decade of thinking in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 and the matter was now subject to an ATO appeal to the Federal Court.
“If the ATO loses in the Federal Court it will be interesting to see what the Tax Office’s response will be,” said Mr Bardos.
But in the meantime, accountants were left in a difficult position.
“How do you advise your client when you’ve got a tax ruling which says one thing and a tribunal decision which says another?”
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Mr Bardos warned accountants that it would be “very brave to go against the ATO’s tax ruling until the matter goes further”.
“The Tribunal doesn’t set the law so once it makes it to the Court then perhaps we’ll have some more guidance.”
Mr Bardos said there have been several recent tax cases challenging longstanding principles on trust distributions.
“As practitioners, we’re still working with clients based on the Tax office’s guidelines on trust distributions which came out last year. There’s since been a couple of tax cases that have challenged some of the views in that guidance,” he said.
“[The Tax Office guidance] removed some of the flexibility where practitioners and their clients rightly or wrongly thought they had the ability to distribute trust income.”
“A lot of businesses that are carried on through a trust or through a company have been distributing income in ways that the Tax Office doesn’t think they will be able to going forward.”
“That’s something that as practitioners we’re still working through.”
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