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Its rulings on when a trust entitlement constitutes a loan remain in place and leave taxpayers with a dilemma, specialists say.
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ATO refuses to budge until result of Bendel case appeal
17 November 2023
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The ATO will stick to its guns on loans and trust entitlements as it awaits an appeal against the AAT decision in the recent Bendel case, which overturned more than a decade of edicts.
Since 2009 the ATO has ruled that an unpaid present entitlement to a company constitutes a Division 7A loan and its position has informed the tax outcomes for thousands of trusts.
“Until the appeal process is finalised, the Commissioner does not intend to revise the current ATO views relating to private company entitlements to trust income, as set out in Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation’?
“Pending the outcome of the appeal process, the ATO is administering the law in accordance with the published views relating to private company entitlements and trust income in TD 2022/11.”
Its stance, outlined in an Interim Decision Impact Statement this week, meant objections to past year assessments would also be put on hold.
“However, if a decision is required to be made (for example, because a taxpayer gives notice requiring the Commissioner to make an objection decision), any objection decisions made will be based on the existing ATO view of the law.”
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BDO partner Mark Molesworth (pictured left) said the ATO left taxpayers and their advisers in a difficult position.
“They will have to choose between the conservative path of continuing to apply the law as interpreted by the ATO or taking a risk, following the interpretation of the law preferred by the tribunal, and being open to amended assessments,” he said.
“Fortunately, most taxpayers will have time on their side in making this decision. It is likely that distributions to corporate beneficiaries from the 2022 year have already been dealt with, one way or another. The distributions from the 2023 year aren’t likely to need a decision made until the corporate beneficiary’s tax return is due for lodgement. This is likely to be October 2024 at the absolute earliest.
“The only other clients who could be affected are those who have previously been issued with amended assessments for deemed dividends under Division 7A in these circumstances. Any client in that situation should be lodging an objection.”
Tax specialist John Jeffreys said taxpayers might have a long wait for an appeal decision.
“It is probable that this matter could eventually be heard by the High Court,” he said. “If that is so, the taxpaying community and their advisers will have a two to three-year wait for the appeal process to finish.”
Mr Jeffreys said the ATO failed to grapple with the issue at the core of the dispute.
“I find it disappointing that the ATO says nothing about the key reasons the AAT gave for the unpaid present entitlement owed to the corporate beneficiary not being a loan.
“The reasoning of the AAT was based on the enactment (over 20 years ago) of Subdivision EA of Division 7A and its predecessor, section 109UB. These provisions were drafted on the basis that unpaid present entitlements were not to be treated as loans for the purposes of Division 7A.
“Everyone knew this at the time – including the ATO. The AAT concluded that due to the existence of Subdivision EA, if the ATO was correct, there would be either double taxation or Subdivision EA was otiose. This could not be what parliament intended. The AAT rejected the ATO’s very weak argument that Subdivision EA has operation only when the corporate beneficiary is unaware of the unpaid present entitlement owed to it.
“The ATO made no reference at all to these key reasons in the Decision Impact Statement. The existence of Subdivision EA has always been the Achille’s heel of the ATO's position. There was no attempt by the ATO to grapple with this issue.”
He said if the ATO lost the case it might request a change in the law to accommodate its position.
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