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Landmark AAT decision casts doubt on a longstanding approach to unpaid present entitlements.
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What Bendel exposes about ATO rulings
08 December 2023
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The issue
The question for determination in Bendel v Commissioner of Taxation [2023] AATA 3074 was whether an unpaid present entitlement (UPE) to income (or capital) of a trust estate was a loan for the purposes of section 109D(3) of Division 7A of the Income Tax Assessment Act 1936. If so, the loan would be treated as a deemed dividend from the corporate beneficiary back to the trust.
The facts
The trustee of the Steven Bendel Discretionary Trust relevantly made distributions to a corporate beneficiary, Gleewin Investments Pty Ltd in various income years. Not all of the distributions had been physically paid by the end of the relevant lodgement dates, thereby creating UPEs.
In accordance with the standard taxing provisions for trusts under section 97 of Division 6 of the ITAA 1936, Gleewin Investments was taxed on the paid and unpaid distributions.
However, the Commissioner also treated the unpaid distributions (the UPEs) that remained outstanding at the relevant lodgement dates as loans under section 109D(3) from Gleewin Investments (the corporate beneficiary) back to the trust. On this basis, the Commissioner issued amended assessments that treated those loans as deemed dividends within the meaning of 109D(1).
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As a result, Gleewin Investments and Mr Bendel, as beneficiaries who were presently entitled to the trust’s deemed income, were then (again) assessed on their proportional share of that deemed (Division 7A) dividend under section 97 of Division 6 of the ITAA 1936.
Mr Bendel and Gleewin Investments objected to the amended assessments, which were disallowed. Both then applied to the AAT to have the objection decisions reviewed.
The ATO’s view
The ATO’s longstanding view is relevantly now contained in Tax Determination TD 2022/11. It provides that a UPE of a corporate beneficiary that remains outstanding at the relevant date can constitute “financial accommodation” – and thus a loan under s 109D(3) – advanced from that corporate beneficiary back to the trust in circumstances where the corporate beneficiary:
(a) Has knowledge of the amount of the UPE (for which it can demand immediate payment); and
(b) Does not demand payment by the relevant date.
The ATO’s position was that the principles in TD 2022/11 applied in Bendel to make the UPEs a loan because:
(a) Gleewin Investments was (knowingly) made to be presently entitled to income of the trust for which it could, but did not, demand repayment; and
(b) The UPEs remained outstanding at the relevant date (lodgement date of the following year).
Tribunal decision
Contrary to the Commissioner’s long-held view, when deploying the tools of statutory construction to interpret the provisions, the tribunal concluded that a UPE is not a loan (within the meaning of subsection 109D(3)) because:
(a) Subdivision EA exclusively deals with UPEs (at the exclusion of s109D(3));
(b) The extrinsic materials do not indicate a UPE is intended to be a loan back to the trust; and
(c) If a loan, it would mean that the same economic profit is taxed twice.
ATO response
The Commissioner has appealed the decision. In its interim decision impact statement, the ATO confirmed that it will continue to administer the law in accordance with its existing view outlined in TD 2022/11, but where possible, will delay making any decisions until after the appeal process is finalised.
What does it mean?
This case is a good reminder that the ATO’s position, even if published in a ruling, is not necessarily correct.
However, until the appeals process is finalised, affected taxpayers will need to make a decision whether to discharge any outstanding UPEs (or to put them on compliant Division 7A terms and make the minimum repayments), or instead to rely on the tribunal’s decision in Bendel and risk a subsequent review.
While relying on the tribunal’s decision in Bendel may expose taxpayers to additional tax arising from a deemed Division 7A dividend if the Commissioner is ultimately successful on appeal, arguably, taxpayers might be protected from penalties on the basis that the decision in Bendel demonstrates that the position (that a UPE is not a loan under section 109D(3)) is reasonably arguable.
What next?
Given the entire outstanding UPE may be deemed to be an unfranked dividend, it may be advisable to tread cautiously and follow the Commissioner’s views pending further guidance from the courts.
Taxpayers who choose to rely on the decision in Bendel should also be mindful that even if the tribunal’s decision is upheld, there remains the prospect of the ATO:
(a) Seeking to apply Subdivision EA of Division 7A in certain circumstances where the trustee makes a loan to a shareholder or an associate of a shareholder;
(b) Seeking to apply the specific anti-avoidance provision at section 100A (about reimbursement agreements); and
(c) Successfully lobbying for the introduction of new legislation to deem a UPE to be a loan, and possibly even retrospectively.
Jeremy Makowski is a partner at Coghlan Duffy Lawyers.
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