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If the ATO succeeds in its appeal it will act as a further deterrent to using trusts for succession planning.
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Why agribusiness needs the Bendel result to flourish
15 December 2023
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Corporate beneficiaries of trusts continue to be used by private groups in the agribusiness sector in high-income years to take advantage of the corporate tax rate, typically 25 per cent for such enterprises. Care has been required with these arrangements to ensure adherence with Division 7A.
Given the various Division 7A (and now section 100A) compliance issues associated with trust structures, there also appears to be an increasing trend in the agribusiness sector of conducting trading operations (and retaining earnings) in company structures. This is the case notwithstanding the inability to access tax concessions such as farm management deposits and primary production averaging via company structures.
In Taxation Determination TD 2022/11, the Commissioner of Taxation reiterates a longstanding view that an unpaid present entitlement (UPE) to trust income created in favour of a private company is a form of financial accommodation and will ultimately become a loan for Division 7A purposes if left unpaid.
There is little case law – and none directly on point – cited in TD 2022/11 or in its predecessor, Taxation Ruling TR 2010/3, to support the ATO’s position.
To the contrary, the AAT in Bendel and Federal Commissioner of Taxation [2023] AATA 3074 has since decided in favour of the position that a UPE does not amount to a loan for the purposes of Division 7A.
The tribunal’s reasoning refers to the operation of Subdivision EA of Division 7A, noting that Subdivision EA contains an express set of rules to deal with the taxation of UPEs in favour of corporate beneficiaries. In effect, the AAT has decided that the contention made by the Commissioner that a UPE is a loan for Division 7A purposes is contrary to the particular provisions of Division 7A that otherwise address the mischief associated with corporate beneficiaries.
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In this regard, Subdivision EA deems a dividend to arise where a company has a UPE and the trust engages in an actual transaction, namely, the trust engaging in a loan, a payment from an unrealised gain or forgiveness of a debt in favour of the shareholders of the company/their associates.
In the authors’ view, there is no mischief (or tax avoidance issue) in distributions to companies that remain unpaid without an actual transaction occurring. After all, this is how Division 7A, with its section 109UB amendment, was originally designed and intended.
All that has occurred in such a case is that profit has been derived and retained in the structure with the corporate tax rate being applied. If the underlying funds are ever accessed without a dividend being paid, then Division 7A already has a remedy under Subdivision EA. When extrinsic materials are relied on to consider the intention of Subdivision EA (by reference to its predecessor section 109UB), it becomes clear that these provisions have been premised on the UPE not being a loan. The Commissioner has appealed the decision in Bendel to the Federal Court and the ATO has reserved its position on the issues pending the outcome of the appeal.
The ultimate outcome of the appeal will be of considerable consequence for agribusiness enterprises and their advisers. To name a few:
- If the AAT decision is upheld by the Federal Court (and pending any possible further appeals or legislative intervention), this will facilitate a return to the pre-16 December 2009 position of agribusiness groups being able to more effectively fund primary production land (and other capital appreciating asset) acquisitions by trust structures from the retained earnings of a company.
- For instance, taxpayers may have an opportunity to create UPEs in favour of private companies but retain the proceeds referrable to the UPE within the trust for the purposes of working capital or reinvestment.
- Similarly, where earnings have been retained in a company (including by earlier UPEs created in favour of the company that have since been paid down), those retained earnings might be tax-effectively accessed to fund a land acquisition in a separate trust. To this end, the company with the retained earnings might declare and pay a fully franked dividend to the shareholding trust, which can on-distribute the dividend to a separate land acquisition trust. That second trust can in turn create a UPE in favour of a private company but retain the proceeds to fund the land acquisition without the need to place the UPE it has created on the terms of a Division 7A complying loan agreement.
- If, however, the appeal is decided in favour of the Commissioner, this could act as a further deterrent to the use of trust structures in agribusiness enterprises given the ongoing impact of Division 7A and, in more recent times, the increasing ATO compliance focus associated with the s100A trust reimbursement provisions. This would be a disappointing outcome for the agribusiness sector given the significant reliance placed on trusts for holding land for inter-generational succession planning.
The stakes are high for the agribusiness sector and the outcome of Bendel (and any legislation arising from the decision) will need to be monitored closely by advisers.
Peters Slegers is director and Daniel Marateo and Joshua Pascale are senior associates at the tax, revenue and agribusiness groups of Cowell Clarke.
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