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The government may look to take matters into its on hands on tax issues relating to Division 7A and UPEs once the Bendel decision is handed down, a tax specialist cautions.
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Bendel decision could spur 'legislative tinkering' from government
14 November 2024
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Tax specialist Tiffany Douglas has warned tax practitioners that the government could look to intervene on taxation issues relating to unpaid present entitlements and corporate beneficiaries once the Bendel decision is delivered by the Federal Court.
In September last year, the Administrative Appeals Tribunal (AAT) in Bendel v FCT [2023] AATA 3074 determined that an unpaid present entitlement (UPE) between a corporate beneficiary and trust did not constitute a loan under s109D(3) ITAA 1936.
This decision was in direct contrast to the ATO's views set out in TD 2022/11 that an unpaid present entitlement to a company constitutes a Division 7A loan.
The ATO announced in November last year it would appeal the AAT’s decision in respect of loans made to trusts and unpaid present entitlements. The case was heard in August with the decision yet to be handed down by the Federal Court.
Speaking at a recent Accurium and TaxBanter conference, Douglas said the Tribunal made clear in its decision that while the language in subsection 109D(3) of the ITAA is very wide, it still needs to be read within its statutory context.
"While the appeal case was actually heard in August this year we are still waiting for the outcome of that to be handed down," said Douglas, speaking at the Tax Practitioners Day.
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Douglas said while it's unlikely the Court will deliver its decision this year, it will be interest to see what the Full Federal Court decides and importantly what the ATO does next should it lose the appeal.
The ATO has issued an interim decision impact statement in the meantime which states the ATO will stick to its views until the appeals process has been exhausted.
"So the Tax Office has made it clear in respect of 2023 distributions that it expects us to comply with its existing views there," said Douglas.
"Depending on what the lodgement day is we potentially still have a little bit of time up our sleeve to wait and see how it all plays out.
"Certainly with respect to our 2024 distributions, we're not going to be needing to take any action there until potentially May 2026."
However, Douglas warned that while the case is potentially significant, practitioners would still need to wait and see how it actually plays out in the longer run.
"We may see the government take matters into their own hands by tinkering with the legislation to get rid of this issue," she said.
Douglas also noted that the ATO has included a warning in its interim decision impact statement about the potential application of section 100A.
"The ATO state that in addition to the application of 109D, the basis on which private companies deal with unpaid present entitlements to trust income may have implications under other taxation laws such as section 100A," she said.
"So what that means is that we may be able to fix our Division 7A problem, but that doesn't necessarily mean that we won't have a problem somewhere else, notably under 100A or the ATO may not like the arrangements and consider applying Part IVA."
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