Full Federal Court rules on Bendel Case - Division 7A
Full Federal Court rules on Bendel Case - Division 7A
The Full Federal Court has unanimously decided that an unpaid present entitlement (UPE) owing by a trust to a company is not a loan. Such UPEs therefore do not give rise to deemed dividends under Division 7A. This is contrary to the Australian Taxation Office’s (ATO) previous position.
What you need to know
An update on the decision
In 2023, the Administrative Appeals Tribunal (AAT) held that an unpaid present entitlement (UPE) between a corporate beneficiary and trust did not constitute a ‘loan’ under section 109D and therefore would not be deemed to be a dividend under Division 7A.
The decision challenged the ATO’s established view in TD 2022/11 (and the previous but now withdrawn TR 2010/3 and PS LA 2010/4), which treated these UPEs as loans for the purposes of Division 7A, unless the UPE was placed in a separate sub-trust solely for the benefit of the corporate beneficiary with an appropriate return on investment being provided through to the corporate beneficiary. The Commissioner appealed the decision.
The Full Federal Court, in dismissing the Commissioner’s appeal, confirmed that for section 109D to be enlivened there must be an obligation to repay the “loaned” amount. A mere obligation to pay (i.e. in a debtor/creditor arrangement) was not sufficient to be considered a “loan” for the purposes of section 109D. As an unpaid present entitlement from a trust is an obligation to pay the relevant beneficiary, the court held that an unpaid present entitlement should not be considered a loan. The Full Federal Court also held the term “financial accommodation”, in the extended definition of “loan” in section 109D, does not include a UPE in the context of Division 7A.
Further, the court found that the Commissioner’s interpretation of section 109D created situations where a taxpayer could be subject to double taxation (which was not the intention of Parliament when enacting Division 7A).
What does it practically mean?
This decision overturns a long standing ATO administrative practice from 2009 and has broad implications for the Australian tax community, particularly private groups that have adopted trust structures.
Our key takeaways for taxpayers from the Full Federal Court’s judgement are as follows:
- Where they have entered into a complying Division 7A loan agreement in relation to a UPE, they should consult their tax advisors before taking any action
- Those who have been previously subject to ATO review/audit should consult with their tax advisors to determine whether there is any opportunity to object to the ATO’s decision which may include a remission of any primary tax, interest and penalties. For those taxpayers that are currently under ATO review/audit, we strongly recommend engaging with the ATO case officers to discuss next steps.
- Careful consideration should be given to the best course of action in dealing with existing UPEs from a trust to a company arising from the 2023 or 2024 income years
- Finally, a note of caution - while a UPE to a corporate beneficiary may not be a loan, if the trust with the unpaid present entitlement to a private company provides a loan to a non-corporate shareholder or associate of a shareholder of the private company, Division 7A may still have application to deem the loan from the trust to be a loan from the private company – care should be taken in respect of these arrangements
What can the ATO/government do next?
The ATO can still seek leave to appeal to the High Court. Failing that, BDO expects that this decision is likely to cause the government to contemplate legislative amendment. If so, we call on the government to consider a broader review of Division 7A which has been talked about for a number of years and is long overdue.
Contact us
If you have entered into a complying Division 7A loan agreement in relation to a UPE or have any questions regarding the content of this article, contact your BDO tax adviser for further guidance.