Full Federal Court Ruling: Bendel Case - Division 7A
Federal Court ruling in the Bendel Case: Unpaid entitlements to companies are not treated as loans under Division 7A.
Bendel Case Update and Division 7A
The ATO’s (Australian Taxation Office) appeal against the AAT (Administrative Appeals Tribunal) decision in the Bendel case was recently denied by the Federal Court. This decision has significant implications for the application of Division 7A, in cases where a trust has distributed profits to a corporate beneficiary.
ATO’s Position on Unpaid Entitlements (UPEs)
The ATO’s long-held position is that where a trust makes a distribution to a company but does not pay the full amount, then the ‘unpaid entitlement’ (commonly referred to as a ‘UPE’) will become a loan, which comes into the ambit of Division 7A. This essentially compels the trust to pay across the distribution amount or have the company declare dividends to extinguish the UPE. This would usually come at a cost in tax payable.
Federal Court’s Decision and Ruling
In denying the ATO’s appeal, the Federal Court has affirmed the AAT’s decision that UPEs owed to a company should not be treated as loans and are therefore not within the scope of Division 7A.
Implications for Tax Planning
So, what does this mean for tax planning going forward? There is still the likelihood that the ATO may appeal further, to the High Court, and given the stakes it is likely they will try to do so. Should they fail there as well, then there may be steps taken to legislate to affirm the Commissioner’s view. Basically, there is still doubt on how the ATO position will be revised and hence what the ‘safe harbour’ approach is when dealing with companies as beneficiaries of trusts.
It should be noted that this decision is not a complete denial of the application of Division 7A. The situation where a trust makes a company entitled to income but advances the funds to related entities / parties is caught by subdivision 109 EA (an extension to Division 7A). And of course, actual loans from companies to shareholders or their related parties remain within the scope of Division 7A.
Future Outlook and Next Steps
Next steps – there are likely strong grounds for an objection where a client has been penalised in the past for not making payment of company UPEs and this has been advocated recently in the financial press. If this has happened to you, then steps should be taken urgently to engage specialist advice. As for managing future company UPEs, the ATO is reviewing and updating its position and will issue a Decision Impact Statement to provide guidance on their interpretation and likely response. We will of course watch that space closely.
If you’ve been penalised for unpaid company UPEs or are concerned about future implications, now is the time to act. Contact the experts at Cordner Advisory today for urgent, specialist advice on navigating the ATO’s evolving stance and securing the best outcomes for your business.
