Private Wealth Client Deputy Commissioner Louise Clarke has released a statement on 28 April 2025 sharing the Australian Taxation Office (ATO) thoughts regarding the Commissioner of Taxation v Bendel case.
Commissioner of Taxation v Bendel [2025] FCAFC 15
On 19 February 2025, the Full Federal Court passed a landmark judgement in favour of the taxpayer whereby the unpaid present entitlement (UPE) resulting from a trust allocating income to a corporate beneficiary is not considered a loan under subsection 109D (3) of Division 7A of the Income Tax Assessment Act 1936.
Background
In 2010, the ATO released taxation ruling TR 2010/3 whereby any unpaid present entitlement owing to the corporate beneficiary could amount to financial accommodation and therefore treated as a loan for the purpose of Division 7A. TR 2010/3 was withdrawn in July 2022 and superseded by TD 2022/11, which applies to UPEs arising on or after 1 July 2022.
In 2023, the Administrative Appeals Tribunal (AAT) held that a UPE between the corporate beneficiary and trust did not constitute a loan, challenging the ATO’s long standing view in TD 2022/11. The Federal Court’s recent decision affirms the earlier decision of the AAT, although for somewhat different reasons.
What is the ATO doing?
The ATO has filed special leave to the High Court against the decision of Full Federal Court. In continuation to it, on 19 March 2025, the ATO released an Interim Decision Impact Statement (DIS), whereby the ATO confirmed that they do not intend to revise its views set out in TD 2022/11.
This DIS is further supported by a statement issued on 28 April 2025 by Louise Clarke. Contrary to the court ruling, this statement confirmed that the ATO don’t intent to revise their view as stated in TD 2022/11 until the appeal process is exhausted. It also highlights the consequences under other integrity provisions, including section 100A and subdivision EA, which are not dependent on the outcome of the Bendel High Court case.
Next steps
On initial view, taxpayers may see the Full Federal Court decision as good news, however, the outcome gives rise to further uncertainty and, as confirmed by the ATO, other integrity measures which consideration must be given to.
Subdivisions EA and EB applies if the trust makes a payment or loan to, or forgive the debt of, a shareholder or associates of a private company for as long there is a UPE of the company to the trust income.
Additionally, it will be interesting to see how the provisions under s100A and general anti-avoidance regime in Part IVA will come into play if the High Court upholds the Full Federal Courts decision.
With the special leave pending before the High Court, we may not see a decision on this for many months and the ATO have confirmed that they will not grant blanket extension to taxpayers affected by this. They have also made it clear that if the guidelines in TD 2022/11 are followed, taxpayers will not be facing the prospects of a deemed dividend or other integrity measures, regardless of the outcome of the High Court proceedings.
Even if the ATO were to lose their High Court appeal being a Federal election year, many consider it likely that Parliament will revisit the proposed reforms to Division 7A.
As we continue to monitor the developments as they unfold, we will be assisting clients on how to treat UPE’s while finalising their 2024 accounts through this interim period.
Please contact your trusted Nexia advisors to discuss and understand how this can impact your situation and to determine the future course of action.
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