By Harrison Dell, Director.
The Bendel decision handed down on 28 September 2023, has sparked considerable interest in the Australian tax community. This controversial ruling by the Administrative Appeals Tribunal delves into the intricate definitions within Division 7A of the Income Tax Assessment Act 1936 (Cth), particularly concerning Unpaid Present Entitlements (UPEs) and their classification as ‘loans’.
This article examines the implications of the Bendel decision and its potential influence on the treatment of UPEs under Division 7A until an appeal is lodged.
The Bendel Decision in the AAT
Background of Bendel and Commissioner of Taxation
The case centered on whether UPEs owed to a corporate beneficiary by a trust could be considered ‘loans’ under section 109D(3) of the ITAA 1936. This inquiry challenged the Australian Taxation Office’s (ATO) longstanding interpretation, crystallized in TD 2022/11, that UPEs constitute loans if they remain outstanding or are held in a sub-trust arrangement.
Tribunal’s Decision: A Shift in Understanding
The Tribunal’s findings underscore a significant deviation from the ATO’s previous interpretation. It concluded that UPEs do not fall under the ambit of ‘loans’ as outlined in Division 7A, citing the policy intent of the legislation and the statutory context, among other factors.
This interpretation opens up a defendable alternative on the actual nature of UPEs and their tax treatment.
Analyzing the Rationale Behind the Decision
The decision hinged on various considerations, from the policy objectives of Division 7A to prevent the untaxed enjoyment of company profits, through to the statutory interpretation principles aiming for harmony within the legislative framework. Notably, the Tribunal highlighted the absence of a provision to prevent double taxation and the specific treatment of UPEs under Subdivision EA, indicating a clear legislative intent distinct from the ATO’s view.
The ATO’s Reaction to the Bendel Decision
Following the AAT ruling in the Bendel case, the ATO has taken steps to reduce the impact of the decision. The Commissioner has released a Decision Impact Statement with a clear stance: the ATO’s current interpretations and guidelines, notably those encapsulated in Taxation Determination TD 2022/11 concerning private company entitlements to trust income, will remain unchanged while the appeal process is underway.
This approach underscores the ATO’s intention to uphold its existing legal viewpoint in objection decisions and other relevant determinations until a definitive judicial conclusion is reached.
The ATO has indicated the possibility of invoking section 100A of the ITAA 1936 in scenarios akin to those discussed in the Bendel case. Section 100A is an anti-avoidance rule which targets arrangements where trust distributions, ostensibly directed to a beneficiary, ultimately benefit another party in a manner designed to circumvent tax obligations. The application of this provision could result in the trustee bearing tax liability at the highest marginal rate, representing a critical consideration for taxpayers and advisors navigating these legal landscapes.
In essence, the ATO’s response to the Bendel decision emphasises its commitment to maintaining established viewpoints on trust income entitlements and the implications of Division 7A, while also signaling the potential use of anti-avoidance provisions to address strategic tax avoidance efforts. This stance reflects the ongoing legal and regulatory debate surrounding the taxation of trust and corporate beneficiary arrangements, underscoring the importance of staying informed on these evolving issues.
Until the case is heard in the Federal Court, we expect the ATO view will not change.
Conclusion
The Bendel decision injects a degree of uncertainty into the application of Division 7A to UPEs, challenging the ATO’s established interpretation. Although this ruling offers a new viewpoint, it does not immediately alter the ATO’s approach, leaving taxpayers in a state of ambiguity.
Taxpayers may choose to rely on the Bendel ruling and it can be used to build a reasonably arguable position. Though do so with caution – the ATO has warned it does not agree with the decision and is heavily appealing.
Until there is either legislative clarification or further judicial guidance, the practical applicability of the Bendel decision remains in limbo. Taxpayers should proceed with caution and seek professional advice when navigating these complex issues.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.
