ATO Releases Decision Impact Statement on Bendel

ATO Releases Decision Impact Statement on Bendel 

Last month, we reported on the High Court’s decision in Commissioner of Taxation v Bendel, which rejected the ATO’s longstanding position that an unpaid present entitlement (UPE) owing to a corporate beneficiary is, without more, a loan for Division 7A purposes. The ATO has now released its Decision Impact Statement (DIS), explaining how it intends to administer the law following the decision. 

The ATO’s Revised Position  

The ATO accepts that where a private company beneficiary has taken no relevant action in relation to its UPE, the outstanding entitlement will not be treated as a loan under section 109D. This applies regardless of whether the amount remains an ordinary UPE or has been set aside and held on a separate trust. A company’s mere failure to demand payment does not amount to the provision of financial accommodation. 

The ATO will therefore withdraw TD 2022/11, which expressed the contrary view, and review its other published guidance. 

However, Bendel does not establish that every amount owing to a corporate beneficiary is outside Division 7A. The legal character of each arrangement will continue to depend on all the surrounding circumstances, including:

• the terms of the trust deed;
• the wording of the trustee's distribution resolutions;
• the treatment of the entitlement in the financial statements; and

• anything subsequently done by the trustee and corporate beneficiary 

Existing Division 7A Loans Remain Loans 

One of the most important points in the DIS concerns UPEs that taxpayers have already converted into complying Division 7A loans. The ATO considers that where a UPE has been placed on complying section 109N loan terms, it is, as a matter of fact, a loan. Bendel does not retrospectively undo the agreement or convert the loan back into a UPE. The borrower must therefore continue making the required minimum yearly repayments and otherwise complying with the loan terms. Cancelling or forgiving the loan may itself result in a deemed dividend under Division 7A.  

Existing loan arrangements should not be reversed merely because the ATO’s earlier interpretation of an untouched UPE has been rejected.

Sub-Trust Arrangements 

The DIS also addresses arrangements implemented under former PS LA 2010/4. Under that guidance, many private groups placed corporate beneficiary entitlements on separate sub-trusts, often subject to seven-year or ten-year investment arrangements. The ATO now accepts that a UPE set aside and held on a separate sub-trust in accordance with PS LA 2010/4 is not, without more, a loan. 

The ATO also indicates that varying the terms of a sub-trust investment agreement will not, by itself, necessarily cause the entitlement to become a Division 7A loan. Nevertheless, the amended terms and subsequent conduct of the parties must be reviewed to determine whether they have entered into an arrangement that falls within the extended definition of a loan. The ATO is separately reviewing PCG 2017/13, which deals with PS LA 2010/4 sub-trust arrangements that have reached maturity. 

Other Integrity Provisions Still Apply

The High Court’s decision only concerned whether the UPE was a loan under section 109D. It did not remove the potential application of other integrity provisions.  

Subdivision EA may apply where a trust owes an amount to a private company beneficiary and the trust then:

• makes a payment or loan to a shareholder of the company or an associate; or

• forgives a debt owed by a shareholder or associate.

Section 100A may also apply where the corporate beneficiary’s entitlement arises under a reimbursement agreement, another person receives the economic benefit and the arrangement is outside ordinary family or commercial dealing.

Leaving a UPE outstanding is therefore not enough, by itself, to determine the tax outcome. In advising your clients you should trace how the trust funds are used and identify who ultimately receives the benefit.

Prior Assessments and Refund Opportunities 

The ATO has confirmed that taxpayers assessed on the basis that a UPE, without more, was a Division 7A loan may seek to have the assessment corrected. Taxpayers who remain within the applicable amendment period may request an amendment. Those outside the amendment period may need to lodge an objection and seek an extension of time.  

This does not mean that every historical Division 7A amount can be reclaimed. No adjustment will generally be available where the parties entered into a complying loan agreement or otherwise took steps that created an actual loan. Each arrangement and income year must be considered separately.

Practical Implications for Clients

So going forward in managing Division 7A exposures for your clients, you should distinguish between:

• UPEs that have simply remained outstanding;
• UPEs held under former sub-trust arrangements; and
• UPEs that have been converted into actual Division 7A loans.

Trust deeds, distribution resolutions and financial statements should be reviewed to ensure they accurately reflect the intended legal arrangement. Groups should also review the use of trust funds while corporate beneficiary entitlements remain unpaid, particularly where funds have been advanced or applied for shareholders or their associates.