The decision of the Administrative Appeals Tribunal (AAT) in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 (Bendel) handed down on 28 September 2023 considers whether an unpaid present entitlement (UPE) of a corporate beneficiary constitutes a 'loan' within the meaning of section 109D(3) of the Income Tax Assessment Act 1936 (Cth) (ITAA36). Significantly, the decision reached by the AAT contradicts the view expressed by the Commissioner in TD 2022/11 and casts doubt over whether a UPE of a corporate beneficiary represents a loan for Division 7A purposes. The Commissioner has appealed the decision, which is not surprising given how common the use of trusts is among families and small businesses (who could be eligible for significant refunds).

The Commissioner's longstanding position

Historically, the view of the Commissioner, as originally expressed in TR 2010/3, has been that a UPE in respect of a corporate beneficiary, in certain scenarios, represents financial accommodation or an 'in substance loan' provided by that beneficiary to the trustee for the purposes of Division 7A of the ITAA36.

TR 2010/3 was withdrawn in July 2022 and superseded by TD 2022/11, which applies to UPEs arising on or after 1 July 2022. The Commissioner's view in TD 2022/11 is that a corporate beneficiary provides financial accommodation (and therefore a loan for the purposes of Division 7A) where that beneficiary is made presently entitled to income of a trust and that entitlement:

• remains unpaid (as a UPE) and the beneficiary consents (by arrangement, understanding or acquiesence) to the trustee retaining that amount to continue using it for trust purposes; or
• the UPE is satisfied by the setting aside of the amount under a separate sub-trust for the exclusive benefit of the corporate beneficiary, and that beneficiary consents to some or all of those funds being used for the benefit of the private company beneficiary's shareholder or their associate (and the funds are actually used).

Importantly, deemed dividends also arise under Subdivision EA of Division 7A where, amongst other things, a trustee makes a loan to a shareholder (or their associate) of a private company and the company has, or becomes entitled to a UPE from the income of the trust, and that UPE has not been paid within a prescribed time.

Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 (28 September 2023)

Bendel involved the Steven Bendel 2005 Discretionary Trust (SB Trust) making a corporate beneficiary, Gleewin Investments Pty Ltd (Gleewin Investments), and Mr Bendel, presently entitled to a share of the income of the SB Trust during the income years ended 30 June 2013 through 30 June 2017. Gleewin Investments' entitlement to the income of the SB Trust remained unpaid as UPEs which the Commissioner considered to amount to a loan to the trustee of the SB Trust, Gleewin Pty Ltd (Gleewin), within the meaning of section 109D(3) of the ITAA36. As a result, the Commissioner took the view that deemed dividends arose under Division 7A in successive income years in respect of these loans.

The critical question before the AAT was whether the UPEs of the corporate beneficiary (Gleewin Investments) gave rise to a loan to the trustee of the SB Trust (Gleewin) for the purposes of section 109D(3) of the ITAA36.

Is a UPE a 'loan' for the purposes of Division 7A of the ITAA36?

The AAT ultimately held at paragraph [101] that a UPE does not fall within the meaning of a loan under section 109D(3) of the ITAA36 as follows:

'…a loan within the meaning of section 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust.

In reaching their decision, the AAT had regard to the following:

• the policy objective of Division 7A being to deprive from taxpayers the benefit of tax-free corporate profits that would otherwise not have arisen had the company paid a dividend;
• the principles of statutory interpretation that call for regard to the statutory context and legislative history, and for 'potentially competing provisions' to be interpreted in a manner which 'gives effect to harmonious goals';
• the absence of any 'tiebreaker provision' to mandate which of two competing provisions would apply if a UPE constituted a loan under Division 7A;
• the unavailability of discretionary relief under section 109RB of the ITAA36 to prevent inappropriate double taxation;
• the presence of Subdivision EA in Division 7A which is a lead provision containing an express set of rules for dealing with the taxation of UPEs in favour of corporate beneficiaries in prescribed circumstances;
• the lack of clarity as to the nature of a UPE and the separate trust concept often approached together with the UPE topic;
• the explanatory material accompanying former section 109UB (the predecessor of Subdivision EA); and
• the lack of any provision within the ITAA36 or ITAA97 that expressly allows for the assessment of two people arising out of the same amount in circumstances where one of those people does not enjoy the benefit of corporate profits that are the underlying cause of an assessment.

Importantly, the AAT recognised that accepting the Commissioner's position that a UPE gave rise to a loan for Division 7A purposes raised the spectre of two Division 7A deemed dividends arising in respect of the same UPE circumstance, where Subdivision EA applied. This was particularly relevant in the AAT's assessment of the context of the legislation and the adoption of a narrower interpretation of 'financial accommodation' than that contended for by the Commissioner.

Notwithstanding both parties' position that a separate sub-trust existed in respect of the UPE, the AAT concluded that no such separate sub-trust existed. This aspect will attract significant attention.

Ultimately, the decision reached by the AAT is at odds with the view expressed by the Commissioner in TD 2022/11, that UPEs of a corporate beneficiary constitute a loan to the trustee for the purposes of Division 7A and casts significant doubt over the correct interpretation of section 109D(3) and the operation of Division 7A generally.

Does section 6-25 of the ITAA97 apply to the UPE?

A superfluous issue considered by the AAT was whether, on the assumption that the UPE did in fact constitute a loan, section 6-25 of the ITAA97 (which operates to prevent the same amount of income being included in assessable income more than once) operated to exclude the deemed dividend from the assessable income of the trustee (Gleewin) in a year on the basis that the same amount had already been included in the trustee's assessable income in the year immediately prior.
The AAT took the view that the term 'same amount' did not extend to 'amounts of a different identity that may have a historical connection'. Accordingly, any amount taken to be a dividend paid by Gleewin Investments to Gleewin was not the same as the amount determined to be assessable income for Gleewin Investments by operation of the usual provisions for the taxation of trust income in Division 6 of the ITAA36 and accordingly, section 6-25 of the ITAA97 did not apply.

The future post-Bendel

Noting that a decision of the AAT is not binding on the ATO, taxpayers and their advisors are now left to reconcile the contradictory views of the AAT and the Commissioner regarding whether a UPE of a corporate beneficiary constitutes a loan for the purposes of Division 7A. Taxpayers should review positions taken historically in relation to the application of Division 7A and the possibility that there may be a basis for challenging assessments within permitted review periods.

The Commissioner has lodged an appeal against the AAT's decision in Bendel. This is not surprising given that the decision contradicts the long-held views of the Commissioner expressed in TR 2010/3 and TR 2022/11 and creates considerable uncertainty for taxpayers in relation to Division 7A of the ITAA36.

If the Commissioner is unsuccessful on appeal, there is a strong likelihood of legislative change which may be retrospective in nature.

On 15 November 2023, the Commissioner has also issued an interim decision impact statement concerning the AAT’s decision and how the Commissioner will apply the law until the appeal is heard. The Commissioner has stated that “[U]ntil the appeal process is finalised, the Commissioner does not intend to revise the current ATO views relating to private company entitlements to trust income, as set out in Taxation Determination TD 2022/11 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation'?... Pending the outcome of the appeal process, the ATO is administering the law in accordance with the published views relating to private company entitlements and trust income in TD 2022/11”.

Further, the ATO does not propose to finalise any related objections in relation to previous assessments dealing with this matter. If an objection decision must be finalised, the decision will be based on the ATO’s existing view of the law.

Please contact any member of the MinterEllison Tax Team if you would like assistance in applying Division 7A of the ITAA36 post-Bendel.