A recent decision in the Bendel Case (Bendel v Commissioner of Taxation  AATA 3074) by the Administrative Appeals Tribunal (AAT) challenges the long-held view of the ATO and the Commissioner of treating an unpaid present entitlement (UPE) of a corporate beneficiary as a loan for Division 7A purposes. This article will briefly jump into the key facts of the case, its resulting decision, and effects on taxpayers.
A brief overview of the case
The taxpayer was a corporate beneficiary of a discretionary trust. The taxpayer became entitled to a share of the trust income for the income years 2013 – 2017. These entitlements were recorded in a current liabilities account by the trust. Because the balance of this account was unpaid by the corresponding years’ lodgement dates s109D of ITAA 1936 in Division 7A Subdivision B was applied to deem the unpaid entitlements to be Division 7A loans. This treatment of the UPE is in line with the Commissioner’s view on the appropriate treatment of similar UPEs.
The decision of the AAT was that s109D did not apply to the UPE as it was not a loan. This decision was based on the definition of a loan under s109D(3), which is a wide definition based on the language of the section. It was decided that it needs to be read in the statutory context. The AAT further noted that UPEs are more specifically dealt with by Subdivision EA of Division 7A, instead of Subdivision B, of which s109D is a part of. The taxpayer also put forward the concerns that a contrary interpretation of UPEs and the application of the Commissioner’s view of UPEs as a loan could result in a duplication of tax outcomes and in effect result in double taxing. The AAT agreed with these arguments resulting in the decision in favour of the taxpayer.
So, what does this mean going forward?
While the decision is currently in favour of the taxpayer, it is likely that the Commissioner will appeal this decision. This decision does however cast serious doubt on the validity of the Commissioner’s past arguments in relation to the treatment of UPEs as a loan. Ultimately, this decision is a win for many taxpayers if there is no appeal by the Commissioner. Caution should still be exercised in the treatment of UPEs as this is a developing situation as we not only wait to see how the Commissioner will react, but also for the ATO to release a Decision Impact Statement in response to the decision.
If you have any concerns or questions in relation to your trusts and UPEs, please contact our office.