On 19 February 2025, the Full Federal Court dismissed the appeal by the ATO in Commissioner of Taxation v Bendel, ruling in favour of the taxpayer. In its ruling, the Court affirmed that unpaid present entitlements (UPEs) owed by a trust to a company, arising from a distribution by that trust, should not be treated as loans under tax law (Division 7A). This Court decision is contrary to the ATO’s long-standing view, which it initially published in two key documents in October 2010.
Since 2009, professional advisors in Australia have assisted private groups, including small businesses and investors to manage and structure their affairs in compliance with the ATO’s view. There may now be circumstances where UPEs owed to private companies may not need to be treated as loans under Division 7A tax rules, where they would have been previously. This is a complex area of tax law however, and it should be noted that there are other tax provisions that could still be invoked by the ATO to apply to arrangements between a trust and a company, regardless of this recent decision, such as Subdivision EA of Division 7A, Section 100A Trust Reimbursements and Part IVA General Anti Avoidance Rules.
Where taxpayers have been subject to income tax on a deemed dividend arising from a UPE under Division 7A, either through self-assessment or resulting from an ATO audit, there may now be the opportunity to amend or object to these tax assessments and claim back refunds of tax, penalties, and interest. We recommend any taxpayers considering such action to proceed with caution, given the significant ramifications that could then arise from these other legislative provisions. Similarly, the alteration of existing loan terms could have unintended consequences. We recommend taking advice on all the potential tax implications before taking any steps in this area.
A spokesperson from the ATO has been quoted saying that the ATO is ‘considering the decision of the Full Federal Court including whether an application for special leave to appeal to the High Court may be appropriate’. We will learn more about the ATO’s plans in this regard in the coming months. The Government has made some previous attempts at re-writing these rules, releasing a Consultation paper in October 2018. These rewritten provisions were never passed into law and appeared in recent years to have fallen off the agenda of Treasury. This recent decision against the ATO’s long-standing position may now prompt the Government to reconvene on this area of tax law to provide certainty to taxpayers. On the other hand, in light of the upcoming Federal election, it could be deemed too risky to consider reform in this area at this time so there may not be any prompt action from the Government to address this. We will watch this space closely.
Our team at Knight will be working through these considerations over the next few months as we advise all our clients who manage Trusts on the options available to them in preparation for the upcoming key dates of 30 March, 14 May and 30 June 2025. If you would like to discuss how this decision may impact your current or future tax position, please contact one of our team.
