Accountants warned not to jump the gun with AAT’s Div7A decision
Accountants have been cautioned against adopting the AAT’s position in Bendel too soon in their tax advice, particularly with the ATO now looking to appeal the decision.
HLB Mann Judd tax consulting director Peter Bardos said a decision last month by the Administrative Appeals Tribunal (AAT) concerning unpaid present entitlements and what comprises Division 7A loans creates a challenge for accountants in terms of determining what advice they give to their clients.
In early October, the AAT handed down its decision in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074, which overturned more than a decade of ATO edicts about the tax implications of unpaid entitlements to companies and what comprises a Div7A loan.
“This decision looked at whether distributions from a trust to a private company fell within Division 7A,” said Mr Bardos.
Mr Bardos noted that back in 2009, the ATO formed the view that this type of arrangement would fall within Division 7A, which has been followed ever since.
“However, the tribunal member formed the view that a distribution from a trust to a private company is not within Division 7A,” he said.
The ATO has filed an appeal against the AAT’s decision, with the matter to go before the Federal Court.
“If the ATO loses in the Federal Court it will be interesting to see what the Tax Office’s response will be,” said Mr Bardos.
Accountants in the meantime are left in a difficult position in terms of how they advise their clients in light of this decision.
“How do you advise your client when you’ve got a tax ruling which says one thing, and a tribunal decision which says another?” asked Mr Bardos.
Despite the outcome of the decision, Mr Bardos warned that accountants and their clients would be “very brave to go against the ATO’s tax ruling until the matter goes further”.
“The Tribunal doesn’t set the law so once it makes it to the Court then perhaps we’ll have some more guidance.”
Mr Bardos said there have been several recent tax cases challenging long-standing principles on trust distributions.
“As practitioners, we’re still working with clients based on the Tax office’s guidelines on trust distributions which came out last year. There’s since been a couple of tax cases that have challenged some of the views in that guidance,” he said.
“[The Tax Office guidance] removed some of the flexibility where practitioners and their clients rightly or wrongly thought they had the ability to distribute trust income. A lot of businesses that are carried on through a trust or through a company have been distributing income in ways that the Tax Office doesn’t think they will be able to going forward.
“That’s something that as practitioners we’re still working through.”
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