Bendel decision could spur ‘legislative tinkering’ from government
The government may look to take matters into its own hands for tax issues relating to Division 7A and UPEs once the Bendel decision is handed down, a tax specialist has cautioned.
Tax specialist Tiffany Douglas has warned tax practitioners that once the Bendel decision is delivered by the Federal Court, the government could intervene on taxation issues relating to unpaid present entitlements and corporate beneficiaries.
In September last year, the Administrative Appeals Tribunal in Bendel v FCT [2023] AATA 3074 determined that an unpaid present entitlement (UPE) between a corporate beneficiary and trust did not constitute a loan under section 109D(3) of the Income Tax Assessment Act 1936.
This decision was in direct contrast to the ATO's views set out in TD 2022/11 that an unpaid present entitlement to a company constitutes a Division 7A loan.
The ATO announced in November last year it would appeal the AAT’s decision in respect of loans made to trusts and unpaid present entitlements. The case was heard in August with the decision yet to be handed down by the Federal Court.
Speaking at a recent Accurium and TaxBanter conference, Douglas said the tribunal made clear in its decision that while the language in subsection 109D(3) of the ITAA is very wide, it still needs to be read within its statutory context.
"While the appeal case was actually heard in August this year we are still waiting for the outcome of that to be handed down," Douglas said at the Tax Practitioners Day.
Douglas said while it's unlikely the court would deliver its decision this year, it would be interesting to see what the Federal Court decides and, importantly, what the ATO does next should it lose the appeal.
The ATO issued an interim decision impact statement stating the ATO would stick to its views until the appeals process has been exhausted.
"So the Tax Office has made it clear in respect of 2023 distributions that it expects us to comply with its existing views there," Douglas said.
"Depending on what the lodgement day is we potentially still have a little bit of time up our sleeve to wait and see how it all plays out.
"Certainly with respect to our 2024 distributions, we're not going to be needing to take any action there until potentially May 2026."
However, Douglas warned that while the case is potentially significant, practitioners would still need to wait and see how it plays out in the longer run.
"We may see the government take matters into their own hands by tinkering with the legislation to get rid of this issue."
Douglas also noted that the ATO has included a warning in its interim decision impact statement about the potential application of section 100A.
"The ATO state that in addition to the application of 109D, the basis on which private companies deal with unpaid present entitlements to trust income may have implications under other taxation laws such as section 100A."
"That means we may be able to fix our Division 7A problem, but that doesn't necessarily mean that we won't have a problem somewhere else, notably under section 100A, or the ATO may not like the arrangements and consider applying Part IVA."
