Commissioner of Taxation appeals Bendel case decision

In an update to the Bendel case, the Australian Taxation Office (ATO) has revealed it will maintain its current position treating UPEs to corporate beneficiaries as loans under Division 7A.

In an Interim Decision Impact Statement (DIS) published by the ATO on Wednesday, it noted it would continue to abide by its established view that an unpaid present entitlement (UPE) to a company constitutes a Division 7A loan.

To appeal the decision, the Commissioner filed a special leave application with the High Court in respect of the Full Federal Court’s decision.

According to the Interim DIS, pending the outcome of the appeal process, the ATO would continue to administer the law in accordance with the published views in TD2 2022/11.

“Until the appeal process is finalised, we do not intend to revise the current 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 subtrust become the provision of ‘financial accommodation?’,” the ATO said.

In addition to this, the statement noted there could be other implications under section 100A on the basis with which private company beneficiaries dealt with unpaid entitlements to trust income.

Section 100A was a commonly referred to exemption under the Division 7A provision as explained in the Practical Compliance Guideline PCG 2022/2 Sections 100A reimbursement agreements – ATO compliance approach.

In this guideline, the ATO explained that where a corporate beneficiary was entitled to income from a related trust, and the trustee retained those funds by way of a loan on ‘commercial terms’ for working capital, it would not typically seek to apply compliance resources to consider the application of section 100A.

For those purposes, the ATO accepted that loans on Division 7A complying terms were sufficiently commercial.

“If instead, a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the green zone in PCG 2022/2,” the ATO said.

“In situations like this, we may engage with you to better understand your arrangement, including the risk of section 100A applying.”

In posts made to LinkedIn on Wednesday afternoon, multiple tax professionals shared their reactions based on their personal and professional perspectives towards the statement.

Posts across the site attracted significant traction from the accounting and tax community, many professionals having expressed opposing views on the Commissioner’s view and ability to disregard court law.

CPA Australia tax lead, Jenny Wong, said the Interim DIS served as an important reminder for taxpayers and to remain up-to-date with the case.

“The ATO has applied for special leave to appeal Bendel and issued an interim impact statement. For now, the Commissioner’s approach remains unchanged, reinforcing the need for Division 7A-compliant terms for unpaid present entitlements,” she said.

“Taxpayers should review their UPE arrangements and seek advice to ensure compliance.”