ATO to challenge ruling in Bendel trust loan case

Monday, 27 November 2023
The Australian Taxation Office (ATO) is to appeal against the Administrative Appeals Tribunal's decision in favour of the taxpayer in the Bendel case, concerning loans made to trusts and unpaid present entitlements (UPEs).

The case (Bendel v ATO, 2023 AATA 3074) concerned a discretionary trust set up by Steven Bendel in 2005, for the benefit of Bendel himself and his wholly owned company. Bendel was also the sole shareholder and director of the trustee company.

Bendel and his company were made presently entitled to the trust's income for the 2013–2016 tax years. The trust made some payments for, or on behalf of, the company that had the effect of reducing its entitlements to trust income. However, those entitlements remained substantially unpaid by the filing deadline for the company's 2013–2016 income tax returns, leaving the funds in the trust as UPEs. The trust's accounting records showed that from 2014–2017 it made significant payments to Bendel, recorded as an amount owing to the trust in its accounts.

The ATO used the Division 7A anti-avoidance legislation to deem that the company's failure to call for payment of entitlements to the trust's income amounted to a loan to the trust. It therefore found that the company was assessable for extra tax on the deemed dividends. It duly issued additional assessments to Bendel and his company for each of the 2014–2017 income years.

Bendel appealed these assessments to the Administrative Appeals Tribunal, where he had a partial victory in September 2023. The tribunal decided that the company did not make a loan to the trustee of the trust within the meaning of the Income Tax Assessment Act 1936 (s.109D(3)). The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, was not a loan to the trustee of the trust. There was therefore no deemed dividend paid by the company to the trust.

The ATO has now lodged an appeal against this part of the decision and issued an interim decision impact statement outlining its next steps. Pending the appeal's outcome, the ATO will not revise its current views on unpaid present entitlements nor seek to finalise any other affected objection decisions where the decision turns on whether a UPE was a s.109D(3) loan. It will continue to apply its current advice and guidance regarding Division 7A and related disputes. However, the ATO says that if a taxpayer forces it to make an objection decision, it will decide based on its own existing view of the law.


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