THE BENDEL DECISION - DIVISION 7A - THE FULL FEDERAL COURT RULES ON UPE'S IN RELATION TO s109D(3) OF ITAA 1977

Now that the dust is settled and the facts well deliberated, what are the practical next steps regarding the Bendel decision?

By way of background, and at the risk of oversimplification, the Full Court of the Federal Court recently dismissed the Commissioner’s appeal and held that a “loan” as defined in s109D(3) for the purposes of Division 7A of ITAA 1936 (Cth) requires an obligation to repay an amount, rather than obligation to pay. Therefore, an unpaid present entitlement (UPE) owed by a trustee to a corporate beneficiary is not a “loan” and therefore not a deemed dividend.

• If an application for special leave is made by the Commissioner, then we expect an interim decision impact statement (Interim DIS) to be published after the application is made, meaning no ‘mea culpa’ from the ATO (just yet). We are likely to see another Interim DIS about ‘no compliance resources will be allocated to such matters’ until the outcome from the special leave application is determined.

• Should you wait before seeking to lodge objections? No, lodge them today.

• Should you change your accounting approach to UPEs? No, a UPE remains a liability of the trust and an asset of the corporate beneficiary.

• Does this decision mean that UPEs are not loans for Division 7A purposes? This decision means that UPEs will not fall within s109D(3), however, in some circumstances, you still need to be alive to Division 7A consequences under Subdivision EA.

• The Commissioner previously threatened the use of s100A to deal with UPEs – what does that mean? We consider that s100A will have limited application to many UPE arrangements.

• Is it possible that we see a retrospective change to the law, either now or after a High Court outcome (if the Commissioner was again unsuccessful on appeal)? It is possible, but law changes are difficult. The strong resistance against the government’s failed attempts to legislate Div 296 would pale in comparison to the multifaceted pincer movement from taxpayers, professional associations, and practitioners alike against a retrospective legislative band aid for Division 7A. Given the next parliament is likely to constitute a minority government based on some recent polls, it would be a ‘courageous’ minority government to take this on without clear cross bench support.

The team at SMAILES KRAWITZ has experience in dealing with these matters, including tax compliance, reviews, audits, voluntary disclosures, reviews/appeals, debt disputes, director penalty matters and criminal prosecutions.

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Alan Krawitz21 February 2025