Bendel Case Update and Division 7A

The Australian Taxation Office (ATO) recently faced a setback in its appeal against the Administrative Appeals Tribunal (AAT) decision in the Bendel case, with the Federal Court ruling against the ATO. This decision carries significant implications for the application of Division 7A in scenarios where a trust distributes profits to a corporate beneficiary.

ATO’s Position on Unpaid Entitlements (UPEs) For years, the ATO has maintained that when a trust distributes income to a corporate beneficiary but does not fully pay out the entitlement, the resulting unpaid entitlement (UPE) should be treated as a loan under Division 7A. This interpretation has meant that either the trust must transfer the distribution amount to the company or the company must declare dividends to clear the UPE—both of which have potential tax consequences.

Federal Court’s Decision and Implications The Federal Court's rejection of the ATO's appeal upholds the AAT’s stance that UPEs owed to a corporate beneficiary should not be classified as loans and, therefore, do not fall within the scope of Division 7A.

This decision challenges the ATO’s long-held position and introduces uncertainty about the treatment of UPEs moving forward. It is anticipated that the ATO may seek to appeal to the High Court. If unsuccessful, there is a possibility that legislative changes could be introduced to reinforce the ATO’s interpretation.

Continued Considerations for Division 7A While this ruling limits the reach of Division 7A concerning UPEs, it does not eliminate Division 7A considerations entirely. If a trust allocates income to a corporate beneficiary but redirects funds to related parties or entities, the provisions of Subdivision 109EA—an extension of Division 7A—still apply. Additionally, direct loans from companies to shareholders or their related entities continue to be caught under Division 7A.

Next Steps for Tax Planning For those who have previously faced penalties due to non-payment of company UPEs, this ruling presents an opportunity to seek redress. Objections may be raised, and specialist tax advice should be sought promptly.

Looking ahead, the ATO is expected to review its stance and issue a Decision Impact Statement to clarify its position and next steps. Until further guidance is provided, businesses should remain cautious and closely monitor developments.

We will continue to track this issue and provide updates on any further legal challenges or policy changes affecting Division 7A and trust distributions to corporate beneficiaries.