A recent tribunal decision could be a game changer for businesses in relation to their tax. Could this mean the return of the Jedi, I mean, taxpayer? Is the tax landscape about to change…again?
Today we bring you the latest episode in the tax saga, or in other words (sci-fi geek jokes aside), we’ve put together this article to explain what happened with Bendel v Commissioner of Taxation and some key takeaways.
In the recent case of Bendel v Commissioner of Taxation (Bendal) the Administrative Appeals Tribunal (AAT) throws doubt on the ATO’s long-standing practices around Unpaid Present Entitlements (UPEs) from trust triggering deemed dividends for taxpayers.
Division 7A of the Income Tax Assessment Act 1936 is a set of provisions that deem a private company to have paid an unfranked dividend where the company either:
a shareholder or their associate.
The concept of a loan extends to the ‘provision of financial accommodation’, and specific issues arise for a company which is the beneficiary of a trust. This can occur where the trust:
For at least the last 13 years the ATO has taken the approach that where there is a common controller of the relevant entities, the UPE will constitute the provision of financial accommodation, and therefore risks triggering a deemed dividend under Division 7A.
Complicating matters, there are specific integrity provisions in Division 7A known as ‘Subdivision EA’ which apply to UPEs, and apply where:
The relevant facts in Bendel are quite simple:
The ATO argued that these UPEs were loans under Divisions 7A and therefore trigger unfranked dividends to Mr Bendel.
The AAT disagreed, and said that as a matter of statutory interpretation the UPEs were not a loan. The case did not consider the application of Subdivision EA, however presumably the UPEs would be a loan if the further conditions under Subdivision EA had been met.
We do not expect to see any immediate change from the ATO to their interpretation of Division 7A and UPEs, especially given this was a Tribunal decision rather than a Court decision.
It is also not yet known whether the ATO will appeal the decision.
However this is a case of ‘watch this space’ – the ATO’s compliance approach to Division 7A and UPEs creates significant practical issues for many small and medium businesses run in a trust structure, reducing the ability to retain income for business operations and expansions. Any changes in this space will have far reaching consequences.
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