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Is an unpaid present entitlement a ‘loan’ under Division 7A? AAT says no.

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On 28 September 2023, Deputy President F D O’Loughlin KC and Senior Member K James of the Administrative Appeals Tribunal handed down their decision in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 (28 September 2023). The case was primarily concerned with whether an unpaid present entitlement (UPE) (as to income or capital) owing to a corporate beneficiary was a ‘loan’ within the meaning of section 109D(3) of the Income Tax Assessment Act 1936 (Cth), as contained within Division 7A. 

The decision is significant as it is contrary to the Commissioner’s long-standing view that a subsisting UPE is a form of ‘financial accommodation’ or an ‘in-substance loan’ and hence, a ‘loan’ as defined in section 109D(3) of the ITAA 1936. The Commissioner’s view was first expressed in TR 2009/D8 which was later finalised in TR 2010/3 (some 14 years ago now).

Most recently, TR 2010/3 was withdrawn and replaced with TD 2022/11 which now expresses the view that a UPE is a loan under Division 7A if a UPE owing to a corporate beneficiary:

  • remains outstanding; or
  • is placed on a ‘sub-trust’ arrangement for the exclusive benefit of the corporate beneficiary.


Bendel concerned Gleewin Pty Ltd ATF The Steven Bendel 2005 Discretionary Trust (2005 Trust) making a corporate beneficiary, Gleewin Investments Pty Ltd (Gleewin Investments), presently entitled to a share of the income of the trust estate for the income years ended 30 June 2013 to 30 June 2017 (Relevant Years).

The entitlements to the 2005 Trust’s income created for the Relevant Years for Gleewin Investments led to the emergence of the UPEs to 2005 Trust’s income.

The emergence of the UPEs raised four ‘Issues’. However, of most interest was Issue 1 - did the corporate beneficiary make a loan within the meaning of subsection 109D(3) to the trust on account of the corporate beneficiary’s UPEs with the trust?

Issue 1 - is a UPE a ‘loan’ under Division 7A?

The Tribunal held at paragraph [101] that:

a ‘loan’ within the meaning of section 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlements of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, does not constitute a loan to the trust.

The Tribunal based its decision on the following:

(i)  The policy of Division 7A is to prevent the enjoyment of private company profits in a manner where there is no taxation that would otherwise arise if the company had paid a dividend.

(ii)  The statutory context and legislative history of Division 7A and the statutory interpretation principle of construing provisions in a manner which ‘gives effect to harmonious goals’.

(iii)  The absence of a ‘tiebreaker provision’ to prevent double taxation that would otherwise arise if the UPE was a loan under Division 7A.

(iv)  The lack of relief afforded by section 109RB outside of instances of honest mistakes and inadvertent omissions to prevent double taxation.

(v)  The importance of Subdivision EA as the specifically designed provision for dealing with UPEs in prescribed circumstances.

(vi)  The lack of clarity as to the nature of a UPE and the separate trust concept often broached in conjunction with the UPE topic.

(vii)  The explanatory material to the former section 109UB (the predecessor to Subdivision EA), which supports the view that:

a.  a UPE to a corporate beneficiary in conjunction with a loan from the trust to a shareholder of the corporate beneficiary (or associate) is in substance a loan by the company to the shareholder; and

b.  a UPE held on a secondary trust is within the ambit of section 109UB.

(viii)  The operation of Subdivision EA and its application in the circumstances prescribed.

(ix)  The absence of any provision in the ITAA 1936 or ITAA 1997 which permits the assessment of two people on the same amount with one of those people not enjoying the benefit of the corporate profits.


What does Bendel mean going forward?

The Tribunal’s decision raises significant doubt about the ATO’s views expressed in TD 2022/11 (and as previously expressed in TR 2010/3). However, we do not anticipate the Commissioner will withdraw his views (at least not yet).

It is likely that the Commissioner will appeal the Tribunal’s decision, given the importance of the classification of a UPE as a ‘loan’ in the context of Division 7A and its wide ramification for taxpayers.

However, that possibility is not strictly necessary, and the Commissioner is not bound by the decision of the Tribunal. The decision of Bendel may just become an alternate view to the Commissioner’s and the Commissioner will bide his time until another taxpayer wants to take a similar matter to the Federal Court. Although this is unlikely.

Absent legislative change and the decision being appealed, taxpayers are left in limbo. In the ATO’s world, a UPE remains a loan for the purposes of Division 7A; in the Tribunal’s, its not. If you need assistance navigating these two worlds, please let us know.

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