The long-awaited decision of Commissioner of Taxation v Bendel [2025] FCAFC 15 was handed down last week.
Here’s the key information you need to know:
Want to know more? Read below. |
The case involves circumstances that many of our clients will find familiar: a trust has earned income (from operating a business or investments) and the trustee has decided prior to 30 June of the relevant year to distribute that income to a company. The company pays tax on that income, however, the remaining unpaid entitlement is retained by the trust for working capital, investment or other purposes. This has long attracted the attention of the Australian Taxation Office concerned that taxpayers are getting the benefit of paying tax at the corporate rate of tax (25% or 30%) rather than the trustee or an individual beneficiary paying tax on that income at up to 47%.
The case revolved around a family trust (the Steven Bendel 2005 Discretionary Trust) and a company (Gleewin Investments Pty Ltd) that was a beneficiary of that trust. The trustee of the family trust, Gleewin Pty Ltd, decided to distribute some of the trust's income to Gleewin Investments Pty Ltd. However, Gleewin Investments Pty Ltd never actually received the full entitlement of the distribution. The Commissioner argued that this unpaid amount should be considered a loan from Gleewin Investments back to the trust, triggering certain tax implications under Division 7A. The case is an appeal by the Commissioner following the taxpayer’s successful appeal in the Administrative Appeals Tribunal in October 2023.
The case follows almost 15 years of uncertainty since the Commissioner released rulings and guidance in 2010 stating the view that Division 7A can apply to the above circumstances.1 The Commissioner’s guidance required taxpayers to place the unpaid entitlements on a loan arrangement and make principal and interest payments (often requiring the payment of additional tax) to avoid a deemed dividend – essentially resulting in taxpayers having to pay tax twice on the same income. In 2022, the Commissioner double-downed by removing interest-only arrangements offered in their previous guidance.
The core question was whether the unpaid trust distribution could be classified as a "loan" under tax law (specifically, Section 109D of the Income Tax Assessment Act 1936). The Commissioner argued that because Gleewin Investments did not demand immediate payment, it was providing "financial accommodation" to the trust, resulting in a loan under Division 7A.
Ultimately, the Full Court of the Federal Court disagreed with the tax office, agreeing with the decision made by the Administrative Appeals Tribunal, albeit, on a different interpretation and application of the law. The court said that simply having an unpaid entitlement to income from a trust does not amount to a loan.
The court emphasised that a key characteristic of a loan for the purposes of Division 7A is the obligation to repay the money. In this case, Gleewin Investments was entitled to be paid its entitlement, but there was no amount that the trust was required to repay.
This aligns with the Commissioner’s Practical Compliance Guideline 2022/2 on section 100A released in December 2022 which indicated the Australian Taxation Office would not apply compliance resources to arrangements where unpaid entitlements to trust income were placed loan terms consistent with Division 7A complying loan arrangements.
For now, the best course of action is to monitor ATO guidance and seek professional advice before making any changes to your business’s trust and distribution strategies.
Please contact your Ulton adviser for more information.
Source
1 Taxation Ruling 2010/3 and Law Administration Practice Statement 2010/4