Commissioner’s position rejected
The Commissioner’s long-held position that a private company beneficiary provides financial accommodation to a trustee that it, by arrangement, understanding or acquiescence, allows to retain funds to which it is presently entitled, is no longer tenable.
Therefore, trustees who have had the balance of an unpaid present entitlement (UPE) to a private company beneficiary treated as a deemed dividend should consider objecting to any assessment issued on that basis.
Breaking down Bendel
On 19 February 2025, the Full Federal Court, in Commissioner of Taxation v Bendel [2025] FCAFC 15, held that a UPE to a private company beneficiary is not a loan for the purpose of section 109D(3) of Division 7A of the Income Tax Assessment Act 1936 (1936 Act).
Specifically, the Court held that:
- for the purpose of section 109D(3), a loan requires a transaction that creates an obligation, or that in substance effects an obligation, to repay an amount: the creation of an obligation to pay an amount is not sufficient; and
- although a debtor-creditor relationship exists between a trustee and corporate beneficiary that refrains from demanding immediate payment of an amount due to it, in those circumstances, there is an obligation to pay an amount, but no loan or creation of an obligation to repay an amount.
Cost of compliance – the implications for taxpayers
Any trustee who, in accordance with TR 2010/3, PS LA 2010/4 and TD 2022/11, entered into a complying loan agreement with a private company beneficiary to which it owed a UPE should seek advice before taking any action to terminate or amend any such agreement. This is because the act of entering into a complying loan agreement may amount to a transaction that creates an obligation, or that in substance effects an obligation, to repay an amount.
It is worrisome that most taxpayers have (perhaps reluctantly) acted in accordance with the Commissioner’s position for nearly 15 years, and altered their trust arrangements, notwithstanding that the Court has now unanimously held it to be incorrect. This is especially so as many practitioners and commentators raised grave doubts about the validity of the Commissioner’s interpretation of section 109D at the time.
What’s next? Likely an increased focus on alternative anti-avoidance provisions
While the Court unanimously rejecting the Commissioner’s construction of section 109D(3) marks a significant development:
- the Commissioner may seek special leave to appeal to the High Court; or
- the Government may seek to amend Division 7A such that UPEs to private company beneficiaries are caught by the extended definition of loan in section 109D(3).
Subject to any legislative reform or a successful appeal to the High Court, it is likely that the Commissioner will, with the aim of applying other anti-avoidance provisions (e.g. Subdivision EA or section 100A), continue to closely scrutinise trusts with UPEs in favour of private company beneficiaries. Therefore:
- trustees with UPEs to private company beneficiaries, particularly where the balance due under the UPE remains unpaid for an extended period, should continue to closely monitor their section 100A risk; and
- shareholders (and associates of shareholders) of private company beneficiaries with a UPE in their favour should ensure they do not receive a financial benefit in the form of a loan, payment or forgiven debt that is referable to the UPE.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.
