If 16 December 2009 was the beginning of the Australian Taxation Office (ATO) treating an unpaid present entitlement (UPE) with a corporate beneficiary as a loan for purposes of Division 7A, could 28 September 2023 be the end of that era?
The former was the date the ATO released in draft what would become Taxation Ruling TR 2010/3. The latter was the date on which the Administrative Appeals Tribunal (Tribunal) handed down its decision in Bendel v FCT [2023] AATA 3074 (Bendel).
In Bendel, the Tribunal held that a UPE with a corporate beneficiary was not a loan under subsection 109D(3) of Division 7A.
Background
On 16 December 2009, the ATO (in what was to become TR 2010/3) said that in many circumstances a UPE with a corporate beneficiary will be an in-substance loan under subsection 109D(3). TR 2010/3, together with the accompanying Practice Statement Law Administration PSLA 2010/4, set out an elaborate system of dealing with UPEs, including ‘grandfathering’ those that arose before 16 December 2009.
In 2022, the ATO withdrew TR 2010/3 and PSLA 2010/4, but doubled down in Taxation Determination TD 2022/11 on the view that a UPE with a corporate beneficiary can be a loan under subsection 109D(3). However, TD 2022/11 includes a simpler administrative system for dealing with UPEs that arose on or after 1 July 2022. TR 2010/3, while withdrawn, continues to apply for UPEs before 1 July 2022.
What did the parties argue, and the Tribunal say, in Bendel?
Bendel concerned four ‘Issues.’ However, of most interest to taxpayers and their advisors 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?
With respect to Issue 1, the taxpayer argued:
the statutory context in which the subsection 109D(3) definition of loan operates includes Subdivision EA with the effect that subsection 109D(3) does not embrace unpaid present entitlements of corporate beneficiaries of trusts; and
somewhat overlapping with 1, the subsection 109D(3) definition of loan does not apply to amounts that are the subject matter of a separate trust. (Under the trust deed in Bendel, UPEs were held on sub-trust – although see the Tribunals views on sub-trusts in paragraphs 75 to 80!).
Meanwhile, the ATO argued:
that the corporate beneficiary made a loan as defined in section subsection 109D(3) to the trust; and
Subdivision EA neither informs the construction to be given to the definition of loan in subsection 109D(3) nor, in any event, has any operation on the present circumstances.
The Tribunal held for the Taxpayer saying that based on the statutory text and extrinsic materials a UPE with a corporate beneficiary is not a loan under subsection 109D(3). Paragraph 101 of Bendel summarises, by way of nine subparagraphs, the Tribunal’s reasons on Issue 1, concluding:
... the necessary conclusion is that a loan within the meaning of s 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 entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust.
What does Bendel mean?
That is the million-dollar question.
The Tribunal in Bendel raises significant doubt about the ATO views in TD 2022/11 and TR 2010/3 before that. However, does this mean the ATO will withdraw TD 2022/11?
We consider at this stage that is highly unlikely.
The ATO could appeal Bendel and wait until an appellate court has decided the issue of whether a UPE is a loan under subsection 109D(3). Whether the ATO withdraws, or amends TD 2022/11 would then hinge on the outcome of the appeal(s).
The ATO may not appeal the Tribunal decision in Bendel. There is no formal doctrine of precedent that applies to Tribunal decisions. Bendel may then become an ‘alternate view’ with respect to TD 2022/11. However, there is a strong possibility that in this circumstance another taxpayer, emboldened by the decision in Bendel, would appeal their matter to the Federal Court with the hope the Court takes the same approach as the Tribunal.
The final possibility is that there is legislative amendment clarifying the scope of subsection 109D(3).
Whatever happens, the aftermath of the Bendel decision is likely to occupy the minds of the ATO, taxpayers, and their advisors for some time. This will not be the last article we write on this topic!
In the interim, one wonders if drawing on the words of The Doors sums up what the decision in Bendel, if upheld by an appellate court, may mean for ATO compliance activities around UPEs and corporate beneficiaries:
This is the end, beautiful friend
The end of our elaborate plans
The end of everything that stands
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au
Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 428 439 730
E: ehennebry@sladen.com.au
