Since December 2009, the ATO has taken the controversial view that when a trustee appoints income to a corporate beneficiary and some or all of this amount is left unpaid, then this amount can be treated as a loan for Division 7A purposes (see TD 2022/11 for the ATO’s latest guidance in this area).
The ATO’s view has been that leaving an unpaid present entitlement (UPE) outstanding can trigger a deemed unfranked dividend for the trust if appropriate action isn’t taken to prevent this, even if no funds are provided by the trust to shareholders of the company or their associates.
However, back in September 2023 the Administrative Appeals Tribunal concluded that the ATO’s approach in this area wasn’t correct, finding that an unpaid trust distribution was not a loan for Division 7A purposes. The ATO appealed the decision and indicated that it would continue to administer the law in accordance with existing ATO guidance until the appeal process was finalised (see the interim decision impact statement at the link here).
The Full Federal Court has handed down its decision in the case (Bendel & Anor v Commissioner of Taxation [2023] AATA 3074), with the Court holding that a UPE balance should not be treated as a loan for the purpose of Division 7A.
While appointing income to a beneficiary might create a debtor-creditor relationship between the parties, this isn’t enough for the amount owing to the company to be treated as a loan. The crucial issue for the Court was that the trustee’s resolution created an obligation to pay an amount to the company, but this needs to be distinguished from an obligation to repay an amount.
It now remains to be seen whether the ATO will seek to appeal the decision to the High Court and if so, how the ATO will administer Division 7A while awaiting the outcome. There is also the possibility that the Government will step in and make a legislative amendment to bring the rules back in line with the ATO’s approach since 2009.
We will bring you further updates as they become available!
