Bendel ruling handed down

The High Court of Australia has handed down its decision in the matter of Commissioner of Taxation v Bendel and found in favour of the taxpayer determining an unpaid present entitlement (UPE) from a trust does not in itself represent a loan or any other type of financial assistance.

The ruling came about from a 5:2 majority vote and means situations involving UPEs will not trigger Division 7A of the Income Tax Assessment Act (ITAA).

Specifically, the High Court held in the absence of an express or implied obligation to repay a UPE does not involve an advancement of funds and only reflects an entitlement to income.

“This ruling brings long-awaited judicial certainty to an area of trust taxation that has been the subject of significant controversy and compliance activity for more than a decade,” The Tax Institute head of tax and legal Julie Abdalla confirmed.

While the decision solely addresses distributions to private company beneficiaries, it also has implications for SMSFs as Sladen Legal business law principal Phil Broderick noted it would just over 12 months ago. This is due to commonalities the ITAA has with the Superannuation Industry (Supervision) (SIS) Act.

“The expanded definition of loan in the SIS Act is almost identical [to that in the ITAA] and the concept is almost identical. So, the expanded definition is designed in the SIS Act to capture loan and loan-like arrangements,” Broderick said at the time.

The ruling has several implications for taxpayers such as the fact private company beneficiaries of trusts will no longer automatically face deemed dividends where UPEs remain unpaid, and trustees can retain funds within the trust without triggering Division 7A outcomes, subject to commercial and fiduciary considerations.

In addition, The Tax Institute recognised taxpayers may now consider objection rights or amendment opportunities where assessments were issued solely on the basis of the Commissioner’s former UPE position, and that any existing rulings or administrative practices dealing with UPEs are likely to be withdrawn or amended.

Abdalla did advise taxpayers to be cautious even though the decision was favourable toward them.

“Taxpayers should nevertheless continue to exercise care, as Division 7A will still apply where funds are actually advanced, loaned, or otherwise made available to shareholders or associates”, she warned.

“We’d expect that following this decision, statutory revision of these rules could be included alongside recent trust tax changes announced in the Federal Budget. This is likely not the final word on this part of the tax legislation.”