The Full Federal Court has handed down the Bendel decision in respect of whether unpaid present entitlements ('UPEs') constitute a loan for Division 7A purposes. Our February tax bulletin outlines the implications of the decision, and key considerations moving forward. In addition, uncertainty remains on the IAWO for the 2025 year, and the ART has ruled in favour of the ATO in two case decisions.

BENDEL DECISION—DIVISION 7A & UPEs

The Full Federal Court has handed down its decision on whether the definition of a ‘loan’ for the purposes of section 109D of Division 7A includes UPEs between a trustee and a private company. It dismissed the Commissioner’s long-held view that a UPE constitutes the provision of ‘financial accommodation’ and is therefore within the extended meaning of a loan.

Historical ATO position

The ATO first outlined its view on UPEs in TR 2010/3 and PS LA 2010/4. The effective outcome was that UPEs that arose after December 2009 were required to be held on sub-trust under an investment agreement, or converted to a loan under a complying loan agreement.

With effect from 1 July 2022, the ATO replaced these documents with TD 2022/11. This dealt with the timing of when financial accommodation, and therefore a loan, arises. The ATO view is that this is when the corporate beneficiary has knowledge of the entitlement but does not demand payment. The ability to enter into an investment agreement so that a Division 7A loan does not arise was removed. As a result, subdivision EA of Division 7A, which may apply to loans made by a trust with a corporate UPE (if the UPE is not considered a loan) had limited ongoing relevance.

Full Federal Court decision

In the Bendel case, the Taxpayers involved were beneficiaries of a trust. During the 2013 to 2017 income years, the Trustee resolved to distribute income to Mr Bendel and to Gleewin Investments Pty Ltd (Gleewin). The UPEs of Gleewin were held on sub-trust as per the Trust Deed, and were not placed under an investment or loan agreement.

The Commissioner sought to have the UPEs taxed as Division 7A loans. The AAT held for the Taxpayer, with the ATO appealing directly to the Full Federal Court. The Court confirmed the AAT’s decision, holding that:

• A loan within the meaning of Division 7A requires a transaction which creates an obligation to repay an amount or which in substance effects an obligation to repay. An obligation to pay an amount is not sufficient.
• It is relevant that UPEs are dealt with specifically under subdivision EA. Where company profits referable to a UPE make their way to a taxpayer subject to tax at personal rates, there is a deemed distribution to the taxpayer and the benefit of the corporate tax rate is lost. “That was the mischief perceived by the legislature. Subdivision EA expressly excludes a private company’s UPEs that make their way to another company. The legislature did not perceive a mischief in respect of UPEs in the way that the Commissioner now perceives.”

Key points: Given the decision is contrary to the ATO’s long-standing position, it is expected the ATO will update its decision impact statement (DIS) and may seek leave to appeal the decision in the High Court. We would therefore recommend, where possible, taxpayers wait until issue of a DIS before deciding whether to convert UPEs to loans in accordance with TD 2022/11. Consideration should also be given to:

• Reviewing the terms in any facility or umbrella agreements to determine how these apply to  UPEs.
• Reviewing the terms of investment agreements for current sub-trust arrangements.
• Understanding the impact of applying subdivision EA to their arrangements.
• Reviewing the potential application of section 100A (trust reimbursement agreements) to corporate UPEs, noting the risk levels outlined in PCG 2022/2.

 LEGISATION UPDATE

Instant asset write-off

The extension of the $20,000 Instant Asset Write (IAWO) off has been re-introduced to Parliament as part of the Treasury Laws Amendment (Tax incentive and integrity) 2024 Bill.

Impact of Federal Election

Parliament is not sitting again until the week of the Federal Budget, which is has been scheduled early this year on 25 March 2025. However, the Federal Election could be announced prior to this, in which case the Budget would not go ahead.

On calling the election, any Bills will lapse. In addition to the IAWO, outstanding tax measures include the proposed denial of deductions for GIC and SIC to apply from 1 July 2025; and the additional tax for superannuation funds with balances greater than $3M.

CASE LAW UPDATE

DJG Consulting Pty Ltd v FCT—PAYG Withholding

Mr. G, an accountant and registered tax agent, was the owner and controller of a group which provided accountancy and advisory services. This included DJG Consulting (the taxpayer) and DJG Admin, which provided employment and administrative services to professional practices and other clients. Employees entered into an employment contract with DJG Admin and it was reflected as their employer on payslips. As DJG Admin did not have a bank account, wages were paid from the account of the taxpayer. DJG Admin disclosed the PAYGW amounts on its BAS. However, on audit, the Commissioner determined that the taxpayer had PAYGW obligations under section 12-35 of the Taxation Administration Act which states that “an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity)”.

The ART affirmed the decision. The taxpayer's argument that it was not the entity that paid the wages because it did so on behalf of, and in accordance with a contractual arrangement with, DJG Admin was inconsistent with section 12-35. In addition, having regard to the knowledge and expertise of key individuals and the clear language of the statutory provision, it also could not be said that the taxpayer made a reasonable attempt to comply with the PAYGW rules for the purpose of applying penalties.

Key point: Section 12-35 applies a strict view of the withholding obligation of the ‘payer’ of salary and wages. Care should therefore be taken with how these payments are managed. In this case, a higher level of care was also expected due to the taxpayer’s position as an accountant and tax agent.

Uyen Nguyen v CofT—Legal v Beneficial ownership

The taxpayer’s parents owned a property needing substantial repairs. As they did not have sufficient funds or borrowing capacity, the property was transferred to the taxpayer in 2001 who took out a loan. The parents lived in the property until their deaths in 2019 and 2021, during which they paid no rent and paid some expenses, including loan repayments. The property was sold for a capital gain and the proceeds divided in accordance with the parents’ wishes.

The taxpayer applied for a private binding ruling that the property was held on trust for her parents and therefore the capital gain was not assessable. The ATO view was that the taxpayer acquired the beneficial interest in the property and had not held it on trust. The ART found for the ATO, with the taxpayer having  difficulty in proving the existence of a trust due to the time that had elapsed and the lack of documentation. Evidence that the parents met property expenses was not evidence of intention to create a trust.

Key point: This has become a more common issue due to the ATO having access to property sales data. Taxpayers will need to have contemporaneous evidence of the intention to create a trust.

TAX DETERMINATIONS, RULINGS & PRACTICE STATEMENTS

Director identification numbers—PSLA 2025/1

The ATO has issued a practice statement outlining the policy to be applied to the use of the Registrar’s power to extend an eligible officer’s time to apply for a director identification number (DIN). 

PS LA 2025/1 provides information to ATO staff on a person’s DIN obligations, how extension of time requests should be made, and what the Registrar may consider when deciding whether it is reasonable to grant an extension of time. It also provides information about the right of review.

OTHER UPDATES

Managing conflicts of interest

The TPB has updated its guidance on managing conflicts of interest to incorporate a reference to the obligation under the Tax Agent Services (Code of Professional Conduct) Determination 2024 when undertaking activities for government.

Transfer balance cap

The Transfer balance cap will increase to $2,000,000 from 1 July 2025. This is the lifetime limit on the amount an individual can transfer into retirement phase accounts.

SMSF auditor compliance

Following an increase of referrals to ASIC in the last financial year that included independence issues, the ATO has announced it will focusing on auditors it considers high risk. This includes auditors conducting in-house audits, with reciprocal auditing arrangements, that have a long association with clients and have a large proportion of their client base coming from a single referral source.

Division 7A common myths  

The ATO has issued information outlining the common Division 7A errors. These include taxpayers not being aware that:

• Division 7A extends to the associates of shareholders.
• A journal entry, without other supporting evidence and contemporaneous action, is not effective to offset a minimum yearly repayment obligation on a complying loan.
• Division 7A can still apply where the loan recipient uses the amounts for a taxable purpose and where the recipient is a trust.
• The benchmark interest rate generally changes each year.
• Division 7A cannot be avoided by temporarily repaying a loan before the company’s lodgment day.

 CONTACT US

For further information on any of these updates, or for general assistance, please contact Our Directors, Jacci Mandersloot or Natalie Claughton.

The information contained in this bulletin is intended to provide general information only and is not intended to serve as tax advice. Specific advice should always be sought regarding a taxpayers’ particular circumstances. Please contact MC Tax Advisors if you would like assistance with the issues identified in this bulletin.