Lee-Ann Hayes

Written by:
Lee-Ann Hayes
Head of Education (Tax)

Bamford, Guardian, or much more historically, Whitfords Beach. These are iconic tax decisions that all caused disruption to our collective tax understanding and resulted in change to the tax landscape. As of last week we may have a new name to be added to the list: Bendel.

On 28 September 2023 the AAT handed down a decision that is completely at odds with the ATO’s long-held view that an unpaid present entitlement (UPE) to a corporate beneficiary can be a form of financial accommodation, such that it attracts the general operation of the loan rules in Division 7A. That case was Bendel and FCT (Taxation) [2023] AATA 3074 (28 September 2023).

Brief facts

The taxpayer, Gleewin Investments Pty Ltd, was a discretionary beneficiary of a trust who became entitled to a share of the income of the Trust for the 2013 to 2017 income years. The entitlements were recorded in a ‘Current Account’ on behalf of the taxpayer and reported in the ‘Liabilities’ side of the trust’s balance sheet as a stand-alone account.

The current account also reflected transactions relating to expenses paid by the trustee on behalf of the company taxpayer and the receipt of tax refunds, which were retained by the trustee as the taxpayer did not operate a bank account.

The amount of the current account that was unpaid at the relevant lodgment day for the year following the year for which the entitlement was created is the amount the Commissioner assessed as a deemed dividend under s. 109D of the ITAA 1936, being the general loan rules of Division 7A.

History of ATO’s view

TR 2010/3 (now withdrawn) first set out the Commissioner’s view that a UPE to a company from a trust is a form of financial accommodation where the corporate beneficiary has knowledge of funds representing its present entitlement being used by the trustee, or remining intermingled with funds of the trust. As a result, a private company beneficiary is taken to have made a loan to the trustee under the extended definition of a ‘loan’ in s. 109D(3). Prior to this, UPEs only triggered a contemplation of Division 7A where the terms of Subdivision EA were met (or s. 109UB for transactions prior to Subdivision EA’s introduction in 2002).

In July 2022, the ATO withdrew TR 2010/3 and replaced it with TD 2022/11. Whilst much of the Commissioner’s view in TD 2022/11 is consistent with TR 2010/3 (sub-trust arrangements aside, which were not significantly considered in this case) it does provide that a private company beneficiary makes the loan when the financial accommodation is provided. It states that this occurs at the point in time when the private company beneficiary has knowledge of an amount that it can demand immediate payment of but does not in fact demand payment. The ATO notes this will typically arise after the end of the relevant income year.

Scope of Subdivision EA

The Commissioner’s view in both TR 2010/3 and TD 2022/11 has always seemed to be somewhat incompatible with the specific integrity provisions contained in Subdivision EA. Broadly Subdivision EA applies where a trustee makes a loan to a shareholder of a private company during a year and as at the lodgment day of the trust return for that year, the trust has a UPE owing to a private company beneficiary. Subdivision EA deems a dividend to the shareholder of the private company.

Concerns about this incompatibility included that:

  1. the introduction of specific rules to deal with UPEs suggested that Division 7A was only intended to apply when the trust separately pays or lends amounts to, or forgives debts of, a shareholder or associate of the private company
  2. the Commissioner’s views mean that Subdivision EA will only apply in limited circumstances
  3. as the UPE to the company is the relevant loan under the Commissioner’s view, it results in the trustee being the relevant taxpayer rather than the shareholder
  4. there is possibility of an amount being taxed twice, first under the Commissioner’s view and under Subdivision EA if the UPE remains outstanding.

The Commissioner countered these arguments stating in the ATO’s view:

  • the express terms of s. 109D(3) are not required to be interpreted in a constrained way to accommodate Subdivision EA
  • Subdivision EA still has scope to operate in circumstances where the UPE of a private company does not result in financial accommodation (e.g. where the private company does not have knowledge of an amount it can demand immediate payment of from the trustee at the relevant time)
  • an amount that has been treated as a loan and dealt with under s. 109D (e.g. where a UPE is made subject to a complying loan agreement) will not be treated as a UPE that remains unpaid for Subdivision EA purposes.


The AAT held that s. 109D did not apply as the UPE was not a loan.

The Tribunal found that while the definition of a loan in s. 109(3) uses very wide language, it needs to be read in the statutory context. That statutory context includes Subdivision EA.

The decision also addressed a number of the concerns raised about the incompatibility of the Commissioner’s view and Subdivision EA, noting:

  • to accept the Commissioner’s proposition that there is a loan to the trustee, raises the spectre of taxing two people in respect of the same underlying UPE
  • the Subdivision EA pathway to a Division 7A was not intended to create a second taxable dividend in addition to a s. 109D dividend arising out of the same UPE
  • Subdivision EA is not expressed or intended to operate in a limited way, only taxing those circumstances that fall within its terms which do not otherwise fall within s 109D.

Where to from here?

The issue is far from settled as the decision is likely to be appealed by the Commissioner. It would seem unlikely that the Commissioner would withdraw or modify TD 2022/11 based on this AAT case alone, but the case does call into serious doubt the validity of the Commissioner’s arguments. It also raises the question about whether the long-awaited recommendations from the Board of Taxation’s ‘Post Implementation Review of Division 7A of Part III of the Income Tax Assessment Act (1936)’ will finally see the light of day.

Whatever the path is from here, the tax landscape seems likely to change … again. Stay tuned.

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