Robyn Jacobson
Hello and welcome to TaxVibe, a podcast by The Tax Institute, where we peel back the layers of the Australian tax world. I'm Robyn Jacobson, your host, and the senior advocate at The Tax Institute. We bring you the sharpest minds in the tax profession, digging deep into their unique insights and sharing nuggets of wisdom you won't find elsewhere, always keeping it real and interesting. So sit back and relax, and let's dive into the world of tax one conversation at a time. We hope you enjoy this episode of TaxVibe.
I am joined by Neil Brydges, CTA, Principal in Sladen Legal's Tax group in Melbourne. Neil primarily practices in direct taxes, and GST with a focus on the taxation of trusts, deceased estates, property corporate tax, M&A and Division 7A. Neil is also advised extensively on cross-border taxation issues. Neil is an accredited specialist in taxation law. A member of the Tax and Revenue Law Committee with the Law Institute of Victoria.A member of the Tax Committee of the Law Council of Australia and a CTA with the Tax Institute, and a member of the Institute's National Dispute Resolution Technical Committee. Neil. Welcome to TaxVibe.
Neil Brydges
Thanks, Robyn, glad to be here.
Robyn Jacobson
So today, we're going to have a chat about the recent Bendel decision. And we will, of course, explain what all this is about ,and why it's so significant. But social media has been abuzz with the long-awaited release of this decision. And we're in particular talking about an appeal relating to the tax treatment of unpaid present entitlements. So, we'll break all this down. But, firstly, why is this such a significant decision? Why is everyone so excited about this, and that's before we even get into what the decision means for everyone.
Neil Brydges
It's a decision that's had quite a long history, not so much in this particular piece of litigation which we'll get to later on, but also what prompted this litigation was the Commissioner's views, which were released in a public form in a draft ruling in December 2009, but also had been expressed publicly a few months before it, and it started in February 2009. When the then Deputy Commissioner Mark Conser, at a talk on basically another topic confirmed his view that a UPE, in certain circumstances could be a 109D loan. and then over the next sort of 10 months. Between February 2009 and December 2009 was discussed at the NTLG meetings, and you can see comments around that in the minutes of those NTLG meetings before releasing a draft ruling in 2009, which became finalised in 2010, as we know, in TR2010/3, and practice statement. 2010/4. Those views. If you read the NTLG minutes and certainly consultation papers that are publicly available. They were controversial views, and that was controversial at time, and they remain controversial for 15 years or so, until ultimately they were tested before the tribunal in 2023 in the Bendel decision, and also the full Federal court more recently. So there's a lot of buzz because the Commissioner's views were controversial back in 2009/10 that probably died down a little bit because people were just like, well, we just have to live with those views until someone challenged them through the courts, and the Bendel decision is basically what has happened with that.
Robyn Jacobson
So let's wind it back. The very essence of the structure for people that may not be familiar with UPEs as we call them, the unpaid present entitlements. What are we fundamentally talking about in terms of a structure, or what the transactions are that's caused this dispute.
Neil Brydges
Fundamentally keeping it to the simplest possible structure. You've got a trust in this case. It's a discretionary trust, that confers a present entitlement to income, in layman's terms makes the distribution of income to a beneficiary, and the beneficiary is a private company. Now that distribution that present entitlement is not paid, it's not paid out in cash or bank transfer. It's just left as an amount owing from the discretionary trust to the private company, the corporate beneficiary. and against this name an unpaid present entitlement. The actual cash that would be used to pay that present entitlement, in the case of Bendel, but also in many cases, retained within the trust. So it's this unpaid amount, owing to a corporate beneficiary that's the unpaid present entitlement.
Robyn Jacobson
Okay. So we need to then put an overlay. We've got some rules called Division 7A. Which in essence talk about loans made by private companies, and if they're not genuine loans, then they can be treated as a deemed dividend, and then they get assessed to effectively the borrower who we're talking about shareholders or associates of those shareholders of the private companies. So again, at its essence, we've got a trust distributing to a company, it's not paid out. The company is therefore owed an amount, so in very simple terms, it's a receivable that the company has on its books. It's waiting to receive the amount of cash. And the whole question is whether that UPE is or is not a loan for Division 7A purposes. So you were saying that the Commissioner's position was controversial. Why was it controversial?
Neil Brydges
So, as you say, Robyn, Division 7A is looking to prevent distributions from private companies of profits to shareholders or associates other than in the form of dividends and Division 7A has a rule around a loan which says, if there's a loan from a private company to a shareholder or associate of that private company, then that loan needs to be paid back before the lodgement date, or put on terms complying with Section 109N, in simple terms, you know, people say complying Division 7A agreement's got to be in writing seven or 25 year term. Now, the definition of loan in Section 109D, includes what we think of as a loan. The Commissioner refers to that as an ordinary loan but also includes an extended definition that deems certain other things which may not be ordinary loans to be loans for the purposes of Division 7A and that extended definition includes the words, a provision of credit or other form of financial accommodation. So in December 2009, when the Commissioner released his then draft views, he said that an unpaid present entitlement with a corporate beneficiary is in effect a form of financial accommodation from that corporate beneficiary to the trust, and if it's not paid back within a certain time, it's going to be treated as a loan for division 7A purposes. So, what the Commissioner was saying was, well, the Trust is getting the benefit of the funds, but it's not a loan. It's an unpaid amount, and because the Section 109D includes this extended definition, including the provision of credit and any other form of financial accommodation. The Commissioner's view was that an unpaid present entitlement fitted within that part of the definition, and so was a loan for Division 7A purposes which, if it wasn't treated in certain ways, would become a deemed dividend under Division. 7A.
Robyn Jacobson
So the Commissioner has taken this view for 15,16 years, that a UPE is indeed a loan. We have got, of course, separate provisions, which were not the subject of this appeal, which we will call subdivision EA. And these deal with loans made by the Trust, where there is an unpaid entitlement with the company. Now that was not what was going on with these circumstances. So it's very important that we distinguish that and say that this case was not about those sorts of arrangements we're just talking about, if you like, the basic UPE between the company and the trust. So the Commission's taken this view. Some in the profession have not agreed with that view. What have you seen all these years? What have most people, therefore, done each year, when the trust has got its income. And it's working out who to distribute to. And we've still had distributions going down to corporate beneficiaries. How have people generally managed these UPE’s
Neil Brydges
So there's a number of ways that people can manage them. So I'll just talk about the ways people can manage them before you know what we've seen. The Commissioner at the same time 2010 released a practice statement which said, There is various ways you could, instead of paying out the UPE’s so that the Trust pays the company the money or putting it on a section 109N loan. Then complying Division 7A loan agreements. The amounts could be held simply on a subtrust investment agreement where there was an interest return paid, and the principal amount was payable after either 7 years or 10 years. Typically there was another option as well. So what people have done in practice when they've tried to comply with the Commissioner's views. Obviously some people haven't complied like Mr. Bendel and his entities in that case, which led to the litigation. But you get a mixture of ways people try to comply with it. Some may pay it out, but certainly sometimes part of the problem is that there is not the cash in the Trust to pay out the present entitlement, because that cash is tied up in working capital stock, etc. Particularly when the Trust carries on a trading business. so in terms of managing it, not falling foul of Division 7A, people have either put it on a complying loan agreement, or one of these subtrust arrangements under the practice statement. Now in 2022 the Commissioner released a taxation Determination withdrew the 2010 guidance, and he provided probably quite a good summary of the various options people have done with in the past, relating to dealing with these UPES putting aside, paying them out in full, or doing nothing but the three where people have tried to deal with them the most and those three are, one, you've made the UPE subject to a ection 109N loan agreement. Two, you've satisfied it, the UPE and replaced it with a 109N loan or three, you've put it under one of the subtrust arrangements. So, certainly those are the main methods in terms of one and two. It's variations on the we're going to make it compliant with 109N. Option one and the TD was, we’re trying to walk the fine line between we're making it subject to 109N but it still maybe is still a UPE and option two is, the UPE is paid out and replaced by a loan, certainly talking to different practitioners. You know there is a mixture of both of those. Some people are firmly in the second camp, where they're doing the repayment or satisfaction, then replacement and other ones are trying to walk that hybrid line. So it's as important as advisors moving forward to see which of those, if you're in the call it the 109N. Treatment, whether you're in the scenario one or scenario 2 because it may have different implications, and and what you do next.
Robyn Jacobson
All right. So without going back into detail to the tribunal decision, because really the focus is now on this full Federal court decision. Suffice to say that the taxpayer, Bendel, so we had a deemed dividend determined by the Commissioner being this UPE down to the corporate beneficiary that created additional taxable income in the trust that ultimately then was distributed for tax purposes down to an individual and that same company. So an amended assessment was raised. The objection was lodged. Commissioner made his decision on objection, and off we go to the tribunal and in that tribunal decision the tribunal found in favour of the taxpayer, which was very significant at the tbut also we all sat back and thought, well, it is just tribunal. It's an administrative decision. It's not law. So we we need to go to the next stage and thankfully, yes, there was an appeal by the Commissioner up to the full Federal court. It has what we call test case funding. So the ATO is paying, or the government is paying for the cost of this particular appeal. So what did the full Federal Court find, and why?
Neil Brydges
So the Full Federal court found, as I'm sure everyone knows, the Full Federal court found that the UPE in that particular case, the Bendel case was not alone under the extended definition in Section 109D. While they came to the same answer as the tribunal, they took a different approach, and they actually criticised the tribunal's reasoning in the Full Federal Court decision. But what the the full court did was they looked at the the context, and the purpose of section 109D. But also particularly the particular subsection within section 109D. That talks about this extended definition of loan. When they looked at that context, they said, while and call it a surface level, leaving an amount unpaid between a trust and a private company there is a form of financial benefit the trust is receiving because they've got the use of the funds, and they're not paying an interest cost on it. But they say, when you look at section 109D,a loan in that context, both starting with an ordinary loan, which is what we sort of, can envisage as a loan. There is an advance of funds by the private company in this case, and then there's obligation to repay. In some of the other extended part the extended definition in Section 109D. They talk about this advance of funds, or a payment of money by the private company, and then an obligation to repay that advance or that amount was paid first. So they said, what with the UPE, there is not this obligation to repay, because there was no advance, in the first place, by the private company to the trust and the example, what the UPE is an obligation to pay, and they said that the loan in Section 109D talks about an obligation to repay as opposed to an obligation to pay. Therefore the UPE was not alone under that definition, because, while there is an obligation to pay amount. It was not an obligation to repay amount. The taxpayer, and Bendel said, a loan requires a positive act by the private company, the positive act being advancing the funds, whereas what the company does is not a positive act, it just sits there. It doesn't call for the funds. The Full Court didn't say about the positive act, but they basically picked up that sort of approach of saying, well, there needs to be this advance of funds, as payment first by the private company, to enable an obligation to repay, not an obligation to pay.
Robyn Jacobson
So the Full Federal was found in favour of the taxpayer. We'll go through what that means for different arrangements in practice, but just for the moment. Let's stick with this appeal. What happens now?
Neil Brydges
Well, Robyn, that's the $64,000 question, as they say, but certainly the taxpayer was successful in the full court, or putting it the other way. The Commission was unsuccessful in their appeal to the full court. So there's various things that could happen now. Probably the most immediate thing is that the Commissioner, if he wants to apply for special leave to appeal to the High Court, must do so by the 19th of March. So that's in less than two weeks time. So, If that application is lodged well, then, a few months down the track, there would be a hearing to determine whether special leave to appeal is granted or not doesn't have to be a hearing. But typically there is. and if that was deniable, that would be would end with a Full Federal Court. if the application for special leave was accepted. Well, then, the substantive hearing, and once that's heard and decisions handed down, the High Court would either agree with the full Federal court or disagree with the Full Federal Court, but certainly in terms of the appeal process, the 19th of March is a very key date, because either the 19th of March is the end of this piece of litigation because the Commissioner doesn't apply for special leave or if he does there's a couple of sort of subsequent steps, irrespective of the outcome of those those steps from the Commissioner's point of view, but it may go on for a few more months.
Robyn Jacobson
So it's not quite choose your own adventure, but there are certainly different junctures or places that we could go down different pathways in terms of the outcome of this particular appeal.
Neil Brydges
That's right, Robyn, and certainly one of the things with applying for special leave, which is which is maybe not peculiar to this case. But as a feature of this case is that the Commissioner lost at the tribunal, there were two tribunal members in this case. They also lost in the Full Federal Court, and there was a unanimous three nil, three judge decision. So in terms of making an application for special leave, there's not a dissenting judgment somewhere in the journey that you can sort of base your special leave application of, going, you know the tribunal was right, the full court was wrong, or the dissenting judge in the full court was correct, and the other two were incorrect. So I imagine the ATO is very carefully going through the full court judgment and finding, sort of, you know, an avenue as opposed to just picking up on a dissenting judgment. The other thing also is the commission is a model litigant. So so in terms of whether they appeal, they are sort of bound by the model litigant rules in terms of you know they need to have, you know, a reasonable charge, you would think in terms of, applying for special leave due to the model litigant overlay as well.
Robyn Jacobson
But they can't just run a case because they're let's say, adamant that they want to win it. They would actually have to have a good legal argument and a good public interest argument for running the case and then ultimately depending where we land with the High Court, whether they grant special leave if they do, whether they find in favour of the Commissioner or not. Would you still expect that at the end of this we're probably going to have a law change that at some point the government might say, well, that might be what the courts found. But ultimately this is what we want, and we can't speculate at the moment what that policy response might be, but it seems that that's going to be likely at some point.
Neil Brydges
Yes, it certainly, it’s possibility, and I think, with a Federal election being on the horizon, that any legislative change, if there were to be a legislative change. There certainly wouldn't be any announcements of that until post the election and post the appeal process. So if the Commissioner does not apply for special leave. We'll know that on the 19th of March. Well, then, I think even on the legislative change it would be a wait until after the election. If the Commissioner does apply for special leave. Well, I think if there was any announcements of legislative change that would wait until you know until that appeal process is finalised one way or the other. In terms of whether there would be legislative change. There has been announcements by the Government in the past about amending Division 7A. I'm just looking now at the 2019 budget, and they said, the government will ensure that UPE’s come within the scope of Division 7A from one July 2019. This will apply where a related private company is made entitled to a share of trust income as a beneficiary, but has not been paid that amount known as an unpaid present entitlement. So certainly back then, That was the 2019 budget announcement, but it was actually flagged before that the Government had sort of indicated that they're looking to change Division 7A. To bring UPE’s into scope apart from what was already the case with subdivision EA. So there was no draft legislation at that time. They have flagged that. So if the Government did look to legislate any changes down the track. You know they have set the scene in the past. I suppose the things that are important to be considered, When would be the application date? Would it apply just prospectively, or would it be retrospectively? If so, what date? Obviously the budget announcements might give them a bit of a handle for doing a retrospective change because they have announced it in the past. But there are precedents also, as well as governments going back and doing retrospective changes many, many years earlier. Petroleum resource rent tax, not something to do with Division 7A but there have been long-term retrospective changes. With that, the other thing also, I think, with any legislative changes, is what is the change? One of the things in the Bendel case, the full court acknowledged, and the and the taxpayer actually submitted as well. was that if a UPE is a loan, under the extended definition of section 109D.
There can be certain fact patterns when the trust would be a deemed dividend to the Trust under 109D. But if money has actually left the trust, say a loan to a beneficiary well, then, under subdivision EA, that amount could also be accessible. So there's a potential, for I'll call it double tax. There might be two different taxpayers, but the same basic set of transactions that if the amendment to 109D. Or if there were an amendment to 109D. Bringing a UPE in, you hope that any legislative change will also have an anti-overlap compensating adjustment type rule that if on the facts subdivision, EA could also apply, there's not double tax. Now. I don't say anything about that in the Budget announcement, but certainly the full court acknowledged that there could be double tax in certain circumstances. not the case in Bendel, because the money never left the trust. There wasn't a subdivision EA issue, but in other fact patterns there could be.
Robyn Jacobson
So in terms of what Bendel did not say, or what it doesn't consider. Pre 2009 UPE’s, those created before 16 December 2009, which was the position the Commissioner took from that date that these were loans. So this was not a pre 2009 situation. So we still don't really have any judicial clarity around how they are to be treated. We've simply got the Commissioners assurance at this stage, based on current guidance that they will not go back and apply Division 7A. To those early UPE’s you've already established for this, that it did not cover subdivision, EA. Because the money stayed in the trust. It was not lent out to a shareholder of the company or one of their associates. but it also didn't consider 100A. Now I'm hesitant to even raise 100A, Neil because it's a whole separate conversation, and it there's a lot been said on it over the past few years, but it does seem that there could be some application here where a UPE does not become alone in so far, as the ATO has said. if a UPE becomes a loan we generally won't manage it under Section 100 A. We won't apply 10A to it because you're running it as a commercial loan.that if it doesn't become a loan, and Bendel confirms that a up doesn't become a loan. Could there still be a 100A issue here?
Neil Brydges
Certainly, as you, said Robyn, raising 100A is a thing that everyone in the tax profession knows. The last couple of years is, we're all probably sick to death of section 100A. But we're going to talk about again. But certainly I think there is a risk that in certain fact patterns that there could be a Section 100A risk that was flagged back as long ago as March 2009, when post the speech by Deputy Commissioner Mark Conzer at the time NTLG Meeting, minutes from March 2009, they talked about section 100A might apply. So this was sort of the very, very pre, the draft ruling in December 2009, when they talked about whether a UPE could be a loan by the NTLG process that they also raised the flag of Section 100A. So it's been acknowledged over the time. It wasn't an issue in the Bendel case. But certainly, if you've got fact patterns around where there's present entitlement, and to a corporate beneficiary, and the funds are left in the trust, say the Bendel fact pattern will then section 100A requires a reimbursement agreement. We know from case law that that agreement needs to be before the present entitlement. But the ATO tax ruling on Section 100A relying on the Raftland decision in comment and orbiter, says that you can infer a reimbursement agreement from prior events. So if there is a pattern of behaviour where they're having this present entitlement left unpaid for for many years. Well, there's certainly a risk that there could be a reimbursement agreement looking at the pattern of behaviour, not saying there would be. But there's certainly a possibility if you're looking at the Commissioner's view on reimbursement agreements. then you'd be in the the question around, Is it an ordinary family or commercial dealing? If there's a reimbursement agreement, then would it be ordinary family and commercial dealing? Now I know the way the rules work was. If there's ordinary family commercial dealings. It's not a reimbursement agreement, but sometimes people do it. That two-step process like I described. Have you got this agreement? And then, was it ordinary dealing, certainly around the ordinary dealing point. If you're looking at the once again the Commissioner's view and the taxation ruling on 100A he does talk about. If funds are retained in the trust to lower the overall tax rate of the group. So ie. There's you use a corporate beneficiary. But the funds are retained, so the overall tax rate is less than if it had been accumulated in the trust or paid to beneficiaries in higher rates, and lent back. The Commissioner says that he doesn't think that that's an ordinary family or commercial dealing. Now, that's not necessarily what the courts say, but the Commissioner says it in his 100A ruling. So if you look at the Guardian case, where Justice Logan at 1st instance made comments around a corporate beneficiary is not necessarily not an ordinary commericial dealing, but I think the Commissioner is flagged in this 100A ruling that some of these arrangements could run a risk of 100A buying to it.
Robyn Jacobson
So if we now look at what the decision means for clients arrangements across the country and I think we can broadly look at the old 2009 prior UPE’s, as we've discussed, not affected by this. If we look at those where they've been managed as a UPE and held on subtrust.
Then this decision would seem to suggest that they are not Division 7A loans. So you've always treated them as a UPE, and they don't become a loan, and the court has confirmed that. What about all those that have been managed as a Division 7A lloan all these years?
Neil Brydges
Yes. So that's, I think, just a useful sort of summary of those, call it three types of arrangements. If you look at paragraph, as I mentioned before. Paragraph 101 of TD2211 has the three types of arrangements. Scenario three is the subtrust arrangements, and then scenario one and two are the ones where scenario one is. It's made subject to a 109A loan agreement and scenario. two is when the UPE is satisfied and replaced by a 109N loan. So I think scenario two is probably the easiest one to deal with where there was a UPE, and it was satisfied, and then replaced by a loan. So now you're in the world of you've got a loan, while that satisfaction and replacement may have been driven by a view which the full Court says is incorrect. The UPE you had is no more, and it's been replaced by a loan. And now you actually have an actual loan, an ordinary loan from a private company to a trust. And so that loan is within Divison 7A And if you stop making minimum payments on it, it could be a 109E dividend, and if you forgive it, there could be a 109F Debt Forgiveness.
Now the 1st category, the ones where the UPE is made subject to a 119N loan agreement. So there's been no satisfaction and replacement of the of the UPE replacement with a loan. But you sort of trying to say it's a UPE, but it's on 119 terms. It gets very nuanced talk because the agreement does it say loan agreement at the top? Does it say talk about repayment of the amounts? and things like this. So it does become down. You know, who had drafted the agreement. How it's done. You know also how it's recorded in the financial statements, if it's put into liabilities as opposed to beneficiary amounts owing accounts that may be an influential factor. So the saying that it's still a UPE. But it was subject to a 119 n loan. And so today, you say, well, it's still a UPE, and it's not a loan you need to sort of scratch below the surface. Look at what the the agreement says, you know, if it says, Talk about loan agreement at the top and repayment, etc. You're probably treding dangerous ground, otherwise might be drafted differently, whereas it was a little bit more, saying, Well, we're just making it this, UPE .It's got to be paid back in 7 years, and it's got to be an interest cost on. And there's got to be minimum, minimum, not repayments. Minimum payments of it over 7 years. So there is sort of picking up the flavour of 109 N, and it's under a written agreement that might mean you're okay, whereas ones which have the more the flavor of an actual loan agreement, saying, calling it a loan agreement, and saying it must be repaid.then I think it may actually mean that the conduct of the parties could have resulted in what was a UPE being converted, not used in a technical sense, converted into an actual loan because of the way they went about it. Type thing.
Robyn Jacobson
Practitioners do now. Some of them are dealing with lodgments of the 24 returns. Still, of course, that'll continue for another few months into May, June this year they could be dealing with even earlier lodgement deadlines. They've got their 2025 distributions coming up for June 30th this year. So there are lots of milestones that need to be considered.
We don't know if we're going to have a resolution of this appeal process before all those particular dates come up. So what should practitioners be doing? And what's the Ata saying to practitioners by way of guidance.
Neil Brydges
So after the tribunal decision in late 2023, the the ATO put out an interim decision impact statement and they haven't updated it post the full court decision. But what that interim statement said was that until the appeal process is complete, we continue with our views. And but we won't apply compliance resources to people, you know, over this period.
I'm paraphrasing that. But basically, it's like until the appeal process is complete, so we will know on the 19th of March whether the appeal process is complete, or whether it has another few months to to run in terms of a high Court application.
So that's in terms of what the ATO is doing. in terms of what taxpayers do, particularly in the next few or advisors do in the next few months in terms of the lodgements of the 24 returns we're really looking at. In many cases the 2023, June 2023 present entitlements, which, on the Commissioner's view, would have become a loan in the 2024 year, under 109 d.
Under the extended definition loan, which means, by the time you get to lodgement date for the 24 year, which is the next few weeks, couple of months, those amounts treated as loans under 109 d. Need to be either paid out or put on 109 N terms.
So the decision, as you sort of said, in terms of what people do in the next few weeks, few months, as a result of the full court decision. As well do they continue to apply the Commissioner's view and say, Well, we'll make it 109 n compliance basis. And then do you, when you do that, do you do the satisfaction and replacement the scenario 2 and paragraph 101 of Td. 2211, or do you do the we're trying to Walk the fine line by saying it's subject to a 109 N. Loan. That's 1 approach. Tthe other extreme is to say, the full court's right, and we'll do nothing, and if ultimately this was what the law ends up. that will be fine. If the law, the Commissioner wins on appeal or the laws change. Well, then, it may mean that you've got a deemed dividend arising because the Commissioner's view, either through a court process or legislative change, is proven to be correct, assuming it applied retrospectively. What you do there, or your clients would do then would be, you know. Would they? Could they make a 109 rb. Application. And would that be successful? Because that requires an honest mistake or an aversion of mission? If you consciously followed the Federal Court decision? Is that an honest mistake? You know,I don't know. Between those 2 sorts of extremes, that do nothing approach and the follow the Commissioners approach. There's probably a middle ground, which is which is. you do something akin to the practice statement. The withdrawn practice statement. Where you say, well, what we'll do is we'll start. The Trust will start to make payments, effectively. 1/7th of the principal, plus an interest cost to the private company. They may not formally do the 109 N sort of loan agreement across the top, but there is an agreement which says, we will pay you 1 7th of the principle of the up plus an interest charge, so that you're sort of in a position where you're you're complying with, call it the cash flow underlying the How Division 7. A works in terms of 109 d. And 109 E. Payments. But you're not, you're leaving it as a UPE. So so then, in terms of you know, if the ultimately the Hr. Was successful. Well, there's, you know, there's probably an argument. There's been no real mischief, because you've been paying it back on the same basis of this as if you had put the the loan agreement in place. So I think those are the 3 approaches.and what's best for you will really come down a lot of it to one. The client's risk profile are they risk averse, you know, risk risk chases, etc. And also their facts. Because if if you have an Ea situation. we excuse me, money's actually left the trust, and, gone to us to to a shareholder associate. say, for a loan, you may be wanting to avoid an EA deemed dividend. putting it, putting either the the loan, the line between the trust and the company, for example, or the line between the the Trust and the shareholder associate onto complying terms, because, irrespective of Bendel and the 109 d. Position, you may have an Ea deemed dividend as well instead. Importantly, with EA the timeline is different as well, so like in terms of when the deemed dividend arises.
Robyn Jacobson
Really, we don't have certainty yet. We need to look and watch and wait. See whether the Commissioner does apply for special leave. What would you say to practitioners who are looking to lodge amended assessments or think that suddenly Bendel is going to give them access to buckets of cash at the end of the rainbow that suddenly we've got all these refunds that might come through.
Neil Brydges
My views on amended assessments, and also objections, are probably in a similar sort of vein, as well as what are you amending the assessment in relation too, one and and two, is there something else you should be looking at? So in terms of that first point, if the amended assessment is relation to. For example, the private company saying, I put this interest in my tax return, and did I actually derive it if these things weren't a loan under Commissioner's view, can I object to or take second amendment in relation to that interest income which I've paid tax on. The other side of the coin is, there may be an interest deduction in the trust, for example, so it may be a bit of a zeo sum game. But if you're just looking at that interest well, then the first thing was, if there was a legally binding agreement to pay interest, they may well have derived that interest anyway. The fact you entered into that agreement because based on the Commissioner's view, which the full court says was not correct. If there was an agreement to pay for a loan to pay interest well, the interest’s been derived, so that may be not the best thing to object against. If there has been a deemed dividend.
so that, division 7A was not complied with, perhaps a 109 RB submission was not successful, and the deemed dividends you could potentially look to object against that saying, well, that deemed dividend arose because of your view of the law and your view of the law, Full Federal Court said is incorrect. Before you do, I think the thing to look at is whether, if there was a subdivision EA problem or 100A problem before you lodge the objection or the amendment, thinking, well, there's a saying, you know ‘clean hands’. So your saying, well great, I can object against the deemed dividend under 109d but there would be an EA deemed, otherwise, you might find there's no benefit, or if 100a applied that could go back multiple years. So certainly. what are you objecting about, It was the first point, and also 2, making sure there's no sort of secondary sort of consequences which haven't been an issue at this point. But if you go for an amendment or rejection, the ATO reviews the client's affairs, they may say, hey, you've got an EA problem, you've got a 100A problem, and you might find that you know the benefits of the objection are lost, and worse.
Robyn Jacobson
So, whilst on the face of it, it seems Bendel is a win for the taxpayer, and indeed they were successful in respect of the Commissioner's appeal to the Full Federal Court which the Commissioner of course lost. It is rather complicated, and there are so many considerations, aside from whether or not the UPE is itself a division 7A loan.
Neil Brydges
Yes, exactly right, Robyn. I think it's one of the things that while all tax advisors will be, you know, celebrating the decision. There's still more to go in terms of the appeal process, maybe legislative change. But also, even if it stays where it is, it's working out what that means in terms of your arrangements some will be complicated. One thing we have not chatted about was what the full court did say. While it was not a loan, they said, in the particular facts under Bendel that there was a debtor creditor relationship that was created.
So they said, it was not a loan under the extended definition but there was a debt accreditor relationship. There's issues that remained unresolved because they weren't an issue in Bendel about it. If your facts there's a debt accreditor, relationship created. And part of that was the way it was recorded in the financial statements.
Would that mean that if that UPE which was a debt accreditor, relationship was forgiven, that there could be a deemed dividend under, for example, section 109F. Which is in Division7A, which deals with the forgiveness of debts. Section 109 F does not mention loans. It mentions debts, so there's certainly other things to consider before we sort of get, you know, rushing away and doing things about sort of, you know, forgiving amounts and lodging objections that there's a lot of sort of nuances to work through for us.
Robyn Jacobson
Neil. Thank you so much for your comments and for your insights. It's going to be really interesting to watch in particular, over the next few weeks, and the months ahead where this goes.
Neil Brydges
Thanks, very much.
Robyn Jacobson
I also want to let all of you know that The Tax Institute will be running a webinar on the Bendel decision, and that will be held on Tuesday, the 25th of March. More details will be available very soon, but we will continue to pick up this conversation with a star-studded panel. Thank you again, Neil. Appreciate your insights and thank you to you all for listening to this episode of TaxVibe.
I've been chatting with Neil Bridges, CTA, of Sladen Legal in Melbourne. If you enjoyed this episode, we'd love for you to subscribe, rate, and review TaxVibe wherever you listen. We welcome any feedback and suggestions to catch all the latest from TaxVibe and The Tax Institute, join us on Linkedin. Thanks again, and till next time on TaxVibe.
