There has been a lot of press and discussion about the implications of the decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel case), which relates to the application of Division 7A to unpaid present entitlements. That case, detailed below, is currently operating in favour of the taxpayer but is subject to an application for special leave to the High Court.
While Bendel case considered issues around unpaid present entitlements and loans from companies to trusts, the outcome of the decision could have a ripple effect into other anti-avoidance provisions, including section 100A, which if applied, could result in a worse outcome for the taxpayer.
Bendel Case
The Bendel case concerned with Division 7A of the ITAA36 and the decision in Bendel case has proved to be one of the more significant developments to Division 7A in modern times, particularly in the context of private family groups and businesses.
In a nutshell, the Full Federal Court of Australia in this case rejected the Commissioner’s long held view provided in Taxation Determination TD 2022/11: Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation that an unpaid present entitlement (UPE) owing from a trust to a corporate beneficiary of the trust is a form of financial accommodation or ‘loan’ for the purposes of Division 7A.
In practical terms, this means taxpayers are no longer required to put in place Division 7A complying loans for any UPEs outstanding to a corporate beneficiary at the end of financial year to protect themselves against potentially un-frankable deemed divided assessments under Division 7A. This also means that taxpayers could re-consider the historical treatment of such UPEs, either under existing Division 7A loan arrangements or past deemed dividend assessments based on now ‘incorrect’ Commissioner’s view.
While the Bendel case was decided in favour of the taxpayer (pending the Commissioner’s special leave to appeal to the High Court and possible law change), we do not think it is all good news for the taxpayers as it could lead way for more frequent application of a relatively more challenging anti-avoidance provision that is section 100A as discussed further below.
Pending the outcome of the special leave application with the High Court filed by the Commissioner, the ATO has said in its interim decision impact statement (IDIS) that, until the appeal process is finalised, the existing position will continue to apply – i.e broadly, UPEs to corporate beneficiaries are a form of financial accommodation which trigger Division 7A deemed divided unless a complying loan is put in place under prescribed terms, even though the current law says otherwise.
Notably, in the same IDIS, ‘section 100A’ appears five times – two more than ‘Division 7A’ which appears three times, while the Bendel case did not consider section 100A at all. This should highlight the fact that the taxpayers will need to consider the likely implications of section 100A as part of their decision-making process in addressing loans and UPE’s under the position in Bendel case.
Section 100A Summary
Section 100A of Income Tax Assessment Act 1936 (ITAA36) generally applies where a beneficiary is presently entitled to a share of the income of a trust estate and the present entitlement of the beneficiary to that share “arose out of or by reason of any act, transaction or circumstance that occurred in connection with, or as a result of a reimbursement agreement”.
A “reimbursement agreement” is defined in section 100A(7) to mean an agreement that provides for the payment of money or the transfer of property to, or provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or persons. Section 100A(13) provides the definition of ‘agreement’ in broad terms to include any agreement, arrangement or understanding, whether formal or informal, but exclude ordinary family or commercial dealings.
Any income of a trust estate that is subject to section 100A is taxed in the hands of the trustee of the trust at the highest marginal rate, and if a beneficiary has been assessed on a relevant share of the net income of a trust and section 100A operates, that the beneficiary is treated as to never have been presently entitled to the relevant trust income.
Section 100A has been on the Commissioner’s radar for the past few years and was considered in the recent cases of Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 and B&F Investments Pty Ltd ATF Illuka Park Trust & Anor v FC of T 2023 ATC.
The main reason why section 100A may apply to UPEs owing to corporate beneficiaries in the absence of a complying Division 7A loan stems from the PCG 2022/2 – Section 100A reimbursement agreements – ATO compliance approach, where the Commission took the ‘green zone’ position (ATO will not dedicate compliance resources to consider the application of section 100A) of section 100A to UPEs to corporate beneficiaries on the basis of such UPEs being Division 7A loans as per the position taken in TD 2022/11, which is now rejected in Bendel case.
Accordingly, in the IDIS, the Commissioner noted if a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the green zone described in PCG 2022/2 and section 100A may be applied.
Implications to taxpayers post Bendel case – Lesser of the Evils?
So what does it all mean and how might this play out in practice?
As Division 7A and section 100A purport to tackle different tax avoidance arrangements, both the operation and implications of each section to the taxpayers are also different.
Firstly, the application of Division 7A is limited to the relevant assessment amendment period (generally 4 years) in the absence of any fraud or evasion while section 100A has unlimited assessment period (due to the operation of subsection 170(10) of ITAA36).
This means, for example, if a taxpayer decides to make certain changes to the Division 7A loan arrangements going back more than five years relying on the Bendel case (i.e no fraud or evasion), the deemed dividend provisions in Division 7A may not apply regardless of the position the Commissioner takes, but the Commissioner may choose to apply section 100A to the relevant distribution in that relevant year instead.
Bearing in mind that UPEs to corporate beneficiaries without Division 7A loans do not automatically trigger the application of section 100A, as a separate set of requirements set out in section 100A must be met for it to apply, if the section applies to the relevant distribution, the trustee of the trust is taxed at the highest marginal rate with no legal recourse to claim the distributions made to the beneficiaries back to the trust.
This could result in the trustee with a significant tax liability with no income to appropriately fund same, and in our opinion, this is a worse outcome from the trust perspective compared to the unrankable deemed divided to the trust from the company.
What now?
Following the decision in Bendel case and as the end of financial year draws near, it is open to the taxpayers to not have a Division 7A complying loan agreement for UPEs owing to corporate beneficiaries if their circumstances allow, as that is the current ‘law’ that should apply to UPEs in the context of Division 7A.
Having said the above, there might still be merit in being conservative and keeping the existing arrangements going as per the IDIS, so that you stay on the safe side under both of PCG 2022/2 and TD 2022/11 until we have more clarity from the outcome of the High Court appeal and/or potential law change. However, if your circumstances demand to do without a complying Division 7A loan agreement for future or past UPEs to corporate beneficiaries, you will need to consider the application of section 100A to your particular circumstances as well as Division 7A before proceeding with any such restructure as it is possible that both Division 7A and section 100A applying to the same distribution.
How we can help
Taxpayers, who are:
- considering restructuring their existing Division 7A loans, or
- deciding if they should put a Division 7A complying loan in place for UPEs owing to corporate beneficiaries from their trusts following the Bendel case,
should consider if section 100A could apply to their arrangements in light of their own circumstances as the application of section 100A will depend on the facts of each specific case.
The Wills, Estate Planning and Structuring team at Moores is one of the largest in Australia with expertise in trusts and taxation. We can provide strategic advice tailored to your specific circumstances and work with you and your advisors to make sure that any restructure or arrangement involving trusts and corporate beneficiaries do not inadvertently contravene the anti-avoidance provisions under Division 7A or section 100A of ITAA36.
Contact us
Please contact us for tailored advice on how you can ensure your school is staying up to date with the relevant guidelines.
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