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How the ATO has morphed into a quasi-lawmaker


A recent AAT decision overturns years of Tax Office thinking about trusts and Div 7A loans – and highlights how it steps beyond its administrative role.

By John Jeffreys 17 minute read

The Constitution sets out the separation of powers, being one of the cornerstones of the way the Australian people are governed. Parliament, the executive and the judiciary are the institutions between which power is separated. Although the average person may spend very little time thinking about the separation of powers, this concept is the foundation of the peace and orderliness our society enjoys. 

The separation of powers is enshrined in the Constitution so that the three groups referred to share the power of government. This prevents one group from having all the power. The legislature makes the laws, the judiciary interprets and makes judgments about the law and the executive puts the law into practice and administers the requirements of the law.

It is my view that the ATO has ventured into the role of making the law in some respects over recent years. I am fortified in this view by the AAT decision delivered on 28 September in Steven Bendel and the Commissioner of Taxation and Gleewin Investments Pty Ltd and the Commissioner of Taxation [2023] AATA 3074.


The decision in this case by the AAT is arguably the most significant decision of the tribunal in relation to a tax matter that has ever been. With much courage (and, no doubt, money) Mr Bendel determined to challenge the ATO on one of the most important tax issues that has affected small and medium enterprises in the past 13 years. 

The issue was over whether an unpaid present entitlement (UPE) to income of a discretionary trust owed to a corporate beneficiary of the trust is a loan for the purposes of Div 7A Part III of the Tax Act 1936. If a UPE is a loan for the purposes of this provision, Div 7A can deem an unfranked dividend to arise to the trustee of the trust. The tax impact of this will then, usually, be felt by the beneficiaries of the trust.

Since December 2009, the ATO has stated in public pronouncements that a UPE is a loan for the purposes of Div 7A. Mr Bendel disputed this view and the two members of the AAT, deputy president F D O’Loughlin KC and senior member K James agreed with Mr Bendel. According to the AAT, the view of the ATO was wrong.

Background to the issue

Div 7A was introduced with effect from 4 December 1997 by government announcement. The enacted legislation followed in 1998.

Early in 1998 and before the Div 7A legislation was drafted when I was a tax partner of Pitcher Partners in Melbourne, I flew to Canberra to meet the Assistant Commissioner in the ATO who was involved with the drafting of the new Div 7A. I met with this gentleman in his office. I have one distinct memory of this meeting. I asked him whether the new legislation would treat UPEs as loans for the purposes of Div 7A. I remember him shaking his head and saying, “No”. 

A little later, Senator Rod Kemp announced that the new Div 7A would contain a provision that would deem an unfranked dividend to arise where there was a loan or payment made to a shareholder or associate of a private company by the trustee of a trust and (broadly) there existed a UPE between the private company and the trust. This provision became section 109UB. It was later replaced by Subdivision EA of Div 7A.

The important thing to understand is that both section 109UB and Subdivision EA were drafted on the basis of UPEs not being a loan for Div 7A purposes. Everyone thought that – the politicians, the professions and the ATO. Everyone was abundantly clear that UPEs were not to be treated as loans. It was abundantly clear that the policy of the legislature was not to treat UPEs as loans. Otherwise, what was the purpose of section 109UB and its successor, Subdivision EA?

But then some years later, a group within the ATO decided they would latch on to a part of the definition of “loan” in Div 7A to change this, formerly, abundantly clear position. This group decided that the term “financial accommodation” in subsection 109D(3) would cover the situation if a UPE existed between a company and a trust and those who controlled the company and the trust were, essentially, the same people.

The view then expressed by the ATO was that the private company was acquiescing to the trust using its money. Therefore, the private company was providing financial accommodation to the trust. This meant that a deemed unfranked dividend could arise for the trustee of the trust if actions were not taken to prevent this.

Entering into the role of the legislature

In my view, by adopting this changed view, the ATO moved out of the role of being the executive administrator of the law and into the role of the legislature. The ATO effectively overrode the clear policy of the legislature and replaced that view with a view of its own. This should not have been done. It became a quasi-lawmaker.

You may well ask, “Why didn’t everyone oppose this view in late 2009 and 2010?” 

Well, many did, but the ATO pushed on with its view despite the strident criticism at the time. It produced a tax ruling and a practice statement that, for most affected taxpayers and their advisers became quasi-law. No one was prepared to have a costly fight with the ATO over its changed view and, I think, the ATO knew this.

We effectively had a change in the law that was not sanctioned or contemplated by the legislature. But then Mr Bendel entered the picture and he had the determination (and the money!) to dispute the ATO’s position. 

The decision of the AAT took 11 months to produce. I have no doubt that AAT members O’Loughlin and James thought very deeply about their decision. They would have been very aware of the significance of overturning a view of the ATO that had stood, almost as law, for a 13-year period. The matter was of significant importance to the SME community, the tax profession and the rule of law. I am sure these two gentlemen of the AAT spent many hours agonising over the decision and eventually ruled in favour of the taxpayer.

After, no doubt, careful consideration by the AAT members, they completely rejected the basis of the ATO’s changed views. If the ATO was correct, then there was either double taxation or Subdivision EA basically had no work to do. Parliament could not have intended legislation that it enacted to produce double taxation or have nothing to do. 

The ATO said that Subdivision EA does have an operation where the corporate beneficiary is unaware of the existence of the UPE. I have always thought this to be a very weak argument and, by implication, the AAT thought the same.

Some have said that this is only a decision of the AAT (not a court) and that it does not have precedential value. That may be so, but it still represents a very considered and well-argued set of conclusions about the ATO position by two highly respected tax lawyers.

Where to now?

At the time of writing, we are still waiting to hear whether the ATO will appeal the Bendel decision to the Federal Court. If the ATO does appeal, it should be a given that Mr Bendel is entitled to test case funding. In my view, it would be an abhorrent use of the ATO’s power to force Mr Bendel to continue to fight this issue at his own cost when there is clearly a very controversial matter to be decided and on which two seasoned tax lawyers (the AAT members) have decided the ATO is wrong.

Until we get the result of an appeal (if there is one) or an ATO Decision Impact Statement about the AAT decision (if there is no appeal) the position concerning UPEs and Div 7A will remain unclear.

Executive or legislature?

Over the past few years, I have observed a tendency of the ATO, in certain situations, to move from its executive role into becoming a quasi-lawmaker. The ATO is able to do this because nearly everyone has a considerable distaste and fear in relation to having a dispute with the ATO – particularly in the courts. Obtaining test case funding is almost impossible and no one wants the considerable cost, time and energy expended on fighting the ATO on uncertain matters.

This puts the ATO in a position of extraordinary power. It can make pronouncements about the law and the vast majority of taxpayers, and their advisers will simply follow what the ATO says. Accountants (and lawyers) don’t like putting their clients in a position where there is a potential dispute with a well-resourced opponent.

Senior ATO officers must be very mindful of the exceptional power that is at their disposal and the production of ATO information of any form must be done in the utmost good faith for the benefit of the community. The ATO must try hard to determine what the legislature wanted when laws were enacted and not to stretch the interpretation of laws to encompass views that were clearly not contemplated by the legislature when a law was enacted just because it might collect some more revenue.

Without going into detail, I am concerned about such things as the Practical Compliance Guidelines on section 100A and the distribution of profits from professional services firms. In my view, these PCGs and related documents are based on disputable views that have been adopted by the ATO. I am certain, for example, that the politicians that originally enacted section 100A would be very disturbed if they knew the position the ATO has now adopted in relation to the operation of that provision. 

I wish to make it clear that Australia does have a world-class tax administrator. I do not subscribe to the sport of ATO bashing. The ATO has a very significant and important role in Australian society and, by and large, it performs that function well. Nevertheless, I am concerned about the growing trend, in my view, of the ATO becoming a quasi-lawmaker and not just an administrator of the law enacted by the legislature.

John Jeffreys is the director of John Jeffreys Tax Pty Ltd.

Disclosure: Mr Steven Bendel is personally known to the author. Further, Andrew de Wijn and Paul Jeffreys of counsel appeared for Mr Bendel in the proceedings before the AAT. Paul Jeffreys is the author’s son. All the above views are entirely those of the author and are not influenced in any manner by his connection with Mr Bendel nor Paul Jeffreys. The author has had very limited discussions about the case with Mr Bendel and Paul Jeffreys.

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