What’s next following Bendel: tax advisers weigh in

Speaking to Accountants Daily, National Tax & Accountants' Association senior adviser Robyn Jacobson (pictured, left) called the dismissal of this appeal a “significant win for trusts with corporate beneficiaries”. 

Head of tax & legal at The Tax Institute, Julie Abdalla (pictured, centre), said the ruling “brings long‑awaited judicial certainty to an area of trust taxation that has been the subject of significant controversy and compliance activity for more than a decade".

IPA senior tax adviser Tony Greco (pictured, right) called Division 7A a “complex maze of anti-avoidance rules”, noting that the ATO has maintained over the past 15 years that UPEs are treated as loans for Division 7A purposes.

However, Greco outlined that many taxpayers will fall outside of this decision. 

“Taxpayers who followed the ATO guidance and converted UPEs into compliant loans to avoid the consequences of Div 7A will most likely fall outside of this decision as they have effectively entered into binding loan agreements which cannot be easily unwound,” Greco said. 

Jacobson said practitioners with affected trust structures should review their existing UPE arrangements in light of this decision.

“UPEs that have not yet been converted to loans will not need to be treated as loans,” Jacobson added.

“UPEs that are not treated as Division 7A loans also remain subject to the potential application of section 100A of the ITAA 1936 where the relevant conditions are met.”

Greco added that despite Bendel confirming a separation between UPEs and Division 7A at the highest level, practitioners must await the ATO’s response to the decision, with the Tax Office maintaining other anti-avoidance provisions such as s 100A, subdivision of EA of Division 7A.

The ATO said it was currently “considering the implications of [the] adverse decision”.

“We will update our views set out in our Interim Decision Impact Statement as soon as possible to provide practical guidance to impacted taxpayers,” the ATO said.

The ATO has stood firm on its views in TD2022/1, which provided that UPEs fall under the jurisdiction of Division 7A; however, following the dismissal of its appeal, the ATO will now need to review its taxation determination.

“We’d expect that following this decision, statutory revision of these rules could be included alongside recent trust tax changes announced in the federal budget,” Abdalla said. 

“This is likely not the final word on this part of the tax legislation,” Abdalla added, and taxpayers must continue to “exercise care”, noting that Division 7A still applies where funds are actually advanced, loaned, or otherwise made available to shareholders or associates.

“It remains to be seen whether the government announces an interim measure until the new trust tax reforms commence from 1 July 2028, to fill the gap in the meantime,” Jacobson said. 

Echoing Abdalla, Jacobson said taxpayers seeking to rely on the decision must be mindful that loans made by a trust with a UPE with a corporate beneficiary will still attract Subdivision EA in Division 7A.

“It would seem that the decision in Bendel will have little relevance beyond [1 July 2028], as distributions to corporate beneficiaries may become a thing of the past, assuming the reforms are legislated as currently proposed,” she said. 

While it is still too early to determine what taxpayers should do, Greco said the Bendel decision was “one of the pressing immediate issues for practitioners”.