Bendel: the blueprint for a ‘devastating attack’

“Everyone is reading Bendel as the ATO’s defeat. I read it as the ATO winning the war while losing the battle – it just doesn’t know it yet,” Cartland said. “The idea that present entitlement is safe because everyone assumes it is safe should comfort nobody.”

For the last 15 years, the ATO has treated UPEs as a loan for the purposes of Division 7A, Institute of Public Accountants senior tax adviser Tony Greco told Accountants Daily. Cartland added that the court’s finding that Bendel’s resolution was not a “payment” or an “application of income”, “knocks out” statutory deeming provisions that have held up present entitlement for decades.

“The commissioner spent a decade and a half arguing that an unpaid trust entitlement is a loan. That was always the wrong question. The right question – the one nobody asked – is whether the beneficiary was ever presently entitled at all.”

“The High Court’s own reasoning now suggests that in many cases, under standard trust deed wording, the answer may be no. And if there is no present entitlement, the trustee is taxed on the lot at 47 per cent.”

“Present entitlement requires a present legal right to demand and receive payment. The High Court has just described the standard family trust distribution as creating no unconditional duty to pay anything to anyone. Those two propositions cannot live together forever.”

Cartland said that if the commissioner had directly attacked present entitlements in the case or pleaded for an alternative, the result could have been the “greatest recent victory in 25 years”. 

“Instead of a deemed dividend, he would have had trustee assessments at the top marginal rate on the whole of the trust’s income. The premises for that argument are now sitting in the law reports, assembled by the High Court itself, in a judgment the taxpayers won.”

Relatedly, Cartland pointed to Commissioner of Taxation v Carter [2022] HCA 10, in which the High Court quashed a disclaimer practice relied on for decades because the settled understanding had never been tested against the statute. Similarly, Cartland said that the Bendel decision “torched” 15 years of ATO administrative practice.

As a result of the High Court’s decision in Bendel, the standard “set aside” clauses found in most Australian discretionary trust deeds are now exposed, and said that it is now the “clause that loses the next case”, Cartland said.

“Trustees and their advisers need to look at their deeds and their distribution resolutions this financial year, not after the commissioner moves.” 

“The choice between Division 7A protection and present entitlement certainty is now a live annual decision that most practitioners do not yet realise they are making.”