UPE liability risks remain despite ATO statement on Bendel, expert cautions

Previously, Accounting Times announced the release of the statement on Friday (26 June), with its aims to clarify that unpaid present entitlements (UPEs) do not constitute a loan under section 109D in Division 7A, following the High Court’s decision to quash the Commissioner of Taxation’s appeal on the Bendel case.

The impact statement read: “The High Court's reasoning makes it clear that section 109D does not apply in relation to a private company's entitlement to a share of trust income that remains unpaid where the company does not take action in respect of that entitlement.”

While Accurium head of education Lee-Ann Hayes told Accountants Daily that she believes the statement provides comfort for practitioners, she said it does not address what will happen if the loan is left unpaid, and for practitioners who have converted their UPE to a loan. She said those who have taken action may be tethered to a legal obligation which cannot be ignored.

Hayes warned against practitioners trying to unwind trust deeds following the pullback of TD 2022/1. “I'm really concerned about people just thinking that they can rescind a contract or ignore what they've put in place. That has actual consequences.”

The ATO added: “If a statement turns out to be incorrect and taxpayers underpay their tax as a result, they will not have to pay a penalty, nor will they have to pay interest on the underpayment provided they reasonably relied on this Decision impact statement in good faith”.

Despite this, the practitioners who opposed the taxation determination, like Bendel, may still be subject to UPE liabilities under both subdivision EA and section 100A.

Hayes cautioned against practitioners depending on the statement without consultation. “We've got [subdivision] EA in the background and, probably more scary, we've got [section] 100A. [The ATO is] still standing behind their previously published decisions with respect to those two things.”

Hayes noted that changes to trust taxation are still subject to amendment following the Budget, with the decision impact statement noting that guidance involving Division 7A generally, and section 100A are under review pending further amendments or withdrawals.

“[The ATO talks] about amending their guidance with respect to [section] 100A, [and] amending quite a number of different pieces of advice they've got out there, which we don't know what that looks like yet. So we don't know what direction the tax office is going to take,” Hayes said.