Until the appeal process is finalised, the ATO will not revise its current views relating to private company entitlements to trust income, as set out 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’?
In addition to the application of section 109D, the basis on which private company beneficiaries deal with unpaid entitlements to trust income may have implications under other taxation laws, such as s 100A.
Pending the outcome of the appeal process, the ATO will not seek to finalise decisions on issuing amending assessments, private ruling applications, or objections related to this issue.
Clearly then, any ATO interaction your clients are involved in with the ATO will be placed on hold until the special leave process and potentially a High Court appeal takes place. This could be years….
What decisions do we need to make now?
We outlined in our recent Autumn QTB some of the more common questions put to us in the weeks since the Full Federal Court decision. However, with 2024 tax lodgement dates fast approaching there is an urgent question, being;
What should we do with 2023 UPE’s to corporate beneficiaries that were required under the ATO’s ruling to be placed on complying loan agreements by the lodgement date of the 2024 tax return?
We recommend that you advise your clients that because of the recent Bendel decision there is currently no legal requirement to place these UPE’s on complying loan agreements, however, you must state that the ATO has sought special leave to Appeal this decision to the High Court, which if granted, may overturn the decision, in favour of the ATO’s ruling.
Where a complying Division 7A loan agreement is entered into it cannot be rescinded and has converted the UPE into a formal loan, subject to Division 7A.
The client’s risk is that if they do not follow the ATO’s current position, and the ATO is successful in the High Court, the decision to not place the 2023 UPE by the lodgement date of the 2024 tax return would give rise to a breach of Division 7A in the 2025 year (or perhaps the 2024 year!).
That breach is unlikely to be able to be rectified in later years and whilst we should be able to argue that the breach was as a result of a reasonably arguable position being taken, ensuring there are no penalties applied, the trustee would still be liable for tax on the deemed dividend, plus any interest charges.
If your client is well informed but still minded not to place the 2023 UPE on Division 7A complying loan terms, then the risks don’t end with the High Court’s eventual decision on Bendel. In the interim DIS above, the ATO also mention that “other taxation laws, such as section 100A” may have implications for UPE’s that are not placed on loan terms.
The issue is really one of risk management for your clients and leaves us all in a very difficult position whilst the Appeal process continues.
If you need to discuss any tax-related matter, please call Ross, Mimi, Linken, Chris or Sean on 9481 8448.