It is common for taxpayers who use discretionary trusts to make distributions of trust income to corporate beneficiaries.

It is also common for those distributions to be made ‘on paper’ without physical payment being made to the corporate beneficiary.  This results in ‘unpaid present entitlements’ in the books of account of both the trust and the corporate beneficiary.

Back in 2010, the ATO released Taxation Ruling TR 2010/3 which espoused the view that unpaid present entitlements would be considered  to be ‘loans’ for the purposes of Division 7A of the Income Tax Assessment Act 1936.

This represented a significant shift in the compliance obligations associated with making distributions of trust income to corporate beneficiaries that have been applied ever since.

More recently, TR 2010/3 has been withdrawn with the ATO issuing Taxation Determination TD 2022/11 which is applicable to distributions occurring on or after the 1st of July 2022.

TD 2022/11 takes an even more strict interpretation of how Division 7A should be applied to unpaid present entitlements that further complicates the compliance landscape.

However, a recent Administrative Appeals Tribunal decision in Bendel and Commissioner of Taxation may have turned the ATO’s position on its head.

In the Bendel case, the AAT found that an unpaid present entitlement was not a loan for the purpose of Section 109D(3) of Division 7A.

This decision is good news for taxpayers who have distributed trust income to corporate beneficiaries as it has the potential to favourably change the accepted view of how Division 7A should be applied.

On the 26th of October, the ATO lodged a notice of appeal in the Bendel case to the Federal Court.  As such, it looks like we might be in for a bit of a wait to learn the final position on whether an unpaid present entitlement is a loan for the purpose of Section 109D(3) of Division 7A.

We will keep you posted on the progress of this case and will reach out to affected clients if and when there are any actions required.

In the meantime, feel free to get in touch if you would like to learn more about the potential significance of this case.

Sky Accountants Ballarat

Phone: 03 5332 8855

Office Address: 902 Howitt Street, Wendouree, Victoria 3355, Australia

Postal Address: PO Box 2234, Bakery Hill, Victoria 3354

Sky Accountants Gisborne & Macedon Ranges

Phone: 03 5428 1400

Office Address: 45 Hamilton Street, Gisborne, Victoria 3437, Australia

Postal Address: PO Box 270 Gisborne Victoria 3437