In the DIS the ATO accepts the High Court’s reasoning is clear and contradicts the position taken in the public ruling which will be withdrawn. Other relevant ATO advice will be reviewed and amended or withdrawn as appropriate with any favourable treatment effectively grandfathered for schemes begun before withdrawal.
This DIS provides guidance to private companies and advisers potentially affected by the High Court’s recent decision to inform their decisions about trust distributions and the operation of Division 7A before the end of this financial year.
The DIS explains that the effect of the High Court’s decision is that no loan will arise for the purposes of Division 7A where a private company beneficiary does nothing in respect of its entitlement to income from a trust.
However, any dealing with those funds that amounts to either a payment or loan to, or forgiveness of a debt of, a shareholder of that corporate beneficiary or their associate, may attract the operation of the rules on unpaid present entitlements in Subdivision EA.
Further, if the entitlement arose from a reimbursement agreement, the integrity measure in Section 100A may apply to tax the trustee at the top marginal rate.
For those who may be potentially affected by the decision in the Bendel case, the ATO said it encourages a thorough read of the DIS and further consultation with an adviser.
The DIS is open for comment until 24 July. The tax office is currently reviewing its guidance products in light of the High Court’s decision and may issue further guidance to ensure the correct application of Division 7A.
Shelley Banton, director for Super Clarity, said in a linkedin post that the ATO will withdraw TD 2022/11 after releasing its DIS on the Bendel case.
“For SMSFs it’s very much an ‘it depends’ situation as to whether a UPE is a loan. It requires a careful review of the trust deed, the terms of any trustee resolutions, the accounting records and any other dealings in respect of that amount,” she said.
“The SIS rules also come into play and can’t be ignored. The ATO said that where ‘the UPE arises out of, or in connection with, an arrangement … where someone else benefits, and that is entered into outside the course of ordinary family or commercial dealing, section 100A may apply, making the trustee liable to tax at the top marginal rate’.”
