Bendel decision creating further confusion

On 18 March, the regulator also applied for special leave to appeal the Federal Court’s decision in FCT v Bendel [2025] FCAFC 15.

Neil Brydges, principal and accredited specialist in tax law for Sladen Legal, said in both the new DIS and former DIS, the ATO took the position that pending the outcome of the appeal process, it would administer the law according to its published views in Taxation Determination TD 2022/11 relating to private company entitlements and trust income.

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It said it also did not plan to finalise objection decisions in relation to objections to past-year assessments for which no settlement was reached, and if a decision was required to be made, for example, because the taxpayer’s period of review will lapse or a taxpayer gives notice requiring the Commissioner to make an objection decision, any objection decision the ATO made would be based on its existing view of the law.

“The New DIS adds to that list, the ATO does not plan to finalise decisions on issuing amended assessments and decisions on private ruling applications that go directly to the issue of whether unpaid present entitlements – UPEs – are loans under the extended definition in section 109D of the Income Tax Assessment Act 1936,” Brydges said.

However, he warned, the Tax Office has also made a slight change in its wording in the new DIS of which financial and legal professionals should be aware.

“The old DIS included the throwaway line, ‘[i]n 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 section 100A’,” he said.

“In the New DIS, the ATO goes much further saying: ‘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 section 100A.”

He added that regarding section 100A, a commonly referred to exception to this provision applying is the arrangement being entered into as part of ordinary commercial dealing.

“In Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements – ATO compliance approach (broadly stated), the ATO explains that: ‘Where a corporate beneficiary is made entitled to income from a related trust, and the trustee retains those funds by way of a loan on ‘commercial terms’ for working capital, we will not typically seek to apply compliance resources to consider the application of section 100A’,” he added.

“For these purposes, we [the ATO] accept that loans on Division 7A complying terms are sufficiently commercial. (See subparagraph 25(e) of PCG 2022/2.).”

Brydges said this meant, if instead, a trustee retained funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the green zone described in PCG 2022/2.

“Section 100A is a complicated provision that depends on the facts of a particular matter. However, even if section 100A does not apply to a matter, the ATO has put taxpayers on notice of its views around compliance action. Depending on the facts, Subdivisions EA or EB of Division 7A could also apply,” he said.

“While the special leave application eliminates one of the known unknowns after the full Federal Court decision. As we said previously, will special leave be an unsuccessful epilogue to the Full Federal Court, is there to be a sequel in the High Court, or could there be legislative change?”

He said the Tax Office guidance was a reminder of the comments by Allsop J in FCT v Indooroopilly Children Services (Qld) Pty Ltd [2007] FCAFC 16 when criticising the ATO’s administration of the law.

“In that case, the ruling stated ‘if the [ATO] has the view that the courts have misunderstood the meaning of a statute, steps can be taken to vindicate the perceived correct interpretation on appeal or by prompt institution of other proceedings; or the executive can seek to move the legislative branch of government to change’.”

“Whatever happens, the aftermath of the Bendel decision is likely to occupy the minds of the ATO, taxpayers, and their advisers for some time.”