“The Bendel case is the first time that the ATO’s longstanding view has been considered by the Courts. In February, the Full Federal Court reached a decision that's contrary to the ATO’s published position. We’re now appealing this decision in the High Court because the decision is of wide interest and will affect many private company taxpayers.”

She continued that the Interim Decision Impact Statement explains the ATO does not intend to revise its current views relating to private company entitlements to trust income, as detailed in Taxation Determination TD 2022/11, until the appeal process is exhausted.

“I won’t second guess the workings of the High Court. However, we can anticipate that the whole process could take a little while, allowing for a hearing to be scheduled and the High Court time to consider its decision,” Clarke added.

“If our appeal is unsuccessful, we will, as a priority, publish our decision impact statement. Of course, over a period of weeks and months, we'll also review and update relevant ATO guidance products.”

Meantime, Clarke said it is not usual practice to grant lodgment deferrals as a matter progresses through the courts and the same will apply to this appeal, adding the ATO is not going to grant a blanket extension of time for affected companies to lodge their tax returns pending the High Court’s decision in its appeal.

“We appreciate that some private company taxpayers will need to decide how to treat unpaid present entitlements (UPEs) when preparing their 2024 tax return. To assist with the decision-making process, the interim decision impact statement explains that taxpayers need to be mindful that pending the outcome of our appeal to the High Court, we're maintaining our view in TD 2022/11,” Clarke said.

“We also observe that the basis on which private company beneficiaries deal with UPEs may have consequences under other integrity provisions in the tax law, including section 100A and subdivision EA.”

Furthermore, she said the application of section 100A and Subdivision EA does not depend on the outcome of the High Court appeal process in Bendel and the ATO considers there is a clear pathway for taxpayers who don’t wish to risk potential exposure to other integrity provisions, regardless of the outcome of the current High Court proceedings.

The ATO will also not be granting a blanket exercise of the discretion.

“Section 109RB allows the Commissioner to consider exercising discretion to disregard the operation of Division 7A or to allow a deemed dividend to be franked where a deemed dividend arose if there's been an honest mistake or inadvertent omission,” Clarke noted.

“In this regard, each case turns on its own individual facts and circumstances, must be considered on a case-by-case basis, and the Commissioner can only exercise the discretion in an individual case when a deemed dividend has actually arisen.”

In regard to converting UPEs to loans, Clarke said taxpayers will need to consider their circumstances and make their own decision pending the finalisation of the appeal process.

“Where a UPE isn’t converted into a complying Division 7A loan, taxpayers face the prospect that other integrity provisions may apply to their arrangement (depending on the particular facts), for example Subdivision EA and section 100A,” she said.

“Placing a UPE on Division 7A complying loan terms requires all the elements of section 109N be satisfied, including that there’s a written loan agreement between the parties. That is, relevant UPEs must be converted to loans to comply with section 109N.”