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High Court hands down significant Div 7A appeal decision
The High Court has published its appeal of the decision in Commissioner of Taxation v Bendel, which challenged the Tax Office’s longstanding views about the tax consequences of unpaid present entitlements owing to corporate beneficiaries.
The appeal in Commissioner of Taxation v Bendel was dismissed on Wednesday (10 June) morning, with the Full Bench of the High Court of Australia finding in favour of taxpayer Steven Bendel and Gleewin Pty Ltd, the trustee of the Steven Bendel 2005 Discretionary Trust.
The original appeal decision before the Full Court of the Federal Court of Australia determined that unpaid present entitlements (UPEs), arising from an entitlement to income of a trust, were not a loan under Division 7A of Part III of the Income Tax Assessment Act 1936.
“A consequence of the Commissioner’s construction of Division 7A is that a share of net income to which a corporate beneficiary has been made presently entitled and on which the corporate beneficiary has been taxed in one year is again included net income of that same trust in the following year,” the court ruled.
“This has the potential result of an overall tax impost that is higher than if the corporate beneficiary was never made presently entitled at all.”
The commissioner’s special leave to appeal raised directly the application of Division 7A, which was enacted to ensure private companies “will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payments or loans”.
The High Court held, by majority, that by not calling for payment of the unpaid present entitlements set aside for it, Gleewin Investments did not provide “financial accommodation” under section 109D(3)(b), “nor did it in substance effect a ‘loan of money’” to Gleewin.
“In addition, the High Court held that the resolutions to set aside the amounts for Gleewin Investments did not relevantly effect the distribution of those unpaid present entitlements, nor did there arise a relationship of debtor and creditor between Gleewin and Gleewin Investments,” the Full Bench said in its summary.
“Rather, by the resolutions, the unpaid present entitlements were held on separate trust for Gleewin Investments.”
More to come.
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