ATO statement on Bendel fails to provide ‘equity and certainty’: CPA

CPA Australia has welcomed the ATO’s confirmation that an unpaid present entitlement (UPE) will not be treated as a Division 7A loan, but has called for further amendments to the ATO’s draft decision impact statement (DIS).

The accounting body urged the ATO to amend the draft DIS to provide practical, streamlined, and equitable guidance, including a clear safe harbour or administrative pathway for unwinding legacy complying loan arrangements where taxpayers acted in good faith in accordance with prior ATO guidance.

The ATO previously released its draft DIS on the High Court decision on Bendel back in June to clarify that unpaid present entitlements (UPEs) do not constitute a loan under section 109D in Division 7A.

The draft decision impact statement was released in response to the High Court decision on Bendel, which rejected the Tax Office’s longstanding views about the tax consequences of unpaid present entitlements owing to corporate beneficiaries.

In a submission to the ATO, CPA Australia said the draft DIS did not provide any equity and practical certainty for taxpayers, advisers and private groups that relied on the Commissioner’s former incorrect administrative position for over 15 years.

“Without clearer administrative pathways, historically compliant taxpayers remain unfairly exposed to unnecessary compliance costs, uncertainty and adverse tax outcomes," the accounting body said.

“The DIS should recognise that many taxpayers entered into section 109D complying loan arrangements in good faith in reliance on prior ATO guidance, and should provide practical relief for these legacy arrangements on equity grounds.”

CPA Australia has also called for a number of other recommendations for the finalised version of the DIS, including clarification on the interaction between passive UPEs, Subdivision EA, and section 100A following the High Court’s decision in Bendel, particularly where trust funds are retained for ordinary working capital purposes.

“[The ATO should also] provide clearer guidance on whether trust deed wording, trustee resolutions, sub-trust arrangements or accounting classifications may affect the characterisation of a UPE for Division 7A purposes.”

The DIS, it said, should also provide practical relief for legacy UPE arrangements, including guidance on unwinding or cancelling historical section 109D complying loan agreements without unintended adverse tax consequences under section 109RB.

“The ATO should address the practical impact of statutory amendment time limits and consider administrative concessions for taxpayers who are otherwise unable to amend historical assessments,” CPA Australia said.

The DIS states that taxpayers may seek amendments or lodge objections where they are self-assessed on the basis that standard UPEs are automatically treated as loans.

“However, the DIS has either omitted or does not address the practical effect of statutory time limits. Most small to medium enterprise groups are subject to two- or four-year amendment periods. Consequently, many UPE arrangements are effectively excluded from the ordinary amendment process,” CPA Australia said.

“Taxpayers would therefore need to seek leave to lodge objections outside the standard time limits, increasing administrative and filing costs without any assurance that the ATO will accept or determine those objections favourably.”

CPA Australia said the DIS should instead provide administrative concessions for out-of-time amendments, on equitable grounds, to correct an ATO-originated error, including by permitting the unwinding or cancellation of legacy section 109D complying loan agreements.