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AAT Decision Contradicts ATO Position in Relation to UPEs, Corporate beneficiaries & Div 7A
Current as of: 5 October 2023.
The AAT concluded last Thursday (28 September, 2023) in the decision of Bendel and Commissioner of Taxation[2023] AATA 3074, that a UPE was not a loan for the purpose of s 109D(3) ITAA 1936 and further, that setting aside a UPE on a sub-trust arrangement generally does not end the existence of the UPE.
This contradicts the Commissioner’s longstanding position as outlined in TD 2010/3 (withdrawn) and TD 2022/11, that an Unpaid Present Entitlements of a corporate beneficiary constitutes the ‘provision of financial accommodation’ by the company to the distributing trust.
In this comprehensive update, industry expert Brian Richards and Acis’ Emily Pritchard unpack the implications of this decision for your clients and answer the following questions:
- What were the facts in the Bendel case?
- What was the decision and reasoning of the AAT?
- What might come next from the Commissioner on this matter?
- How do advisors practically approach this situation in the meantime?
Webinar resources
If you have any questions, please contact us.
Transcript
Emily:
Welcome everybody to this morning’s update webinar. I’m joined by renowned tax advisor Brian Richards. Thank you for your time. Once again, Brian, hard to believe it was only six weeks ago that we were sitting in this very room presenting on UPEs, Corporate Beneficiaries and Division 7a, concentrating largely on TD 2022/11, but obviously there’s a whole new layer to that discussion that we need to discuss today and it was only a week ago the IAT handed down the decision.
I guess, big question first, Bendel or Bendel?
Brian:
Whatever the thing is that this, this case will be notorious and will be discussed amongst the tax environment for a number of, a number of weeks to get some resolution. So, obviously it’s early days so this moment of time the purpose of today’s webinar is to perhaps provide an update and to try to provide some clarity around you know, what has happened and, and for advisors particularly, you know, what they, they should, should do.
Emily:
Yeah. You noted, you know, we’ll be talking about it for some time. It is a very significant case. I don’t think I’m being too dramatic in saying that. We look historically at the tax landscape in Australia, and we think of Bamford, we think of Guardian. Is Bendel going to be the next, historical tax case added to that list?
Brian:
Yeah, well that being a melodramatic, because I’m an accountant after all, so I’m not, not prone for my melodramatics. The, issue that the Bendel case arises is, a very fundamental point that really goes back, if you like, to 2010, where the commissioner issued TR 2010/3 that was the first iteration of the application of Div 7A to Unpaid Present Entitlements to, where the trust had made a distribution to a company. And at that point of time, TR 2010/3, wasn’t predicated by any court decision. It wasn’t predicated by any change of legislation.
It wasn’t predicated by any treasury announcement. It was simply. a viewpoint adopted by the Australian Taxation Office about the relevance of an Unpaid Present Entitlements in, connectivity with between a trust and, and a company. And, whereas TR 2010/3 was obviously in existence for 13 odd years, it was accompanied by PSLA 2010 /4.
So to some extent the economic implications of the first iteration of this was not profound. We then, as people know, as you say, we only spoke about this some, you know, 600 weeks ago. I’d just come back from Scotland and all of a sudden I’m talking about TD 2022/11. And TD 2022/11, you know, was effectively based on the previous ruling be it with some sort of revisions and updates and some greater, some greater clarity about the circumstances where the UP has put aside or set aside on the sub trust, which is the fairly common feature of most trustees.
And again, the simplicity of the Commissioner’s argument was evidence, not only in their rulings to date, but also in their arguments before Bendel. And I’ll talk about that in a moment’s time, because I think to some extent you, you made reference amongst other things to Guardian AIT and would join B Blood in those circumstances.
Those cases whilst they dealt with Section 100A, which again is a sort of a topical subject matter. But those cases to some degree had a degree of unusualness about them in terms of the facts when I took it, when I, when I go through the facts of Bendel, that’s not the situation. This is as vanilla a set of facts that you’re going to get and would be applicable in, I would say, at least 80 percent of most trust company interactions.
The circumstances are to the extent and I’ll hopefully give some explanation about what the AAT said in terms of their discussion and their decision. What happens now is a, is a matter of conjecture. I have a particular view and I’ll express that. But suffice it to say, it’s unsatisfactory.
This particular case goes to the very essence of TR 2010/3 and the essence of TD 2022/11. This is a very common scenario. This is a significant economic situation. And unfortunately, we have governments – treasury, ATO – sitting on their backsides, not introducing specific statutory change to the Division 7a, notwithstanding these matters have been called for.
So I’ll take a deep breath and go back.
Emily:
I’m sure it’s funny you keep watching, cheering you along as you say these things, but you’re quite right in this case. So often we see these significant cases and they reach decisions, but the circumstances and the facts are so nuanced that you can almost set them to one side in a lot of scenarios.
The facts in Bendel, they weren’t that complicated.
Brian:
We only have a very short period of time and I don’t have any magic wand to say, well, by the way, this, this particular decision of the AT has been handed down, this is what you do. I have a view and people know me well enough to know that you know i’m old enough ugly enough to be able to say I have a view but I can’t say with any sort of certainty About what’s going to take place given that this decision was handed down last thursday and I must admit, because I have a sad and lonely life, I read tax cases on a nightly basis.
So when I found the bendel case read it I sort of took a deep breath, went outside, made a cup of tea, came back and re read the case. I’m saying this can’t be right at this point in time, given that we’ve had some 13 odd years, 14 years of reliance upon the ATO’s strong viewpoint that an Unpaid Present Entitlements constitutes a provision of financial accommodation.
So I reread the case and because I was looking for, as you say, some sort of nuanced fact that said, well, this Bendel is such an unusual creature that he deserved what he, what he got, so to speak. I mean, you don’t do that, but, but this is not the case. And so this is, this particular decision isa polarized outcome vis a vis the ATO’s current position.
And as the extremity and the, and the implications of the differences of view, not a, not a small differences, but a significant difference that, you know, that I think raises this particular case to a point of significance. And I must admit what I’m surprised by that notwithstanding, I was aware of the fact that everyone’s aware of the fact that the ATO would look for cases, how the, how the ATO issued TD 2022/11, when we had this case pending.
Emily:
Correct. Yeah. So I think it’s worth noting, and I should have noted this at the beginning for you all, apologies, slides and a recording will be circulated. The purpose of this webinar is an update based on, as Brian and I both mentioned, we met here six weeks ago and covered these topics. So please feel free, we’ll include a link maybe in the follow up email for you as well, feel free to go back and look at those in detail.
So that we don’t cover all of that content again. But I guess take us quickly, Brian, to bring us up to speed through TD 2022/11, the quick overview, so that we can then look at how they compare.
Brian:
And again, what I’ve done in the slides indicate that if you like the summarized view of TD 2022, but as I’ve said a moment ago, that you must bear in mind that TD 2022 was this little follow up or add on.
To the previous t T 2010 three, which as you all know, was withdrawn not to apply to distributions made after the 1st of July, 2022. So if, if I can just do a very broad summary. Mm-hmm. Which it was evident on the, on the slide and, and, and so these are the uncontroversial aspects of T 2022 11. The first instance, what the commissioners maintain.
Is that when a trust makes a distribution to a company and that amount was unpaid, then prima facie, because the, the, the company hadn’t sought the payment of the, you know, the equitable obligation being the distribution, that by reason of the company not seeking the payment of that distribution.
They were, in essence, providing financial benefit to the company, and the provision of financial benefit is one of the, one of the elements of what constitutes a loan for the purpose of 109D. 109D 3 provides a definition of loan, including, amongst other things, that the and it is provided financial accommodation.
And the commissioner, and so that was the, if you like, the, the, the plank that the ATO sort of indicate, has indicated it’s relied upon. And in, in the context of that, when you go back and, as I’ve done, going back and look at TR 2010 and three and 2022 11, what was the, what was the premise of the commissioner’s argument?
And interestingly enough, it was the reliance upon other other case law, be it in other contexts. There was no specific case dealing with Div 7a. And that’s, that is a very relevant point when I go back and look at what the AAT said as far as this is concerned, that the use of other statutory interpretations in a different context.
Should not necessarily be the, the, you know, the, the, the type of stuff that the a t o rely upon to justify in this particular case that Diff seven A. So the first instance we have is, is very simply that when a, when a, a trust makes a distribution with company that was unpaid, the a t o say at that moment of time that that was the Unpaid Present Entitlements was a former of financial accommodation.
And therefore that triggered the div seven A. Requirements. The next point that came out of 2010 sorry, 2022 11 was the, the, the relevance that in most, in most trustees, most trustees, not all of them but most trustees make a provision that when the trustee makes it an allocation of income to the beneficiary, that they said that they can set aside the amount to be held on a separate trust absolutely for the benefit of the of the beneficiary.
And so that that’s a feature of the access deed, but also it was very much the feature of this particular deed in Bendel as well, that the trustee concern there had the right to set aside the distribution on a subtrust, be it absolutely entitled to all the beneficiary. Now, in TD 2022/11, what the commission said that they’re putting aside of the distribution on the subtrust brought the UPE to an end.
And that seems unduly simplistic, but, you know, very clearly in that particular instance, when, when that happens the UP being one equitable obligation is, is if you like satisfied by a secondary obligation. Now, the consequence of that being in the first instance is a tier of consequences. The first consequence of being, well, we don’t have a UP, therefore the trust, the main trust making distribution is not making any financial accommodation to the company.
Reason of the distribution simplistic. The, the secondary consequence of that being that as a result of the, the, the amount no longer being up, but being a subtrust that subdivision EA wasn’t applicable other than in extreme circumstances. And the reason why that’s the case EA is reliant upon that there is a UP owing to a company.
So the commissioner saidup comes to an end. Subdivision EE doesn’t apply, but however, then the commissioner went on to say that now what we have is that the company has this subtrust amount for their absolute benefit, that that if the company not, you know, the controlling mind of the company acknowledges that that subtrust amount can be utilized by either the shareholder of the company or an associate, then there is a secondary 109D loan.
And, and so even though it’s on subtrust, even though they say that all of a sudden we don’t have the primary 109 D3 issue, that there was a secondary 109 D issue associated with the fact that if the company, which will invariably be the case in, in private, in, in business, small business environments, that if the, if the controlling minds of the company and the controlling mind of the trustees say, well, we understand our subtrust amounts being utilized, be it by the trust or by someone associated with the company, the shareholders, then there is a secondary 109D loan at that moment of time, based on the same thing that the company is now allowing if, if it’s subtrust amount to be used.
For those of you that read the TD will note that there was a specific exclusion that says where the subtrust amount, where in actual fact the, the trust alloc specifically allocates assets against that subtrust.
Now that, that doesn’t happen. It just doesn’t happen. Most occasions, what you find, that the, the subtrust amount is, if I can use the words, intermingled, because they’re the words used in the TD, intermingled with the other trust assets. And so the commission then views that because those funds are intermingled with the, with the trust other assets to be able to use, then ipso facto, there is this loan at that moment of time.
That’s, that’s in essence where, where we got to in, in broad terms. Now one of the other important things, and this is this is relevant, I think, to, you know, what actions we can take. One of the importance important matters that TD 2022/11 provided for was that when was the loan made?
Because that becomes critical in terms of the application of 109D. And so the commissioner said that the loan. Effectively, based on the, you know, the, the their interpretation of what conscious loan was not made until the beneficiary had certainly about the actual amount. So typically, that’s 30th of June, 2023, by way of example, the trustee would have made a distribution say to the company.
So that’s all done to make the the corporate beneficiary presently titled, if it’s shown to the application section 97 and otherwise. But that’s all done on the, on the hypothetical that. You know, the trust is going to have income, the accounts are done, at that point of time there is a degree of certainty about the actual amount, and the Commissioner says in his TD that at that moment of time, that the loan is made, that occurs during the 2024 year and so that sort of brings it up, and then pursuant to the the application of 109D1 if that amount is not rectified, if I can use that term, is by, Thank you, David.
The due date of lodgement that a company’s return, then you’ll have a deemed dividend under 109D. And so effectively in relation to the 2023 year people have up until effectively May, 2025 to rectify the distribution that was made on the 3rd of June, 2023. So that’s gonna be a window of both doubt and we need some clarity about what we do in the interim period of time. So this decision doesn’t mean we’ve got to do something today other than think about it and, be aware of the, of the consequences as far as that is concerned. And so that’s effectively where we are as far as TD 2022/11.
And again people that know me, I agitate, I agitate very strongly on occasions, maybe unduly strongly, that the ATO I really have adopted the policy of making the law rather than administering the law. And and we see this both in Division 7A and also more more recently in Section 100A where the commissioner is taking a particular interpretational role.
And, and really, you know, the, the practitioners and the, and the clients have effectively no economic option other than to comply with the commissioner.
Emily:
Correct. And we’ve seen so little other guidance on it and we’ve had these longstanding determinations from the commissioner. It’s very difficult for practitioners to rely on anything else.
Brian:
But maybe this, this is the case that brings that, well, I mean, to the forefront. Well, well I think it must do. I mean, the history of these things. So as I said a moment ago that Mark [inaudible] from the commissioner’s office, you know, way back in late 2009, stood up at a conference and says, oh, by the way that he thinks that the Unpaid Present Entitlements represent a lot, it was 109D, and the audience at that point, it was an Adelaide conference, so maybe they, everyone was drinking, he was drinking too much wine, I don’t know.
When were we talking, yeah, 2009. 2009 leading up to 2010. And he made that off the cuff comment, which, you know, you, you applaud the ATO for, you know, making comments at conference or whatever. At least it wasn’t a private conference. It was a, you know, unlike our current second commissioner going to be at a receipt conference.
But it was made at a comment at a general accounting conference. Now people sort of Gulped at that point of time, the commissioner subsequently came back and said Mr. Conti was making a comment without necessarily being the view of the ATO and sure, sure, soon after that we then have a draft ruling that led out to TR 2010/3.
And so the commissioner’s stance was very, very much based around the fact that if a distribution is made by a company, sorry, a trust to a company, that that constitutes a loan. They’re based on this as a provisional financial combination. It wasn’t as if 109D/3 was changed, it was always in existence of that matter of form.
The commissioner just took a different view of longstanding practice deemed that to be case. And, and lo and behold we’re left with the situation of, of necessarily having no option other than follow it. that in fact, that’s what happened in Bendel.
Emily:
let’s move on. That’s good. Let’s talk about the facts, the arguments and where we’re at as of last Thursday.
Brian:
I mean, in the Bendel case, as I said, you know, the cases aren’t exceptional for its circumstances. You know, maybe Mr. Bendel will have a different view of that. But the ATO commenced a A review of Mr. Bendel’s affair. I mean, Mr. Bendelwas an accountant, a tax advisor, investment thing. You had a trust that had investments in different parts of Mr. Bendel’s corporate conglomerate. In the relevant year, the trust made a distribution to one of Mr. Bendel’s corporate beneficiaries. Now, that wasn’t, that wasn’t the subject matter of the review.
He was just subject to a review of his affairs more generally. And as the auditors were coming through, they discovered that there were these loans or these distributions made by the trust to his company. And they hadn’t been treated in accordance with TR 2010/3 because These particular transactions occurred during that sort of part of this current history of, of events that hadn’t been put on a loan arrangement that weren’t subject to the PSLA 2010 for investment loan arrangement.
Nothing of that happened. So it was really incidental that this, this matter arose. And, and so. Again, the simplistic facts of Bendel was that trust makes a distribution to a company. The, the amount in terms of the distribution prerogative of the deed, the deed provided that upon the distributions, those amounts would be set aside on a separate trust Ceasing to be part of the main trust for the absolute benefit of the, of the beneficiary.
Stock standard situation. it’s what the, access deed provides for.and it’s the very sort of terminology, I mean the slight different wording, but exactly the same unexceptional features of the Bendelcase. Commissioner took the view that, oh golly gee, you know, you haven’t complied with our view of of Division 7a, in particular the 109D/3.
The commissioner ruled that, because the trust hadn’t paid the distribution, because there was no complying loan agreement under any sort of manner of form, that there was a deemed loan under 109D because of the unpaid amount constituted a the provision of financial accommodation.
That was it. There is nothing else about these particular facts that gave rise to the fact, I mean, certainly when you go through the evidence that is provided for in the AAT’s decision, you’ll find there is a significant amount of detail about the interaction between Mr. Bendel personally how he made drawings from the from the trust of the company, how they were offset about distributions, again, nothing exceptional about his affairs, you know, he’s just a , dare I say, a simple accountant – I’m sorry, Mr. Bendel – but as a simple taxpayer, trust makes a distribution to a company.
Company doesn’t seek payment. Company doesn’t put it on a 109 in line room. Company doesn’t put it on a PSLO 10/4 investment line room. It is just simple, simple this. The amount was set aside of trust. So the facts of the case really go to the very heart of what TD 2022/11 say and in those circumstances the facts are uncomplicated.
Now the, one of the interest, interesting things, bearing in mind I’m a tax nerd, one of the interesting things about this particular case, which was argued and, and made note of in the IAT decision that effectively what, this is what happened because when the trust made, first of all, its decision to determine what is trust income, it was referenced to section 95.
And so, as we’ve found in other cases dealing with this particular situation, once you establish the methodology for determining trust income, then any adjustments made by the commissioner fits into that definition. And so it was in, in this particular situation, the trust income was determined in accordance with section 95.
The trust had made a distribution to a company that hadn’t been paid. So what the commission then raised the assessments to be sure to 109D. Which then said the trust had received a dividend, a deemed dividend under 109D/1. The consequence of that being the trust income increased by reasonably the deemed dividend.
And that because the distributions to the other beneficiaries was based around a share of the net income, there was a double whammy, no franking credits. Not because a deemed dividend doesn’t give rise to a franking credit. So there was a deemed dividend. The financial implication was that the beneficiaries, the other beneficiaries of the trust, were then levied or assessed on the incremental charge by the dividend.
And to some extent. The, the taxpayer argued section 6-25, which is sort of the side argument in, in the case and the AAT sort of looked at that and said, well, it doesn’t really apply. butwhat the taxpayer argued and what the AAT identified, that effectively there was double taxation here.
And and so their interpretive decision, I think, to some extent, was, made by that.
Emily:
All right. Talk about the decision?
Brian:
So the decision itself and this was a decision by two esteemed members of the AAT. So this is not, not a decision by someone that’s we’ve got to be careful what I say here, nothing defamatory, but the decision taken, the members of the AAT in this decision were noted tax council and so what they, what they have done and I think not that I’ve spoken to them, but obviously what they’ve done, very mindful of the implication of this decision. And so the reasoning is fairly detailed about the reason why they’ve come to the conclusion. So maybe if I can just say what the conclusions were and then backtrack a little bit.
And so having what, what they did, they went through it and they analyzed the interaction about what section 109 D3 says, what the concept of financial accommodation says. They looked at the interaction with subdivision EA when, because division 7A EA, I beg your pardon, was was a specific amendment to overcome the previous 109 UB and so it’s integrity measure.
And so they, they analysed all those things. They looked at you know, more the legal concept of what constitutes financial accommodation. So let’s put a full stop there. Noting, noting very much in this particular instance here that this particular distribution had been set aside on the subtrust. So again, their commentary spoke about the relevance of the subtrust treatment and whether or not it was a subtrust in the More general sense that, you know, I, I’ve got money, I give it to Emily, hold this property, you know, and so there is a trust created by reason of holding a property.
Whereas the sub trust in this particular instance here, as with most cases, it’s merely a trustee is obligated under the, under the terms of the setting aside to hold the monies for and on behalf of the, of the designated beneficiary. So in the first instance, what the AAT said that the, the term loan in 1093 does not include a UPE.
categorically. No ifs, no buts. It doesn’t include a UPE. Because of the fact that the UPE is an equitable obligation, it doesn’t, doesn’t transform or go into a situation where a loan and, and the concept of a loan must be based around a debt accreditor relationship, whereas this particular situation is an equitable obligation and, and nothing that happens in terms of the process changes that equitable obligation.
So the UP doesn’t, is, is not alone. Fairly, fairly straightforward. And the, and I’ll go through and look at, you know, because I’ve got the particular parts of the, the, the judgment that that based around that. And secondly, that Even though, even though the money’s been put aside on subtrust, what they concluded that that subtrust treatment did not bring the UP to an end.
And so again, that contradicts what the ATO say in terms of their TD 2022. No loan under one of, you know, UP, the subtrust amount did not. Bring to an end the UPE, it still exists to be in a slightly different form. And, and again, I’m generalised because I specifically identify that it can well be a situation where, like the Commissioner’s example in his TD, where he makes provision that, oh, if you set aside money or set aside an asset specifically to deal with that subtrust, then that, that’s a slightly different situation, because then there is an allocation of an asset, the absolute entire amount of an asset for the benefit of the beneficiary that would bring it to an end the UP, but that doesn’t happen other than in the, in the commissioner’s, commissioner’s mindset.
So the commissioner no, no loan subtrust amount doesn’t bring, doesn’t bring an end to the UP scenario Also interesting, rejected, and again, I, I, I’m conscious of the word using reject sense, a bit harsh but made comment that it was inappropriate that the commissioner used other interpretations of you know, financial accommodation in other context to support the view in in, in 1 0 9 D.
And were very, scathing that to some extent, I think at some point in time, the AT says, well, the hearts roof sold by tax counsel or the commissioner to justify the position, you know but clearly, and again, I went back and looked at the authority of the commissioner, so what is one particular matter that commissioner did rely upon was the matter where dealt with whether or not the family trust distribution tax applied, whether it was inverted, come as a benefit being provided.
And so I can maintain the view that a 109E is not a peripheral provision, sorry, a subdivision EA is not a peripheral provision, a subdivision EA was a leave provision specifically inserted to acknowledge the existence of, of UPs owing to a company and was part of the integrity measures to ensure that a, A trust couldn’t get around the Division 7a provisions by making a distribution to a company, leaving a sit there, and then the trust then making a loan to, to the shareholder of, of the company.
And so what the IAT said that when you go and look at the history, and they did look at the expenditure memorandum, and the reason why a subdivision now was introduced, it wasn’t just a, a Band Aid. It was a leave provision and needed to maintain the integrity of the status of the U, UPE as far as that’s concerned.
And, and, and so a part of the, part of the decision was the, you know, trying to get some justification for the interaction between EA And Section 109D3, and the AOT said, well, they serve different purposes, certainly there is some sort of commonality in terms of the overload, but because of the didn’t bring to an end and shouldn’t influence the decision about whether or not something was allowed for the purpose of 109D3.
And, and, and the other point that I raised earlier was that the Commission’s arguing about EA in particular. The AIT said that raises the spectrum of people paying tax twice and felt that, that could clearly not be the intent of, of Parliament that the same amount is taxed to more than, more than two, more than two people.
I’m going to jump on you just really quickly, Brian, I can see a number of hands raised. If those people who’d like to contribute would be happy just to pop their questions or comments in the, in the Q and A function there, that’d be great.
Sorry, Brian. No, no, again, I mean, I mean, a large, a large part of the decision was set was based around the, the concept of, you know, When the money is set aside on a subtrust, in the, in the, in the general sense, which is most common to, you know, what we accountants do, there is no specific allocation of assets or funds for the particular subtrust, which is, as I, as I use the word, intermingled with the, the trust’s other assets.
And, and the IAT went through and analysed that there was That created an equal obligation, but it wasn’t a separate trust. It was a continuation of the old trust, if you like accepting the trustee has a separate legal, separate equitable obligation. So they emphasize very much that the, there was an equitable obligation on the trust to hold these funds for the benefit of the, of the beneficiary.
And so that equal obligation was. Not necessarily a specific trust as we, as we generally know, it’s more just a refinement of the equitable obligation of the principal trustee. One of the other things that that that comes out of this, and I’ll, I’ll touch upon this, you know, in, in, again, I know I’m gonna have time, so I apologize.
I’m bit excited about this.
Emily:
Plenty of people are coming and still here with us. So thank you for bearing with us.
Brian:
This raises the, the spectrum of the app application of of 100A. Because notwithstanding this decision deal with Div 7A my respectful opinion is that there is, there are some nice thoughts that should be given to 100A as far as it concerns.
So I’ll just flag that and remind me if I forget. Now, and, and so if, if for those of you that want to go to the case and, and read more particularly what the IAT said, I’ll refer you to a paragraph 101 of their particular decision. Where they go through and, and talk about having regard to a number of factors and their final conclusion, the necessary conclusion that a loan within the meaning 109D3 does not reach so far as to embrace the rights and equitable equity created with entitlements to a trust income or capital created but, but not satisfied and remain unpaid.
And so that is, there’s no doubt about what they’re saying. There’s no doubt about their reasoning for it. It is, it is clinical. And so oftentimes when you read a decision, you try to determine whether or not there was some sort of twist or there’s some sort of element of the decision that could well be interpreted based around the facts.
This is as clear as they get. An unpaid entitlement. maintains the equitable obligation on the trust to be held for the benefit of absolute benefit for the beneficiary. That does not, that does not represent a loan. Full stop for the purpose of 109 D3. And so that they’ve kept it in, in, in the particular context, as far as that, that’s concerned, and the reason for that being amongst other things, the prominence of EA and the fact that the equitable obligation does not convert that equitable obligation into a debtor credit.
So, and the interesting thing about it, the interesting thing about it is that most of us are aware of the fact that in many other aspects of the tax act, the commission has been at pains to emphasize the fact that the word debt. Used in, in other provisions of the Act does not include a UPE because debt does not include an equitable obligation.
And yet for the purpose of 109 a difference between loan and debt. So don’t, for those of you, don’t jump on me. But again, in a practical context, it’s exactly the same. The Commissioner wants to argue that a UPE is a loan. For the purpose of 1093, but doesn’t accept that a UPE is dead for the purpose of, amongst other things, you know, bad debt provisions, commercial debt forgiveness provisions, 109F, blah, blah, blah.
So and, and, and, and, and we go. So the equitable obligations matter arises and And, and there, there we stand. Now.
Emily:
There’s a lot of people here for, I’ve seen lots of Q& A and chat here about what your, your kind of predictions in terms of appeal. Yeah. I mean, decision impact statements, border reform.
Brian:
Yeah. Now, I mean, this decision only had, it was only handed down last Thursday and I rang Emily on the Friday morning, cause I, cause I get excited about these things. “Emily! Emily!”
Emily:
Others have joined you in their excitement. There’s lots of comments saying they’re excited.
Brian:
What’s this about? You know, have you read it? Emily? Emily,
Emily:
He’s always enemy when we’re reading cases, that’s for sure.
Brian:
We’ve gotta, we’ve gotta get out, we’ve gotta get out this wrong. We’ve gotta sort of send the message from the mountain, you know, blah, blah, blah. But the, you know, the, the problem is that I can get excited about tax decisions, and say this is different.
The question that we all have is that what do we do?
So here’s my take. Now I, you know, the commissioner of taxation, God love him, doesn’t ring me. He should, but he doesn’t ring me. None of his officers ring me because, you know, I don’t come from one of those large accounting firms where they embrace, I’m just, you know, I’m just a small.
We might see what we can do about that. Okay. So the commissioner will have to appeal. So, because this, this decision. is uncontroversial. The facts are so simple. The facts are, will be generated over and over again in the broader tax community. This is, this is an unexceptional set of facts and the decision is unambiguous.
Full stop. It is polarized as far as the Commissioner’s long standing view that expressed in TR 2010/3 and TD 2022/11. So he’s got to appeal that particular decision. He’s not going to lie down saying, oh my gosh, I’ve got that wrong for the last 13 years. You know, that’s not going to happen. So the Commissioner will have to appeal as far as he’s concerned.
Now the issue is going to be… If he does appeal, you know, the timing that of and, and bearing in mind when I, I mentioned a moment ago that, you know, the application of the current TD 2022/11, the critical cutoff time, if you like, is May, 2025. So, you know and I’m aware of the fact that a lot of people saying, I’m not gonna wait till 2000 and, you know, 25, we’re gonna do it now.
So, you know, if, if there’s. You know, distribution was by 2020 and they go about and they’re doing 109m because they have their viewpoint that we better deal with straight out rather than waiting another year. And so some accountants are going to have to sort of bite their bottom lip a little bit and saying, what do we do?
So the commissioner, obviously as of yet, hasn’t issued any decision in sex statement, hasn’t made any comment about this, is most probably sort of rolling around the floor saying, Oh, God, golly gosh, what do we do? So, they will appeal, and the question about taking appeal is that, you know, it goes to the federal court.
That’s going to take months and months and months before we get there. This is not a type of decision that I think, rightly or wrongly, the commissioner’s going to accept. So, if the federal court come back and saying, oh, we agree with the IAT my, my better view is that this will, this will be taken before federal court.
This is of such a significant issue, given the, the, the absence of the government. And treasury taking any more precipitative action as far as this is concerned. So part of me says this is going to be an appeal. Now in the interim period The Commissioner will presumably stand steadfast on his, on his ruling in TD 2022.
So the Commission’s not going to resolve saying, oh gosh, I’ve read this, I’m not going to do anything. They will maintain that particular circumstances. And so what I’m saying is that I, and again, I use the word respectfully, ignore the AAT’s decision. It, there is, there is precedent where the commissioner doesn’t like a decision maintains the status quo of his previous rulings and, and, and says, well, if I’m wrong, then we’ll go back and amend it at that moment of time.
Again, notwithstanding the commission doesn’t have a direct line to the to the to the treasurer or treasury per se, but there is some interaction as I made a note on, on the slide some 2018, I think it was 2019, treasury issued recommendations about the changing of this seven a and one of the things that was muted in that particular change was the statutory acknowledge that a up.
Was a loan for the purpose of 1 0 9 3. Now, as we all know treasury nor the government have done it, done, done anything about that this moment of time. And so I think my better view is that the commissioner will appeal. I think the commissioner will maintain his status of his current ruling.
And hopefully that there will be words getting to the government if they find some time to, to deal with such mundane matters as Div 7a loans and get some statutory action as far as this is concerned. Because the commissioner is, is on a, at a big downside. If if This appeal doesn’t change the the status of the current decision of the A.
Now, more importantly, I gather, not more importantly the issue for advisors as, as I say the critical time period in relation to distributions made on 2023 is to make a number of decisions. And again, bearing in mind the application of TD 2022/11 was that. In most instances, the Subtrusts amount had been, sorry, this, the distribution be set aside on Subtrusts.
So that’s and most deeds that I come across in terms of my consulting work this is fairly standard, standard process where, and again, in the circumstances where they’ve set aside so. That raises two things that if that’s been set aside, then we are left with the, the treatment of the subtrust amount where the commissioner says in his TD that if those subtrust amounts are then applied for the benefit of the trust by intermingling the subtrust amount in the trust funds and or the use by actually a shareholder or an associative shareholder more directly, then you’ve got a separate 109D.
Now those, those things won’t occur until the 2024 year and so by reason of, by reason of that. It would be anticipated that accountants will need to identify, first of all, who is the beneficiary of your, if you like, the deem, the deem line is at the trust or is it, you know, and then one of the other shareholders or associates because then you need to then look at who you make a loan agreement for if you want to go and use 109M.
That will have to be, those decisions will have to be made by May 2020 25. Now the danger for accountants will be that and again I’ve had this situation many times where I’m sitting in front of a client, not that I do that often times, but you’re sitting in front of a client and the client is told that they’ve got to take this action and they ask me this inane question.
Brian, has there been a change of law? No. So why are you telling me to do this? Because the Commissioner has taken the view. Well, Brian, you know, hasn’t the IAT told you that that view is not right? But now, Brian, you’re telling me I’ve got to do what the Commissioner says. I mean, it’s a conflict situation, big time, that if you precipitate the ATO’s for UNTD 2020, and put those loans, those UPEs, or Subtrust Amounts, on a complying loan agreement, binding the client to a seven year principal interest loan arrangement, whereas in actual fact, they may not have required to do so.
That, I think, is a real difficulty and something that hopefully the professional bodice will get off their bloody backsides and make some proactive decisions about dealing with, you know, us little accountants and us little lawyers dealing with the real world of clients and take some proactive advices and tell the commissioner, bugger off.
Get this right and get us some sort of set process to deal with it. Is that too strong?
Emily:
Not at all. I think you’re going to get a lot of support from the viewers
Brian:
in that respect. But again, the issue is that the Commissioner’s view has been longstanding. Commissioner has forced people because we’ve, we’ve taken the view of the Commissioner is right.
And we, we can’t go against what the Commissioner says, because golly gosh. As Mr. Vendale found, you know, you get your, you get your backside kicked big time if you don’t comply with the commission of taxation. We’ll go, we’ll go to court. That costs a lot of money. The majority of people don’t have the option of doing that because costs prohibit it.
The anxiety and the economic downside is, is difficult. Now, so, my view is that We should take a deep breath for the next six odd months to see what emanates out of the ATO. I would not, at this moment of time, be taking any proactive action, but clearly accountants generally have to be advising their clients of these circumstances.
Now, the difficulty being, to some extent if you get an anxious client or angsty client, that this goes back beyond 2022 11. This goes back previously. So if, if an actual fact the IAT’s decision is right, this gives us the TR 2010/3 ruling. And that, that is a fundamental concern, not so from, from the point of view of making decisions about Div 7A, but more particularly clients economic circumstances, putting lines in place.
Now I will finalize my, my comments in relation to this. So hopefully that whether this does provide any clarity. I mean, what I’ve tried to do respectfully is to be as simplistic as possibly can. I’m not prone to melodramatics. And so when I read this case, I look for the twists and turns and I, you know, you know, I read the cases from the point of view, does, does that sort of those facts overlap what I expect to see in most, in most cases, is the decision so skewed or biased by reason of.
The particular nuances of the particular clause. This has none of that. This is simple facts, simple decision by the AT, uncontroversial, but against everything the AT the ATO have said. So that of itself is a dilemma. Now that raises the issue of 100A. Because those people will know that, you know, putting aside the decision in, in, in Guardian ART, which the Commissioner lost on, on 100A, because of the particular nuances of whether or not the, you know, distribution was predicated by the reimbursement agreement the Commissioner utilised
Part three in relation to the distribution based around the, you know, the, the position of Mr. Springer being a non-resident. But again, I think that’s an extended, you know, I, I, you know, I can argue div seven a, sorry division part for a more generally where trust that make distribution to companies and leave it, sit there in the trust unless not get into that moment of time.
And so what, what we now have, and so we have the commissioner’s reeling in relation to 100A, and, and part of that, and again in simplistic terms, is that the commissioner takes the view that, that if a distribution has been made, economic sort of a distribution has been made to a beneficiary.
That distribution was predicated on the basis that there should have, there was knowledge that that distribution would be married up with the provision of economic benefit associated with the distribution, that if so facto, the benefit of that distribution was being enjoyed by another party, namely the trust.
And so the Commissioner’s ruling on 100 A’s predicated on the fact that the beneficiary doesn’t receive the, If you like the benefit, the economic benefit of, of that particular distribution and so, and so that’s the, you know, the very simplistic version of what the commissioners are doing. Gosh,
Emily:
I’ve made you talk too long too. Sorry, Brian.
Brian:
Everyone’s sticking there. The PCG, which is not a ruling. Which is merely the commissioner saying, Oh, well, this is how I’m going to apply my compliance resources to the application 100A. And most of us read these things and we, you know, we elevate the PCG to be, Oh my gosh, if we don’t do what the commissioner says, then we’re going to be, we have the likelihood of being subject to an order.
And, you know, we don’t want that. So we, we, we, we think we elevate the PCGs to a point of view of this is what the commissioner does. Now, I have a view that I wasn’t of the viewpoint. Thank you. That the tax act gave the commissioner the discretion not to apply the law, but in the PCG it says, well, we’re not going to apply 100A in circumstances where there is the working, working capital conditions are satisfied.
Amongst of which is that first of all, there’s a two year, two year funding opportunity, if you like. So the trust makes a distribution of a company. The company what’s put forward in the working capital requirements is that particular distribution. He’s put on a loan agreement and the loan agreement for all intents and purposes is a 109M loan agreement.
So, so we have this polarized view now that we may jump out of the Div 7A issue, but if we don’t put a loan agreement around the 100A scenario, then we’re going to be stuck with the 100A, like, you know, the 100A scenario, excuse me, is much worse than the Div 7A. But, and, and I ponder my, my thought process here that what was clear from the IAT decision in, in, in Bendelwas that an actual fact, the, the trustee of the principal trust has an equitable obligation.
And so I go back to the, to the, you know, to the decision in, in Montgomery, which was a high court decision about whether a lease incentive was a gain. And in that, some of the justices of the High Court argued that because not only there was a benefit received, but they took on an obligation that there was no gain.
I just wondered whether or not some smart lawyer, some smart barrister, some smart accountant would argue that in actual fact the economic benefit of the distribution is in actual fact retained. By the, the recipient bene corporate beneficiary because they have an equitable entitlement to the SubT trusts amount and the, the main trust has an equitable obligation.
So, you know, I borrow money from the bank to buy an asset, but that asset has an obligation. Has the trust benefit? No, because they net each other up. And that was the, you know, again, I’m not elevating myself to a high court justices, but that was one of the arguments. The strong argument is by the minority in Montgomery’s case.
High Court says that. It makes for interesting, you know, reading. So we’ll see whether or not, you know, Wise Council will, will talk about the application of this to one over at home.
Emily:
I think you have answered a lot of questions in relation to law reform. Thank you Brian for the time you have spent. This decision has only been out for a week. You’ve spent substantial time, obviously, reading the decision multiple times, updating Brian’s paper from our last webinar, which we will circulate to all attendees.
So thank you very much for your records on that, Brian. We did touch base a few times over the weekend and I know you worked. straight through on it. Any questions that we do find that we’ve got that we maybe haven’t gotten to, we’ll reach out as long as you haven’t submitted them as anonymous.
Brian:
And we’ll be in touch.
Thank you very much. And thanks very much for your attendance. And if we can be of further help get in touch with Emily. Yeah.
Emily:
And more than happy to connect you with Brian when need be. So reach out. Thanks everyone for sticking with us. We did say we go for half an hour, but it turns out we can do a lot more talking than that.
So thank you, Brian. Everyone appreciates your thoughts. Thank you.
