Landmine Div 7A decision for Commissioner – FCT v Bendel 2025 FCAF 15 (31 March 2025 – Backfire for Commissioner – Section 109D Div 7A attack on Corporate Beneficiaries fails and causes Commissioner other problems)

The Full Federal Court, in Bendel, has confirmed the earlier AAT appeal decision in favour of the taxpayer in a landmark decision on Division 7A, causing a series of landmines for the Commissioner in respect of his past interpretations on Div 7A ITAA 36 in which the Commissioner assessed deemed dividends to a trust that had made a distribution to a corporate beneficiary but not paid it.

The Federal Court did not fully endorse the earlier AAT decision, however did find that an unpaid present entitlement was not a loan (including the provision of financial accommodation) but was further also a debt for a sum certain that however did not qualify as a debt forgiven under s109D(3) ITAA36.

Bendel is an intriguing case that will have further developments given the Commissioner has already lodged an application for special leave in the High Court and if granted a further decision. On the face of it, it is difficult to see where the Full Federal Court has gone wrong and whether the Commissioner would get satisfaction in pursuing this. The Legislature was not trying to potentially double tax amounts owed to the company by shareholders and associates as the Commissioner has been arguing for by implication.

The purpose of Division 7A is to ensure that shareholders of private companies are not able to enjoy effective distributions of company profits in a tax-free form.

In Bendel, the Commissioner decided to assess the Trustee in respect of a Trust distribution to a corporate beneficiary that had not been paid to it and where there was also a clear loan out to a related beneficiary from the Trust, via Section 109 D ITAA 36, rather than by assessing a related beneficiary using Subdivision EA ITAA 36, which was designed to assess the related beneficiary in these circumstances.

The earlier Tribunal had held that the amount owing by the Trustee to its beneficiary company was a right in equity created by the entitlement to trust income (or capital), and that the balance of any outstanding/unpaid present entitlement is not a loan to the Trustee under s 109D(3) (see paragraphs 33-34 of the Federal Court judgment). Further the Tribunal held that if the amount was a dividend, it would not be the same amount as determined by the operation of s 95 and 97 for the company Gleewin Investments as the threshold conditions for s 6-25 do not arise in the present circumstances.

If the Commissioner had succeeded then there was potentially a double taxation situation that could have arisen due to the fact that the beneficiary, Bendel, could also have been assessed under Subdivision EA if there was an assessment issued in the time limits.

The Commissioner was unsuccessful and the Courts have upheld the long standing legal position that an unpaid present entitlement is not a loan but a trust entitlement, due to it being for a sum certain is also a debt owed as has been earlier determined by the High Court (see below - Fischer v Nemeske Pty Ltd (2016) HCA 11). The debt owed does not fall within the terms of a Section 109B (and therefore 109D) due to there being no forgiveness of a debt.

Nor does this case mean that that Subdivision EA is ineffective and in our current view it is likely to remain effective, noting that the Commissioner did not make this second assessment in this case, although could have, and we await further action on this topic. Subdivision EA is briefly discussed at para 82 of the judgement and includes:

(See Subdivision EA and EB.)

However, it should be noted that the Commissioners requirements in respect of unpaid present entitlements that were created before the introduction of Subdivision EA and EB may need to be revisited by clients and their accountants in light of this decision.

The ATO guidelines for compliance PS LA 2010/4 and TD 2022/11 will need to be reviewed regardless of the recent ATO interim impact statement. We also note that in addition to the ATO's refusal to revise the current views relating to private company entitlements to trust income, the Commissioner may elect to apply s 100A instead. For your reference, s 100A is an anti-avoidance provision which seeks to prevent a tax benefit arising under a pre-existing arrangement between two or more people in which:

• A beneficiary is made presently entitled to a share of trust income;
• A party other than the beneficiary receives a benefit in some way, shape or form;
• At least one of the parties to the agreement has a purpose of reducing the amount of tax that would otherwise be paid;
• The agreement is not entered in the course of an ordinary family or commercial dealing.

As per PCG 2022/2 and the interim decision impact statement, the ATO may apply s 100A where "a trustee retains 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 Background

1. The facts of Bendall showed a classic family trust distribution to amongst other beneficiaries, a corporate beneficiary.
2. The distribution was not paid to the corporate beneficiary.
3. There was a loan account owed by the individual Bendell to the Trust.
4. The Commissioner assessed the Trustee Gleewin. In paragraph 12, it is stated that Gleewin Investments (the corporate beneficiary) had unpaid present entitlements to prior year trust income and these prior year unpaid present entitlements comprised loans within the meaning of s 109(3) made by Gleewin Investments in the current year to Gleewin.
5. The loans were taken to be dividends by virtue of se109 D (1) ITAA 36. They were taken to be paid out of Gleewin Investments profit by operation of s 109D (1) ITTA 36.
6. Further the dividends were taken to be paid out of profits of Gleewin Investments by operation of s109Z to the extent there was a distributable surplus.
7. The dividends taken to be paid out of profits were assessable income by virtue of section 44 ITAA 36.
8. The beneficiaries entitled to the income were assessed to be liable under section 97 ITAA 36.
9. There was no attempted assessment of the amount owed by Bendall to the Trust under subdivision EA (sections 109 XA and XB) to Bendall. Note that Section 109 XB assesses the amounts determined under section 109XA which in turn refers to amounts that if loaned by the trustee to a shareholder or associate of the corporate beneficiary of the trust which has an unpaid present entitlement , it would be a The AAT Tribunal in the earleir determination was concerned about the possible double taxation of the same amount The Tribunal believed that Subdivison EA would be the lead provision because it was the more specific provision and should be the method of assessment rather than s109 D. ( see paras 31 and 32).
10. Section 109 B ITAA 36 treats the following transactions as dividends:
    • The payment of amounts (includes a transfer of property ) by the company to a shareholder or a shareholders associate (s109C) .
    • The loan of amounts by the company to a shareholder or shareholders associate ( ( 109 D & E) ; and
    • The forgiveness by the company of an amount of a debt owed by a shareholder or a shareholders associate.

11. The earlier Tribunal decision was discussed at paragraphs 32 - 34 of the Federal Court judgement and noted :
    Subdivision EA was considered by the Tribunal (at TR [100]) to be the "lead provision" where the terms of that subdivision are satisfied because it was the more specific provision. The Tribunal concluded at TR [101] that: ... a loan within the meaning of s 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust. The Tribunal concluded (at TR [108]) that if it were wrong on the application of s 109D(3), s 6-25 of the Income Tax Assessment Act 1997 (Cth) (1997 Act) did not apply because: The amount taken to be a dividend paid by Gleewin Investments to Gleewin was not the same as the amount determined to be assessable income by operation of ss 95 and 97 for Gleewin Investments. The threshold condition for s 6-25 to apply does not arise in the present circumstances.
12. The Court held that in construing legislation, the purpose of the legislation must be derived from the legislation itself, not from any assumption about the desired or desirable reach for operation of the provisions. (para 85-90)
13. It however interpreted section 109 D (3) such that unpaid present entitlement is not a loan or financial accommodation however it is a debt as it is an unconditional obligation to pay a specified amount of money to a beneficiary . See Fischer v Nemeske Pty Ltd [2016] HCA 11
    "a trustee who admits to having an unconditional obligation to pay a specified amount of money to a beneficiary can thereby become liable to an action at law for the recovery of that amount as money had and received to the benefit of the beneficiary, so as to overlay the equitable relationship of trustee and beneficiary with the legal relationship of debtor and creditor. That has been settled since at least the middle of the nineteenth century"at [105]
14. "However, s 109D(3) requires more than the existence of a debtor-creditor relationship. It requires an obligation to repay and not merely an obligation to pay. The Commissioner contended before the Tribunal that the non-exercise by Gleewin Investments of its right to call for payment of its present entitlement amounted to the provision of financial accommodation. The Commissioner contended that Gleewin Investments had consented or acquiesced to Gleewin not paying the present entitlement by making a decision to refrain from calling for payment. However, the consensual arrangement relied upon by the Commissioner did not involve the payment of a sum by or at the direction of Gleewin Investments that was required to be repaid."
15. "In those circumstances, applying the correct construction of s 109D results in only one conclusion being open. Section 109D is not satisfied. Although - based on the concessions made by the taxpayer - a debtor creditor relationship was created by the trustee resolution and the entry in the trust accounts, there was no loan or creation of an obligation to repay an amount as opposed to an obligation to pay."

Conclusion

This is a landmark decision in respect of the interpretation and operation of Division 7A in respect of distributions to corporate beneficiaries of trusts. In our view, it is unlikely to change current accounting practice in respect of all amounts distributed post the introduction of subdivision EA and EB. As noted above, the Commissioner may choose to apply section 100A in regard to unpaid present entitlements to corporate beneficiaries.

Amounts that were distributed prior to the introduction of these subdivisions on 16 December 2009 may need to be reviewed by accountants and their clients.

Assessments made by the Commissioner under s109D in the past decade may be incorrect and when this occurred, accounting advisors should seek advice as to challenging the incorrect assessment. We would be happy to advise and assist. The Commissioner's practice of using section 109D to assess rather than subdivision EA and EB may change.

Should you wish to discuss the above, please contact Tony Pointon and Andrew Pointon of our Taxation Team.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.