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From 2009 until October 2023, a UPE to a company was always a Div 7A issue. Not anymore.
UPE to Company: The Bendel Case
The AAT has overturned the ATO’s position on UPE’s to companies in the Bendel Case. This is a big one. It challenges the ATO’s position it has held on to since 2009. And will have implications for thousands of trusts with corporate beneficiaries.
There are about 1m trusts in Australia, many with corporate beneficiaries. All of these will be affected by the decision in the Bendel Case.
Andrew Henshaw of Velocity Legal in Melbourne discusses with you in this episode how and when.
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
The Bendel Case
The Bendel Case is about the tax implications of unpaid entitlements to companies. What makes a Division 7A loan?
From 2009 until now, these trusts usually set up a Div 7A loan and paid interest to avoid a deemed Div 7A dividend. The Bendel Case changes all this by saying that a UPE to a company is not a Div 7A loan.
However, the ATO might appeal or issue a Decision Impact Statement. All of which will affect Australian trusts.
Quick History
Before 1997 there was no Div 7A. Just some very weak rules that didn’t really work.
Then in 1997 Div 7A arrived, and had a major gap when it came to UPEs to corporate beneficiaries.
So in 2004, s109 EA was introduced which says that if money leaves a trust as a loan to an individual that is owed to a corporate beneficiary, then treat that money as if it was a loan directly from the company to the individual. So as long as money stays within the trust, there is no issue. And if the money goes to a third unrelated party, most likely no Div 7A either.
Then in 2009, the ATO introduced its own rules. With those any UPE to corporate beneficiaries is a loan from the company to the trust, hence a Div 7A issue. There was a concession for UPEs that existed by 16/12/09
In 2022 the ATO updated its statement and confirmed its position.
Now in the Bendel case, the AAT says that a UPE is not a loan, so going back to s109EA before 2009. Otherwise, the company has a deemed dividend to itself.
Timing
If the company loans in June 2022, you need to deal with it by May 2023.
If there is a UPE on 30 June 2022, it becomes a Div 7A issue by June 23 and you need to deal with it by May 2024.
So with a UPE, you get one extra year.
This is just a very quick brainstorm. Please listen to the actual interview since Andrew Henshaw goes into a lot more detail.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 07 November 2023
Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.
