What unfolds when a trust designates income to a beneficiary in a private company but fails to execute the actual payment? The recent case of Bendel vs. Commissioner of Taxation [2023] AATA 3074, presented before the Administrative Appeals Tribunal (AAT), sheds light on the tax implications of this scenario, challenging the Australian Taxation Office’s (ATO) long-standing stance.
Traditionally, the ATO has maintained that if a trust allocates income to a private company beneficiary but neglects to make the payment, the unpaid amount can be treated as a loan. According to Division 7A of the tax rules, these loans may be subject to taxation as unfranked dividends unless managed through a complying loan agreement with annual principal and interest repayments.
The AAT’s decision in the Bendel case challenges a crucial ATO position, potentially leading to significant tax consequences for trust clients who currently have outstanding (or had past) unpaid trust entitlements to affiliated private companies.
However, this narrative is far from concluded. On October 26, 2023, the Tax Commissioner lodged an appeal notice with the Federal Court. The outcome in the Federal Court is uncertain, and whether it aligns with the AAT’s decision remains to be seen. Stay tuned as Heaney Business Group will keep you informed about the ongoing developments and their potential impact.
