What happens when a trust appoints income to a private company beneficiary but does not actually make the payment?

The tax treatment of this unpaid amount was at the centre of a recent case before the Administrative Appeals Tribunal (AAT) that saw a taxpayer successfully challenge the ATO’s long held position (Bendel and Commissioner of Taxation [2023] AATA 3074). For many years, the ATO’s position has been that if a trust appoints income to a private company beneficiary but does not actually make the payment, this unpaid amount can be treated as a loan. Under Division 7A of the tax rules, these loans can be taxed as unfranked dividends unless they are managed using a complying loan agreement with annual principal and interest repayments.

This AAT decision challenges an important ATO position, with the tax outcomes being potentially significant for trust clients that currently owe (or may have owed in the past) unpaid trust entitlements to related private companies.

But this is not the end of this story. On 26 October 2023, the Tax Commissioner lodged a notice of appeal to the Federal Court. There is no guarantee that the Federal Court will reach the same conclusion as the AAT. We will need to wait and see.

As the case progresses, we will let you know about the impact.

Update: ATO Interim Decision Impact Statement

The ATO has issued on 15 November 2023 an interim Decision Impact Statement setting out its views on the Tribunal decision in Bendel v FCT that a company’s unpaid present entitlements to trust income did not constitute loans for Div 7A purposes.
 
Pending the outcome of the Commissioner’s appeal, the ATO will continue to administer the law in accordance with its existing views and the Commissioner does not propose to finalise relevant objection decisions.
 

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