What unfolds when a trust designates income to a private company beneficiary but fails to execute the actual payment? This query lay at the heart of a recent case in the Administrative Appeals Tribunal (AAT), where a taxpayer successfully contested the Australian Taxation Office’s (ATO) longstanding stance (Bendel and Commissioner of Taxation [2023] AATA 3074).

Traditionally, the ATO has maintained that if a trust allocates income to a private company beneficiary but neglects to process the payment, the unpaid amount can be treated as a loan. 

According to Division 7A of tax regulations, such loans can be subject to taxation as unfranked dividends unless managed through a compliant loan agreement involving annual principal and interest repayments.

The AAT’s decision challenges a crucial ATO position, carrying potential significance for trust clients with outstanding (or previously owed) unpaid trust entitlements to affiliated private companies.

However, this saga is far from over. On October 26, 2023, the Tax Commissioner filed a notice of appeal with the Federal Court. The outcome in the Federal Court is uncertain, and it remains to be seen whether it will align with the AAT’s conclusion. 

Ongoing updates will be provided as the case unfolds, shedding light on the potential impact of this development.