You might have read or heard about an important tax case decided last week (the Bendel decision), in which the ATO suffered a major loss. The headlines have suggested that Family Trusts might be entitled to up to $1billion in tax refunds.
We thought it a good idea to put the decision into some context.
The case involved a Trust that distributed its profits to a company, which is a very common tax planning strategy. Since 2009, the ATO have taken the view that where a distribution to a company is not physically paid on a timely basis, it automatically converts into a loan that is subject to Division 7A, which must then be repaid to the company over the next 7 years with interest.
In the Bendel decision, the Full Federal Court held the ATO’s position since 2009 is not correct at law. The unpaid distributions can stay as unpaid distributions and the ATO cannot make the Trust physically pay the company under current laws. This is a massive and embarrassing loss for the ATO.
What does it mean? Firstly, the ATO can appeal the decision, or more likely lobby the Government to retrospectively change the law to align with their 2009 position. Secondly, only those Trusts that had been penalised by the ATO under the now incorrect application of the law can arguably seek tax refunds. Trusts who were not penalised have no current basis to claim tax refunds.
We are monitoring this issue closely and will discuss with you what it means for you when finalising your 2024 tax returns. We will keep you updated when we know more.
