The impact of this case on ATO policy is discussed in Decision Impact Statement: Bendel and Commissioner of Taxation (2021/3330-3331 and 2021/3324-3327).

Bendel & Anor v FC of T

Members:
FD O'Loughlin KC DP
K James SM

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2023] AATA 3074

Decision date: 28 September 2023

FD O'Loughlin KC (Deputy President) and K James (Senior Member)

INTRODUCTION

1. The critical question for determination is whether an unpaid present entitlement to income (or capital) of a trust estate is a loan for the purpose of s 109D(3) of the 1936 Assessment Act.^[1] Income tax Assessment Act 1936 (Cth).

2. These reasons use the expressions 'unpaid present entitlement' and/or 'UPE'. Those terms are used to identify or describe an entitlement to income (or capital) of a trust estate that has sufficiently vested, assuming the entitlement is to distributable trust income, to attract s 97 of the 1936 Assessment Act, but in respect of which no step has been taken or event has occurred beyond vesting the entitlement to satisfy that entitlement by payment, set off, or vesting assets in the entitled beneficiary, and which is recorded as not fully satisfied or discharged by the entitled beneficiary and/or the trust/trustee. The typical manifestation of such an entitlement is a resolution to vest an entitlement to annual income in a beneficiary of a family trust without any further step being taken or event occurring to discharge the entitlement.

3. The parties dispute that an amount that is, or has its origins in, an unpaid present entitlement to income of a trust estate conferred upon a corporate beneficiary that remains not fully satisfied or discharged by the lodgment day,^[2] Lodgment day within the meaning of 1936 Assessment Act, s 109D(6). is a loan to the trust estate within the reach of s 109D(3). If such an amount is such a loan, one of the threshold conditions for an amount to be taken to be an assessable dividend pursuant to Division 7A and s 44(1) of the 1936 Assessment Act is satisfied.

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The present dispute is agitated through disputed assessments that were issued to beneficiaries of a trust under s 97. The beneficiaries were presently entitled to the income of the trust estate. The Commissioner says the trustee/trust estate was recipient of a loan in circumstances causing the trust estate to have dividends included in its s 95 net income pursuant to Division 7A. The resultant additional taxable amounts have been included in the beneficiaries' (the Applicants) assessable income pursuant to s 97.

5. The entities involved in the events leading to the disputed assessments were:

(a) the 2005 Trust ^[3] The Steven Bendel 2005 Discretionary Trust, created by deed of settlement of 24 June 2005 (“2005 Trust Deed”) between Benjamin Nathan Orbach as settlor and Gleewin Pty Ltd (ACN 075 582 535) as trustee. and Gleewin ^[4] Gleewin Pty Ltd. Unless the context suggests the contrary, all references to Gleewin are a reference to Gleewin in its capacity as trustee of the 2005 Trust, and references to Gleewin’s assets, liabilities, expenses, income, financial statements, obligations, entitlements, and activities etc., are references to the assets, liabilities, expenses, income, financial statements, obligations, entitlements, and activities etc., of Gleewin in that capacity. which was and is the trustee of the 2005 Trust;
(b) Gleewin Investments ^[5] Gleewin Investments Pty Ltd. who was a discretionary beneficiary of the 2005 Trust who became entitled to a share of the income of the 2005 Trust for the 2013 to 2017 Years ^[6] A Year being a year of income, normally (as is applicable in the present circumstances) a 12-month period that ends on 30 June in a calendar year. ; and
(c) Mr Bendel^[7] Mr Bendel was also described as the public officer in Gleewin Investments’ tax returns. who:
- (i) was also a discretionary beneficiary of the 2005 Trust who became entitled to a share of the income of the 2005 Trust for the 2015 and 2017 Years; and
- (ii) at the times relevant to the events leading to the present applications, was the sole director and secretary of, and the beneficial owner of the shares in, both Gleewin and Gleewin Investments.

6. Gleewin Investments' entitlements to amounts distributed ^[8] Distributed in the sense that the Trustee has exercised a discretionary power to pay, apply or set aside amounts to and/or for Gleewin Investments. to it were shown as outstanding. The Commissioner says those outstanding amounts represent a loan to Gleewin that is a dividend and that Gleewin Investments and Mr Bendel have been properly assessed as beneficiaries. Penalty has also been imposed.

ISSUES FOR DETERMINATION

7. There are four issues for determination.

Issue 1

8. Did Gleewin Investments make a loan within the meaning of s 109D(3) of the 1936 Assessment Act to Gleewin during each of the 2014 to 2017 Years on account of Gleewin Investments' unpaid present entitlements to 2005 Trust income of the previous year?

9. The parties describe Issue 1 in different ways.

(a) The Applicants say this issue is

[d]id Gleewin Investments make a loan (as defined in s 109D(3)) to the 2005 Trust during each of the 2014 to 2017 income years by reason of part of the trust income of the previous year that was set aside for it remaining unpaid and held on separate trust on the lodgment day?^[9] Applicants’ Statement of Facts, Issues and Contentions dated 6 June 2022 (“ASFIC”) [28(a)]. The Applicants’ submissions dated 26 August 2022 (“AS”) at [22(a)] express the issue in a slightly different way without any substantive change in meaning.
(b) The Commissioner describes this issue:
- (i) in his SFIC in terms:
  
  whether either Applicant has discharged its onus of proving that Gleewin Investments did not make a 'loan', as defined in s 109D(3) of the [1936 Assessment Act], to the 2005 Trust during any of the 2014 to 2017 income years by reason of part of the trust income set aside for it in the previous year remaining unpaid;^[10] Respondent’s Statement of Facts, Issues and Contentions dated 24 December 2021 (“RSFIC”) [5(a)].
  
  and
- (ii) in his submissions in terms first as
  
  … whether, by failing to demand payment of the amounts, Gleewin Investments made a 'loan' to the 2005 Trust for the purposes of section 109D …^[11] Respondent’s submissions dated 26 September 2022 (“RS”) [2].
  
  and second as
  
  … whether, in connection with each amount set aside for Gleewin Investments, there was a 'loan' (within the meaning of subsection 109D(3)…) from Gleewin Investments to Gleewin Pty Ltd atf the 2005 Trust in one of the 2014 to 2017 income years.^[12] RS [54].

10. Repeating the various descriptions of Issue 1 is not meant as a criticism. It is probably a reflection of a lack of clarity associated with the concept of an unpaid present entitlement, and the consequent taxation considerations that emerge from such entitlements in some circumstances, such as the present.

11. If the answer to the Issue 1 question (whichever way it is formulated) is yes, subject to Issues 2 and 3 below, the parties do not dispute matters necessary for assessable amounts to arise. The Applicant does not contest the remaining conditions for inclusion of the amounts of the loans in assessable

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income by operation of ss 44(1), 109D(1), and 109Z of the 1936 Assessment Act bringing the loan amounts into both Gleewin's s 95 net income and the Applicants' assessable income pursuant to s 97 of the 1936 Assessment Act.

Issue 2 -

12. If the answer to Issue 1 is yes, does s 6-25 of the 1997 Assessment Act ^[13] Income tax Assessment Act 1997 (Cth). prevent the amount that is taken to be a dividend paid from Gleewin Investments' profits from being included in Gleewin's assessable income or, alternatively, the Applicants' assessable incomes on the basis that the same amount has already been included in assessable income?

Issue 3 -

13. If the answers to Issues 1 and 2 are yes and no, respectively, are the conditions for exercise of the discretion afforded by s 109RB of the 1936 Assessment Act satisfied, and if so, will the Tribunal exercise the s 109RB discretion and either:

(a) disregard the consequences of those answers; or
(b) allow the amount that is taken to be a dividend paid from Gleewin Investments' profits to be franked?

Issue 4 -

14. Have penalties been imposed correctly and if so, will the Tribunal remit them?

Legislation

15. The issues for resolution, call for consideration of the definition of a loan in s 109B, s 109D, former s 109UB, Subdivision EA and s 109RD of the 1936 Assessment Act, and s 6-25 of the 1997 Assessment Act and ss 284-30 284-75 and 298-20 of Schedule 1 to the Administration Act.^[14] T axation Administration Act 1953 (Cth).

16. Section 109B is in the following terms:

Simplified outline of this Division

The following is a simplified outline of this Division:

This Division treats 3 kinds of amounts as dividends paid by a private company:

• amounts paid by the company to a shareholder or shareholder's associate (see section 109C);

• amounts lent by the company to a shareholder or shareholder's associate (see sections 109D and 109E);

• amounts of debts owed by a shareholder or shareholder's associate to the company that the company forgives (see section 109F).

This treatment makes the amounts assessable income of the shareholder or associate (under section 44).

However, some payments, loans and forgiven debts are not treated as dividends. (See Subdivisions C and D.) Also, this Division does not apply to demerger dividends. (See Subdivision DA.)

An amount may be treated as a dividend even if it is paid or lent by the company to the shareholder or associate through one or more interposed entities. (See Subdivision E.)

An amount may also be included in the assessable income of a shareholder or shareholder's associate if:

(a) a company has an unpaid present entitlement to income of a trust; and

(b) the trustee makes a payment or loan to, or forgives a debt of, the shareholder or associate.

(See Subdivisions EA and EB.)

If the total of the amounts is more than the company's distributable surplus, only the part of the total equal to the distributable surplus is treated as dividends. (See section 109Y.)

This Division applies to non-share equity interests and non-share dividends in the same way it applies to shares and dividends.

17. Section 109D(1) is in the following terms:

Loans treated as dividends in year of making

(1) A private company is taken to pay a dividend to an entity at the end of one of the private company's years of income (the current year) if:

(a) the private company makes a loan to the entity during the current year; and

(b) the loan is not fully repaid before the lodgement day for the current year; and

(c) Subdivision D does not prevent the private company from being taken to pay a dividend because of the loan at the end of the current year; and

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(d) either:

(i) the entity is a shareholder in the private company, or an associate of such a shareholder, when the loan is made; or

(ii) a reasonable person would conclude (having regard to all the circumstances) that the loan is made because the entity has been such a shareholder or associate at some time.

18. Section 109D(3) defines a loan in the following terms:

What is a loan?

(3) In this Division, loan includes:

(a) an advance of money; and

(b) a provision of credit or any other form of financial accommodation; and

(c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and

(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

19. When it was an operative provision, section 109UB was in the following terms.

109UB Certain trust amounts treated as loans

(1) If:

(a) a private company is, or has been, presently entitled to an amount from the net income of a trust estate; and

(b) the trustee has not paid the amount to the private company; and

(c) the trustee has made a loan to a shareholder of the private company, or an associate of such a shareholder after the time that the private company first became presently entitled to that amount. the private company is taken to have made a loan to the shareholder or associate, at the time that the trustee made the loan.

20. Relevantly, Subdivision EA is in the following terms:

109XA Payments, loans and debt forgiveness by a trustee in favour of a shareholder etc. of a private company with an unpaid present entitlement

(2) Section 109XB applies if:

(a) a trustee makes a loan (including a loan through an interposed entity as described in section 109XG) to a shareholder or an associate of a shareholder of a private company (except a shareholder or associate that is a company) (the actual transaction); and

(b) either:

(i) the company is presently entitled to an amount from the net income of the trust estate at the time the actual transaction takes place, and the whole of that amount has not been paid to the company before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place; or

(ii) the company becomes presently entitled to an amount from the net income of the trust estate after the actual transaction takes place, but before the earlier of the due date for lodgment and the date of lodgment of the trustee's return of income for the trust for the year of income of the trust in which the actual transaction takes place, and the whole of the amount has not been paid to the company before the earlier of those dates.

109XB Amounts included in assessable income

(1) An amount is included, as if it were a dividend paid by the company at the end of the year of income of the company in which the actual transaction took place, in the assessable income of the shareholder or associate referred to in subsection 109XA(1), (2) or (3) if:

(a) had the actual transaction been done by a private company (the notional company); and

(b) had the shareholder or associate been a shareholder of the notional company at the time the actual transaction took place;

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an amount (the Division 7A amount) would have been included in the shareholder's or associate's assessable income because of a provision of this Division outside this Subdivision.

(2) Subject to section 109Y, the amount that is included under subsection (1) is the Division 7A amount.

21. Section 6-25(1) is in the following terms:

Sometimes more than one rule includes an amount in your assessable income:

• the same amount may be *ordinary income and may also be included in your assessable income by one or more provisions about assessable income; or

• the same amount may be included in your assessable income by more than one provision about assessable income.

However, the amount is included only once in your assessable income for an income year and is then not included in your assessable income for any other income year.

22. Section 109RD is in the following terms:

Commissioner may disregard operation of Division or allow dividend to be franked

(1) The Commissioner may make a decision under subsection (2) if:

(a) this Division (disregarding this section) operates with the result that:

(i) a private company is taken to pay a particular dividend to a particular entity (the recipient) under this Division; or

(ii) a particular amount is included, as if it were a dividend, in the assessable income of a particular entity (also the recipient) in relation to a private company under Subdivision EA; and

(b) the result mentioned in paragraph(a) arises because of an honest mistake or inadvertent omission by any of the following entities:

(i) the recipient;

(ii) the private company;

(iii) any other entity whose conduct contributed to that result.

(2) The Commissioner may decide in writing that:

(a) the result mentioned in paragraph (1)(a) should be disregarded (see subsection (4)); or

(b) the dividend mentioned in subparagraph (1)(a)(i) may be franked in accordance with Part 3-6 of the Income Tax Assessment Act 1997 (see subsection (6)).

(3) In making a decision under subsection (2) (or refusing to make such a decision), the Commissioner must have regard to the following:

(a) the circumstances that led to the mistake or omission mentioned in paragraph (1)(b);

(b) the extent to which any of the entities mentioned in paragraph (1)(b) have taken action to try to correct the mistake or omission and if so, how quickly that action was taken;

(c) whether this Division has operated previously in relation to any of the entities mentioned in paragraph (1)(b), and if so, the circumstances in which this occurred;

(d) any other matters that the Commissioner considers relevant.

(4) The Commissioner may make a decision under subsection (2) subject to any of the following kinds of condition:

(a) a condition that the recipient or another entity must make specified payments to the private company or another entity within a specified time;

(b) a condition that a specified requirement in this Division must be met within a specified time.

(5) This Division is taken not to operate with the result mentioned in paragraph (1)(a) if:

(a) the Commissioner makes a decision under paragraph (2)(a); and

(b) if the Commissioner makes the decision subject to a condition under subsection (4)--the condition is satisfied.

(6) If the Commissioner makes a decision under paragraph (2)(b), subparagraph 202-45(g)(i) of the Income Tax Assessment Act 1997 does not make the dividend mentioned in subparagraph (1)(a)(i) unfrankable.

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(7) Despite subsection 33(3A) of the Acts Interpretation Act 1901, each decision made under subsection (2) must relate only to one amount that would(disregarding this section):

(a) be taken to be a dividend paid by the private company; or

(b) be included, as if it were a dividend, in the assessable income of an entity.

23. Sections 284-30, 284-75 and 298-20 of Schedule 1 to the Administration Act is in the following terms:

284-30 Application of Division to trusts

If you are a trustee of a trust and:

(a) you make a statement to the Commissioner or to an officer who is exercising powers or performing functions under a * taxation law about the trust; and

(b) the statement:

(i) is false or misleading in a material particular, whether because of things in it or omitted from it; or

(ii) treated an * income tax law as applying to a matter or identical matters in a particular way that was not * reasonably arguable; or

(iii) treated a taxation law as applying in a particular way to a * scheme;
this Division applies to you as if any * shortfall amount or * scheme shortfall amount of a beneficiary of the trust as a result of the statement were your shortfall amount or scheme shortfall amount.

…

284-75 Liability to penalty

(1) You are liable to an administrative penalty if:

(a) you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law (other than the * Excise Acts); and

(b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it.

Note: This section applies to a statement made by your agent as if it had been made by you: see section 284-25.

…

(6) You are not liable to an administrative penalty under subsection (1) or (4) if:

(a) you engage a * registered tax agent or BAS agent; and

(b) you give the registered tax agent or BAS agent all relevant taxation information; and

(c) the registered tax agent or BAS agent makes the statement; and

(d) the false or misleading nature of the statement did not result from:

(i) intentional disregard by the registered tax agent or BAS agent of a * taxation law (other than the * Excise Acts); or

(ii) recklessness by the agent as to the operation of a taxation law (other than the Excise Acts).

…

298-20 Remission of penalty

(1) The Commissioner may remit all or a part of the penalty.

(2) If the Commissioner decides:

(a) not to remit the penalty; or

(b) to remit only part of the penalty;

(i) the Commissioner must give written notice of the decision and the reasons for the decision to the entity.

Note: Section 25D of the Acts Interpretation Act 1901 sets out rules about the contents of a statement of reasons.

(3) If:

(a) the Commissioner refuses to any extent to remit an amount of penalty; and

(b) the amount of penalty payable after the refusal is more than 2 penalty units; and
Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.

(c) the entity is dissatisfied with the decision;
the entity may object against the decision in the manner set out in Part IVC.

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ISSUE 1 WERE THERE S 109D(3) LOANS MADE BY GLEEWIN INVESTMENTS TO GLEEWIN?

Issue 1 facts

24. The Facts relevant to Issue 1 are as follows.

The Bendel group of entities and their inter relationships

25. The Bendel group consisted of trust entities which conducted a busy suburban accounting and registered tax agent practice controlled by Mr Bendel and/or participated in commercial property syndicates (unit trusts and one company) which Mr Bendel operated with his brother. The 2005 Trust, Gleewin, and Gleewin Investments were part of that group.

26. The 2005 Trust, Gleewin, and Gleewin Investments were all controlled by Mr Bendel. His knowledge of the affairs of each entity can be attributed to each entity, and each entity can be accepted as having knowledge of the affairs of the others of them, including knowledge of Mr Bendel's affairs and circumstances.

Entitlements leading to the present dispute

27. In the 2013 to 2017 Years, in varying proportions or amounts the Applicants were the only beneficiaries that became entitled to the Gleewin's income.

28. The entitlements to Gleewin's income created for the 2013 to 2016 Years for Gleewin Investments led to the emergence of the unpaid present entitlements to Gleewin's income for those years. Those UPEs are the source of the presently disputed Division 7A dividends. Table 1 sets out Gleewin Investments' entitlements to 2005 Trust income for the 2013 to 2016 years, the amounts of those entitlements the Commissioner says were unpaid at the relevant lodgment day for the year following the year for which the entitlement was created, and the amount of the Division 7A deemed dividends that he has assessed.

Table 1
Year	Gleewin Investments' entitlement to 2005 Trust income when created	Gleewin Investments' UPEs to 2005 Trust income at the lodgment day for the Year following the Year of the entitlement as calculated by the Commissioner	Deemed dividend assessed under Division 7A
Year
2013	$236,251	$181,601
2014	$149,513	$164,242	$181,601
2015	$840,529	$807,417	$164,242
2016	$433,188	$229,955	$807,417
2017			$229,955

29. The compilation of the amounts the Commissioner says were unpaid at the relevant lodgment day for the year following the year for which the entitlement was created is set out in Annexure C. It seems that the Commissioner has:

(a) taken the relevant entitlement for each year and deemed it to be a loan on the trust lodgment date;
(b) then applied payments made by Gleewin on behalf of Gleewin Investments between the trust lodgment date and the company lodgment date as repayments of the deemed loan;
(c) recognised other receipts of money belonging to Gleewin Investments (tax refunds totalling $41,252 in the 2015 Year and $9,431 in the 2016 Year) and banked by Gleewin as further loans by Gleewin Investments to Gleewin; and
(d) worked out a balance which is deemed to have been a dividend.

30. The method of application of amounts reducing the outstanding obligations appears not to adopt the FIFO principle applied in some

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settings to the effect that the earliest obligation ought be the first satisfied.^[15] See Devaynes v Noble (Clayton’s case) (1816) 35 ER 781 . If the FIFO principle were to be observed in allocating credits to the earliest outstanding obligation, having regard to the balances owed by Gleewin to Gleewin Investments from earlier periods as shown in Table 5 below, none of Gleewin Investments 2013 to 2016 entitlements to Gleewin's income, would have been satisfied. If there were to be assessable dividends as a consequence of Gleewin Investments' UPEs, the Commissioner's recognition of the amounts that have been accepted to reduce particular obligations shown as outstanding, and the amounts of the loans that he has treated as a Division 7A dividend, is generous. Apart from the method of allocation of credits, the choice of dates used in the process is also confusing. The trust return lodgment date only finds expression in Subdivision EA. And the Commissioner contends that Subdivisions EA does not apply in the present circumstances.

31. Given the apparently generous nature of the Commissioner's approach to determining the amount he says the basis for the loan not repaid and therefore a Division 7A dividend, the Tribunal will not disturb it other than to separate and deal with loans that did not have their origins in entitlements to trust income.

32. The assumed repayments referred to at [29(b)] creating or contributing to the differences between the respective amounts in Table 1 is the result of the practice of Gleewin paying Gleewin Investments' expenses and liabilities from time to time, setting those payments off against the unpaid present entitlement, and the application of credits processes noted above.

33. The difference in the respective amounts in Table 1 for the 2014 Year entitlement is $14,729. The amount the Commissioner has said is an unpaid present entitlement based loan, and dividend pursuant to Division 7A, is the larger the amount, namely $164,242. That amount is $14,729 greater than the amount of Gleewin Investments' entitlement for the 2014 Year. For the 2015 Year, the $164,242 amount the Commissioner has assessed as an unpaid 2014 Year present entitlement sourced dividend cannot be correct. Without explaining the difference, the Applicants accept this difference to be the result of some further relatively small amounts that were loaned to Gleewin by Gleewin Investments during the 2015 Year. Having regard to the amounts disclosed in Annexure C for the 2014 Year entitlements, if the Commissioner's annual credit allocation process were to be observed to allocate particular periods' credits to the preceding Year's unpaid present entitlement, rather than the longer standing outstanding obligation generally, and applying those credits to the earliest arising obligation within that period first, the correct amount representing an unpaid present entitlement for 2014 was $122,990 and the balance of $41,252 represents outstanding other loans. Having been aware of the difference and attempting to explain it, erroneously as it is, and having had the Commissioner's calculations (reproduced in Annexure C) since at least 21 December 2018 ^[16] Gleewin Investments T Documents GI-T48 Audit Position Paper dated 21 December 2018. the Applicants have not advanced any basis upon which outstanding other loans ought not be deemed to be dividends. Accordingly, for the 2014 unpaid present entitlement the Applicants have not established that a deemed dividend of $41,252 has not arisen for the 2015 Year.

34. Included in the calculation of the 2016 Year dividend of $807,417 is a similar further loan of $9,431 which did not have origins in UPEs and needs to be treated the same way as the $41,252. Accordingly, for the 2015 unpaid present entitlement the Applicants have not established that a deemed dividend of $9,431 has not arisen for the 2016 Year.

35. The balances of the UPEs were shown as a liability in Gleewin's financial statements until after the Commissioner commenced a review of the tax affairs of Mr Bendel and his related entities.

36. The entitlements to Gleewin's 'other income' (namely income not consisting of capital gains or franked dividends) created for the 2014 to 2017 Years inform the proportions in which the adjustments the Commissioner has made to Gleewin's s 95 net income are to be reflected in additional amounts included in the Applicants' assessable income for those years pursuant to s 97 of the 1936 Assessment Act. Table 2 sets out the relative proportionate entitlements to that Gleewin's other income for the 2014 to 2017 Years.

Table 2
Year	Entitlements to Gleewin's 'other income'
Year	Mr Bendel	Gleewin Investments
2014	-	100%
2015	10%	90%
2016	-	100%
2017	25%	75%

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37. As noted above, Mr Bendel also became entitled to 2005 Trust income. Unlike Gleewin Investments, Mr Bendel was not a creditor of Gleewin. He owed Gleewin amounts it had loaned to him.^[17] The 2005 Trusts Financial Statements included an asset ‘Beneficiaries Current Account Steven Bendel’ at GI-T17. Table 3 sets out the amounts to which he became entitled and the balances as at 30 June of 2013 to 2017 that, after set-off of his entitlements to 2005 Trust income, he owed Gleewin. All of his entitlements were set off against amounts he owed to Gleewin from a time before the entitlement was created.

Table 3
Year	Mr Bendel's entitlement to 2005 Trust income for Year	Balance owed by Mr Bendel to Gleewin as at 30 June
2012		$825,180
2013	-	$1,400,000
2014	$714,423	$741,288
2015	$93,392	$1,663,561
2016	$87,516	$1,973,170
2017	$256,519	$2,164,381

38. Mr Bendel attempted to contend in evidence, a contention not replicated in any submissions on his behalf, that the balance he owed to Gleewin had been discharged in the 2017 Year when he sold his house and he started afresh. He said, '$1,866,000 was deposited into the bank account which effectively cleared out my drawings for that year. So I started afresh. It effectively cleared it out.' The reality is that his account records that before the $1,866,000 deposit was made, he had already drawn down approximately $2.46 million for the purchase of a new house one month earlier.^[18] GI-T42. His attempt to demonstrate that the account was cleared cannot be accepted.

Gleewin's activities

39. Gleewin held interests in other Bendel group entities, and derived income that had its origins in the profits of those entities' investments in commercial property syndicates (two unit trusts conducting the accounting and registered tax agent practice. Gleewin's financial statements reveal:

(a) the assets comprising the interests in other Bendel group entities were described as 'Investments' whose values were reported at their historical costs;
(b) the trust's capital in all years was $30;
(c) for each of the 2013 to 2017 Years, a non-Current liability 'Quarantined Pre 16.02.09 Unpaid Present Entitlements Gleewin Investments Pty Ltd' of $72,050 is reported;^[19] It was accepted by the parties that the date was a typographical error and should read 16 December 2009.
(d) a current asset in the Bendel Current Account ^[20] An account maintained in Gleewin’s financial records called ‘Beneficiaries Current Account Steven Bendel’. was reported each year. As shown in Table 3 above, as at 30 June 2013 the amount was $1,400,000, as at 30 June 2014 the amount was $741,288 and thereafter year end balances owed increased to $2,164,381 as at 30 June 2017. Distributions of trust income made to Mr Bendel were credited to this account and reduced the balance owed at year end. Interest was not received or accrued on this account.
(e) During the 2013 to 2016 Years Gleewin:
- (i) did not make any new or additional material investments.
- (ii) derived gross income
  - a. interest of $6,396
  - b. trust present entitlements of $2,192,177
  - c. dividends (fully franked) of $814,932.
- (iii) recorded expenses totalling $451,815. In 2016 a loss on disposal of investments of $6,878 was recorded.^[21] Offword Bunby 2007 Unit Trust was wound up.
(f) As at 30 June 2016 the balance of the unpaid trust present entitlements in favour of Gleewin was $561,045 (out of entitlements totalling $2,192,177 over the period from 2013 to 2016).^[22] Distributions were also made from the Port Sorell Shopping Centre Unit Trust and the Bendel 1992 Trust which had previously borrowed from the 2005 Trust. The closing current asset from these trusts was after adding the distributions less than the borrowed amounts. A running balance account was kept in 2016. Although the accounting for the UPEs is unclear, payments were made in excess of the distributions. Of the dividends of $814,932, $198,068 was recorded as still owing or lent back to the dividend paying company as at 30 June 2015 and 30 June 2016. What can be concluded from this is

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that Trust distributions of $1,631,132 ($2,192,177 less $561,045) and dividends of $616,864 ($814,932 less $198,068) were received.^[23] GI-T17, see 30 June 2016 Balance Sheet showing current assets of Bendel 1992 Trust, Bendel 2009 HJ Trust, Bendel Partners Unit Trust.

40. The accounting processes Gleewin adopted involved:

(a) recording journal entries from time to time;
(b) preparing final accounts in the third quarter of the Year following the period to which they related;
(c) disclosing UPEs in its favour as current assets in its financial statements; and
(d) maintaining two beneficiaries' current accounts, the Gleewin Investments Current Account ^[24] An account maintained in Gleewin’s financial records called ‘Beneficiaries Current Account Gleewin Investments Pty Ltd’. and the Bendel Current Account. These accounts appeared as stand-alone accounts described as they are named and not specifically included in Current Liabilities, Non-Current Liabilities, Current Assets, Investments, or Intangible Assets. Where the balance of a beneficiaries' current account was in Gleewin's favour, as was the case for the Bendel Current Account, it was reported in the 'Assets' half of the balance sheet as a stand-alone account and its balance was included in Total Assets reported. Where the balance was in favour of a beneficiary, as was the case for the Gleewin Investments Current Account, it was reported in the 'Liabilities' side of the balance sheet as a stand-alone account and its balance was included in Total Liabilities reported.

41. Gleewin did not recognise any separation of any of its assets in its accounts, or anywhere else in the evidence, reflecting or commensurate with unsatisfied entitlements to income. Similarly, the wider Bendel group accounting records did not entail any financial statements for any separate trusts on account of unpaid present entitlements.

42. During and/or for each of the 2013 to 2017 Years (and in and for Years before and after):

(a) Mr Bendel caused Gleewin to advance money from its resources to him or for his benefit from time to time;
(b) the advances to Mr Bendel were recorded with the description 'Drawings' by way of journals posted to the Bendel Current Account maintained by or on behalf of Gleewin;
(c) distributions of (or creation of entitlements to) Gleewin's income or capital were made from time to time;
(d) when the amounts of the distributions (entitlements) were ascertained, journals were posted to the Bendel Current Account maintained by or on behalf of Gleewin; and
(e) for each Year Mr Bendel's entitlement to Gleewin's income was less than the then balance owed by him to Gleewin so that his entitlement to Gleewin's income was always fully discharged or paid.

43. The payments made by Gleewin from its resources on behalf of Mr Bendel were significant. 'Drawings' increased the balance owed to Gleewin by Mr Bendel (as shown in the Bendel Current Account) as set out in Table 4. The year-end balance was always recognised as an asset in Gleewin's Balance Sheet.

Table 4
Description	2013 Year	2014 Year	2015 Year	2016 Year	2017 Year
Opening Balance	$825,180	$1,400,000	$741,288	$1,663,561	$1,973,170
Capital Introduced	($53,360)	($6,245)	($19,676)	($25,273)	($2,209,647)
Share of Profit ^[25] The Share of Profit amounts in Table 4 are the same as the amounts of the 2005 Trust’s income to which Mr Bendel became entitled as shown in Table 3. No significance should be attached to the different nomenclature as they are the same amounts.	-	($714,423)	($93.392)	($87,516)	($256,519)
Drawings	$628,180	$ 61 ,956	$1,035,341	$422,398	$2,657,377
Closing Balance	$1,400,000	$741,288	$1,663,561	$1,973,170	$2,164,381

44.

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Gleewin Investments' financial affairs were similarly managed. During and/or for each of the 2013 to 2017 Years (and in and for Years before and after):

(a) Mr Bendel caused Gleewin to meet Gleewin Investments' tax liabilities and other expenses from time to time;
(b) when Gleewin Investments' expenses were met by Gleewin, entries were made to both entities' accounts - in Gleewin's accounts, expenses were recorded in the Gleewin Investments Current Account, and in Gleewin Investments' accounts, the expenses were recorded in the account named 'Steven Bendel 2005 Discretionary Trust';^[26] The account in Gleewin Investments is entitled ‘Current Assets Steven Bendel 2005 Discretionary Trust.
(c) from time to time amounts belonging to Gleewin Investments (PAYG tax refunds) were received by Gleewin and not passed on. These amounts also were posted to the same accounts by or on behalf of each of Gleewin and Gleewin Investments and reflected an increase in Gleewin's obligations to Gleewin Investments; and
(d) for each Year Gleewin Investments' entitlement to Gleewin's income was also posted to the Gleewin Investments Current Account, and for each of the 2013 to 2017 Years that income entitlement was greater than the taxation and other expenses paid on Gleewin Investments' behalf by Gleewin from its resources so that its entitlement to Gleewin's income was always recorded as at least partly outstanding.

45. The balances owed by Mr Bendel to Gleewin and the balance of the Gleewin Investments Current Account in Gleewin Investments' favour as at 30 June of each of 2008 to 2012 ^[27] Further Supplementary T Documents FST-11. are as set out in Table 5.

Table 5
Year	30 June balance owed by Mr Bendel	Distribution to Mr Bendel	Distribution to Gleewin Investments	Gleewin Investments outstanding UPE
2008	$527,800	$20,000	$127,951	$127,951
2009	$490,518	-	-	$87,556
2010	$520,835	-	-	$72,050 ^[28] See [39(c)] above.
2011	$714,029	$15,116	$85,655	$72,050 $84,711
2012	$825,180	-	$240,004	$72,050 $240,004
2013	$1,400,000	-	$236,251	$72,050 $328,618

46. Mr Bendel's use of money provided by Gleewin while Gleewin Investments was not paid its entitlements by Gleewin has a history leading up to the Years of the disputed assessments.

Gleewin Investments activities

47. Gleewin Investments:

(a) held assets comprising:
- (i) cash on hand;^[29] $100 in each Year. The paid-up capital of the company was 100 ordinary shares of $1.
- (ii) outstanding entitlements (income) from Gleewin; and
- (iii) prepayments of income tax;
(b) did not operate a bank account;
(c) derived income from trust distributions for which it was the beneficiary;
(d) incurred taxation liabilities and other expenses that were paid from Gleewin's bank account and accounted for by journal entry posted to the Gleewin Investments Current Account.^[30] GI-T35.

The 2005 Trust Deed terms and income distributions

48. Clauses 3(1)(a), 2(c) and (5), and Clause 6 of the 2005 Trust Deed provided:

3. Payment or Application of Income - Trustee's Determination

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(1) The Trustee may at any time before the expiration of any Accounting Period with respect to all or any part or parts of the net income of the Trust Fund for such Accounting Period determine:

(a) to pay apply or set aside the same to or for any one or more of the General Beneficiaries living or in existence at the time of the determination

…

(2) The following provisions shall apply to any determination made pursuant to sub-clause (I) of this Clause -

…

(c) a determination to pay apply or set aside any amount to or for the benefit of any beneficiary shall be irrevocable and may be effectually made and satisfied (inter alia) by a resolution of the Trustee that a sum out of or portion of the net income of the Trust Fund for the accounting period or a sum out of or portion of the net income of the trust estate as defined in Section 95 of the Income Tax Assessment Act of the Trust Fund for the accounting period be allocated to that beneficiary or otherwise dealt with for the benefit of that beneficiary or by placing such amount to the credit of such beneficiary in the books of account of the Trust Fund or by drawing any cheque in respect of such amount made payable to or for the credit or benefit of such beneficiary or by paying the same over to or for the benefit of such beneficiary in such manner and to such person on behalf of such beneficiary as the Trustee shall think fit;

…

(5) Any amount set aside for any beneficiary …shall cease to form part of the Trust Fund and upon such setting aside … shall thenceforth be held by the Trustee on a separate trust for such person absolutely with power to the Trustee pending payment over thereof to such person to invest or apply or deal with such Fund or any resulting income therefrom or any part thereof in the manner provided for in Clause 6 (5) hereof.

6. Application of Trust Fund Prior to Vesting Day

The Trustee may -

(5) where the Trustee holds any amount upon separate trust for any person pursuant to Clauses 3 (5) … but the amount is left in the hands of the Trustee invest on behalf of such person that amount and the resulting income thereof in any of the investments hereby authorised …at any time or times and from time to time in their absolute discretion resort to such amount and the income thereof and pay apply or deal with the same or any part thereof (but not so as to infringe the rule against perpetuities) in such manner as the Trustee in its absolute discretion thinks fit for the benefit of such person in the terms of the powers contained in sub-clauses (3) and (4) of this Clause.

49. In each year from 2013 to 2017 Gleewin distributed all of its income by creating entitlements to that income. The resolutions to effect these distributions were in the terms reproduced in Annexure B. In summary, the income was distributed as shown in Table 6.

Table 6
Year	Capital Gains after recoupment of losses	Franked Dividends less direct expenses	Other Income
2014	100% Mr Bendel	100% Gleewin Investments	100% Gleewin Investments ATC 11511
2015	10% Mr Bendel 90% Gleewin Investments	10% Mr Bendel 90% Gleewin Investments	10% Mr Bendel 90% Gleewin Investments
2016	100% Mr Bendel	100% Gleewin Investments	100% Gleewin Investments
2017	100% Mr Bendel	100% Mr Bendel	25% Mr Bendel 75% Gleewin Investments

50. For each Year, Gleewin reported Mr Bendel's entitlement as discharged or paid, and Gleewin Investments' entitlements were reported in the Gleewin Investments Current Account that showed a running balance of entitlements not satisfied.

51. Beyond passing its income distribution resolutions and recording them as outlined above, Gleewin did not report any asset held separately, did not purport to alienate or create any interest in any identified asset to meet or correspond with Gleewin Investments' unpaid present entitlements, and did not report or account for any separate trust. It is not possible to identify any Gleewin asset in respect of which any change in any form of ownership occurred. Gleewin Investments reported its entitlements each Year in a corresponding way.

The Commissioner's Audits, Assessments and Objection Decisions

52. The dispute is agitated as noted at [4] above. On 23 October 2017 the Commissioner started an audit of Mr Bendel's affairs. One consequence of that audit was that the Commissioner discovered that Gleewin Investments had unpaid present entitlements to Gleewin's distributable income.

53. On 4 September 2019 the Commissioner issued amended assessments to the Applicants contending that:

(a) Gleewin Investments' unpaid present entitlements to prior year trust income comprised loans within the meaning of s 109D(3) made by Gleewin Investments in the current year to the Gleewin;
(b) those loans were taken to be dividends paid within the meaning of s 109D(1) of the 1936 Assessment Act;
(c) those dividends were taken to be paid out of Gleewin Investments' profits by operation of s 109Z of the 1936 Assessment Act;
(d) the dividends taken to be paid out of profits were assessable income by operation of s 44(1) of the 1936 Assessment Act and included in Gleewin's s 95 net income; and
(e) the beneficiaries who were entitled to Gleewin's income were liable to be assessed under s 97 for a proportion of each such dividend determined by reference to their proportionate shares of Gleewin's income.

54. Objections to those assessments were lodged on 1 November 2019. On 23 March 2021 those objections were disallowed for the 2014 to 2016 Year assessments and allowed in part for the 2017 Year assessments.

55. Table 7 sets out the post objection decision Gleewin Investments unpaid present entitlements to trust income for the relevant prior years pursuant to Division 7A/s 44(1) that have been included in Gleewin's s 95 net income, and the amended s 97 amounts that have been included in the Applicants' taxable incomes.

Table 7
Year	Post objection decision Gleewin Investments' UPEs treated as an assessable dividends under Division 7A and included in Gleewin's s 95 net income	Additional s 97 taxable amounts
Year		Mr Bendel	Gleewin Investments
2014	$181,601	-	$181,601 ATC 11512
2015	$164,242	$16,424	$147,818
2016	$807,417	-	$807,417
2017	$229,955	$57,489	$172,466

56. During the audit, objection and in post objection correspondence with the Commissioner, no reference was made to a separate trust in respect of any asset or unpaid present entitlement to 2005 Trust income.^[31] Transcript p 56 lines 28-31.

57. The Commissioner has also assessed the Applicants to administrative penalties and objections against those assessments were also disallowed. Those decisions are also the subject of the present review applications.

Contentions

Issue 1 - Applicants' contentions

58. The Applicants contend that:

(a) the statutory context in which the s 109D(3) definition of loan operates includes Subdivision EA with the effect that s 109D(3) does not embrace unpaid present entitlements of corporate beneficiaries of trusts; and
(b) somewhat overlapping with (a) above, the s 109D(3) definition of loan does not apply to amounts that are the subject matter of a separate trust.

Issue 1(a) - Applicants' statutory context contentions

59. The Applicants' statutory context contention:

(a) acknowledged, and accepted, that the ordinary meaning of the words used was clearly a relevant factor, but maintains that dictionary definitions at the expense of statutory context and legislative history is a foundation for error where the outcome is contrary to statutory context and legislative history; and
(b) asserted that s 109D(3) does not embrace unpaid present entitlements of corporate beneficiaries of trusts because Subdivision EA, and before its enactment s 109UB, deals with the tax treatment of unpaid present entitlements.

60. The core of the submission was

50. The statutory context and purpose of s 109D indicates that the definition of loan does not extend to amounts of trust income which are either set aside for a beneficiary on a separate trust or to which a beneficiary is presently entitled. Statutory context must be considered, particularly because that context might show that a word or words are used with some meaning other than their ordinary meaning. That is especially the case where the relevant words, here 'credit' and 'financial accommodation', do not have a fixed ordinary meaning but can have a wide range of meanings depending on context.

…

51. A construction of s 109D(3) that includes unpaid present entitlements to companies as loans would lead to absurd and unintended results from the dual operation of s 109D and Subdivision EA. Such a result is to be avoided if possible.

…

53. It is immediately apparent that those provisions would have little, if any, work to do if the unpaid present entitlement to the company gave rise to a loan, and therefore a deemed dividend under s 109D, as the Commissioner contends. Instead, the dual operation of s 109D and Subdivision EA would lead to the multiple taxation of the same event or amount. There is no indications [sic] from the extrinsic material that such an absurd and punitive outcome was intended.

54. Indeed, the expressed reason for including the predecessor to Subdivision EA, s 109UB, in the Act that originally introduced Division 7A was to deal with the situation in which a company's present entitlement to trust income is left

ATC 11513
unpaid, including where the income is held on a separate trust. Concerns had been raised that Division 7A did not otherwise deal with that situation.^[32] AS [50]-[54].

61. In their reply ^[33] AR [9]-[10]. the Applicants submitted that:

9. … [they] did not contend that the legislative history and extrinsic materials surrounding Division 7A displaces the statutory text. The plain text of Subdivision EA (including, not least, its heading) shows that it contains the provisions intended to deal with situations involving unpaid present entitlements and that an unpaid present entitlement (whether put on separate trustor not) was not intended to be a loan as defined in s 109D(3).That approach 'best give[s] effect to the purpose and language of those provisions while maintaining the unity of all the statutory provisions'. The legislative history and extrinsic materials are relevant and support the statutory intention revealed by a proper consideration of the statute itself. That is an orthodox application of established principles for construing a statute.'

…

10. … However, the legislature did not expand the definition of 'loan' to include an unpaid present entitlement. The extrinsic materials, including the media release confirm what is obvious from the statute itself. The legislature deliberately enacted separate section (s 109UB, which was later replaced by Subdivision EA) that expressly provided that the existence of an unpaid present entitlement is not, by itself enough. Rather, the legislature included additional requirements that must be satisfied before a loan or dividend is deemed.

62. The annexure to the Applicants' submissions that sets out the legislative history to s 109UB and its replacement Subdivision EA of Division 7A is reproduced as Annexure A to these Reasons.

Issue 1(b) - Applicants' separate trust contentions

63. The Applicants' separate trust contention is that a beneficiary does not make a loan to a trust where an amount of trust income is set aside and held on a separate trust for the beneficiary'.^[34] AS [2]. The submission was that in the present case the entitlement to income was a function of a trust relationship and not a debtor and creditor relationship. The Applicants submitted:

45. First, the trustee had no obligation to pay money to Gleewin Investments in the relevant sense. Credit or financial accommodation requires allowing time to pay, or forbearing, a monetary obligation. The trustee's obligation, as trustee of each separate trust, was not to pay the relevant amounts to Gleewin Investments, but rather to hold them for Gleewin Investments absolutely. In contrast to having an obligation to pay those amounts to Gleewin Investments, the trustee was permitted to invest them on Gleewin Investments' behalf.^[35] AS [44]-[45].

…

47. Second, there is a fundamental distinction between a trust relationship and a debtor/creditor relationship as is implied by a loan or credit or other financial accommodation. Where the recipient of money is required to hold the money for the benefit of the other party (or a third party), there is a trust but not a debt. Where the recipient is only required to repay the same amount of money at a future time and is free to use the money as his or hers in the meantime, there is a debt but not a trust. This is, as is made explicit by the trust deed, a case of the former; the relevant amounts were required to be 'held by the Trustee on a separate trust for [Gleewin Investments] absolutely'.

48. It could never be suggested that a company that gives money to a trustee to be held on trust for the benefit of either the company or some third party or parties thereby makes a loan to the trustee, even under the extended definition in s 109D(3). Yet that is exactly equivalent to what has occurred here. Part of the 2005 Trust's income each year was set aside on a separate trust for the benefit of Gleewin Investments. The mere fact that Gleewin Investments could have called for payment of the amounts, but instead left them sitting on trust, as opposed to expressly

ATC 11514
giving the amounts to a trustee, could hardly turn the transaction into a loan as opposed to a simple trust relationship.

49. Indeed, the current facts are less like a loan, credit or financial accommodation than the example of a company giving money to a trustee because there was no consensual transaction. Gleewin Investments should no doubt be taken to have been aware that the separate trusts had invested the relevant amounts in the 2005 Trust given Mr Bendel was a common controller. However, awareness is not consent. The most that could be said is that Gleewin Investments acquiesced through its silence and decision not to call for payment. But acquiescence does not, without more, amount to financial accommodation.^[36] AS [47]-[49].

Issue 1 - Commissioner's contentions

64. The Commissioner's contentions concerning Issue 1 have two limbs:

(a) that Gleewin Investments made a loan as defined to Gleewin; and
(b) Subdivision EA neither informs the construction to be given to the s 109D(3) definition of a loan nor, in any event, has any operation on the present circumstances.

Issue 1.1 - Commissioner's loan as defined contentions

65. The Commissioner contends that:

(a) Gleewin Investments made a loan to Gleewin because Gleewin Investments:
- (i) provided a form of financial accommodation to Gleewin in that:
  
  57. The phrase 'any other form of financial accommodation' covers a consensual arrangement where a beneficiary does not require the amount of a distribution to be paid, or does not exercise a power to bring a trust to an end, and in consequence a trustee retains the use of funds but remains obligated to pay the amount of the distribution in the future. … [T]his conclusion accords with the phrase's ordinary meaning, context and purpose, as well as with the meaning given to similar statutory language by courts and tribunals in other statutory contexts.^[37] RS [57].
  
  and/or
- (ii) 'entered into a transaction which in substance effected a loan of money to [Gleewin]';^[38] RSFIC [61(b)].
(b) the 'Tribunal should not construe a provision in a way that departs from its natural and ordinary meaning unless it is plain that Parliament intended it to have some different meaning';^[39] RS [58].
(c) the term 'financial accommodation has a broad meaning which includes the provision of assistance that relates to money matters and thereby confers a pecuniary favour';^[40] RS [59].
(d) in '[t]he statutory context in which the term 'financial accommodation' falls to be interpreted here - Division 7A - indicates that a broad interpretation is appropriate, and the phrase 'any form of financial accommodation in subsection 109D(3) of the ITAA 1936 should be interpreted to cover an arrangement of the kind described in paragraph [57] above'.^[41] RS [61].
(e) the broad interpretation was supported by case law in other statutory contexts;^[42] RS [65]-[71].
(f) financial accommodation in the relevant sense should not be restricted to debtor/creditor relationships and that any analogy to shareholder, partner, settlor was misplaced;
(g) in the present circumstances:

25. the Relevant UPEs were recognised on the balance sheets of [Gleewin], where they were described as relating to the 'Beneficiaries' Current Account' in respect of Gleewin Investments which [Gleewin] recorded as a liability. The balance sheets made no reference to any sub-trust;^[43] RSFIC [25]. and

26. the funds representing the Relevant UPEs remained intermingled with funds of [Gleewin].^[44] RSFIC [26].

66. The Commissioner's primary case concerning the s 109D(3) loan question did not substantively or expressly engage with the separate trust contention but in oral submission did so. There the Commissioner indicated:

… [he didn't] dispute the existence of the separate trusts. …[T]he parties are in agreement that there were a number of potential rights and obligations … which

ATC 11515
included a right on the part of Gleewin Investments to … terminate the sub-trust: … [a] Saunders v Vautier right.

If it had exercised that right, the moneys would have come to it. Perhaps it's a little unclear as to the exact juridical basis on which one then traces that through. …

But … if Gleewin Investments have exercised its rights, the amounts which remained intermingled in the 2005 Trust would have been paid to it. And that the financial accommodation is found in the decision not to exercise that right with a result that the amounts remained intermingled in the 2005 Trust. And that's how the 2005 Trust was financially accommodated.

… Nothing was … set aside and then transferred to a separate bank account, for example.

…

… the Commissioner's case is that one finds the financial accommodation in this decision to refrain from calling for payment, which is the thing that allows the relevant funds to remain intermingled in the 2005 trust. One sees that accommodation reflected in the disclosures that are made in the financial statements for the 2005 trust and for Gleewin Investments. They recognise that - well, the 2005 trust recognises the liability in respect of Gleewin Investments, and Gleewin Investments recognised an asset in respect of the 2005 trust.'^[45] Transcript p 182 lines 35-46; p 183 lines 1-18 and 37-45.

Issue 1.2 - Commissioner's statutory context contentions

67. The Commissioner's Subdivision EA and statutory context contentions were largely responsive. The Commissioner contends that the existence of Subdivision EA of Division 7A and the legislative history do not indicate that the definition of loan in s 109D(3) excludes a 'consensual arrangement where a beneficiary does not require the amount of a distribution to be paid, or does not exercise a power to bring a trust to an end, and as a consequence a trustee retains the use of funds but remains obligated to pay the amount of the distributional in the future.'^[46] RS [57]. His submissions were to the effect:

(a) first that 'subsection 109D(3) does not expressly prevent a trust entitlement from giving rise to a "loan". It is very difficult to see what construction could be placed on the words of subsection 109D(3) to have such an effect - and the Applicants propose none';^[47] RS [80].
(b) second that 'construction of subsection 109D(3) under which a private company's failure to demand payment of a present entitlement is capable of giving rise to a "loan" does not result in Subdivision EA lacking meaning or proving "superfluous, void or insignificant" (c.f. AS[51] and [53]). If the private company does not have knowledge of the entitlement, then there will be no consensual arrangement of the requisite kind and consequently no financial accommodation, and Subdivision EA may operate. Accordingly, Subdivision EA is not otiose';^[48] RS [81].
(c) third, 'the legislative history and extrinsic materials 'cannot displace the meaning of the statutory text. Nor is their examination an end in itself'.^[49] RS [82], referring to Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at 519 [39] (French CJ and Hayne, Crennan, Bell and Gageler JJ). Nevertheless the Commissioner calls in aid extrinsic materials in the following terms:

83. '[i]n any event, the 27 March 1998 media release (from which the Applicants quote in Appendix I at [4]) indicates that an unpaid present entitlement was intended to be capable of giving rise to a 'loan' (within the meaning of subsection 109D(3)), with section 109UB being inserted into the ITAA 1936 to put it beyond doubt that Division 7A applied'.^[50] RS [83].

84. In addition, the explanatory memorandum which accompanied the Taxation Laws Amendment Bill (No. 3) 1998 (Cth) indicates that the draftsman of section 109UB assumed that, wherever a private company beneficiary has an unpaid present entitlement, the amount which is the subject of the entitlement would be held on a separate trust for the benefit of the company (and, seemingly, no other person). At [9.82], it states:

New section 109UB will apply if a private company, as a beneficiary of a

ATC 11516
trust estate, is or has been presently entitled to some or all of the net trust income which has not actually been paid. In such a situation the amount to which the company is presently entitled is held on secondary trust for the benefit of the company . The provision applies to any subsequent loan by the trustee to a shareholder (or associate) of the company. (Emphasis added.)

85. Against that background, it would be understandable if the draftsman also assumed that, if the company did not call for the payment of amounts to which it was entitled, it would not provide financial accommodation to any other person - so that it was only through a further transaction, such as a loan made by the trustee, that a shareholder of the private company (or an associate of the shareholder) could benefit from the company's distributed profits.

86. Fourth, there is no 'dual operation' of section 109D and Subdivision EA of the ITAA 1936 leading to the 'multiple taxation of the same event or amount' (cf AS[53]). In order for section 109XA to be enlivened, it must be the case that the company in question (here, Gleewin Investments) is or becomes presently entitled to an amount from the net income of the trust estate (here, the 2005 Trust) which is not paid to it. That condition is not satisfied here. That is because cl 3(5) of the Trust Deed provided for any amount set aside for Gleewin Investments to cease to form part of the 'Trust Fund' and to commence to be held on a separate trust. Accordingly, only section 109D applies. The Applicants have been assessed on that basis.

CONSIDERATION

Issue 1 - Does s 109D apply?

Was there a separate trust?

68. Resolving Issue 1 calls for findings of fact, and then a statutory interpretation task. In support of at least some of their competing contentions, both parties contend that a separate trust was either created or arose upon vesting entitlements to income, or distributing Gleewin's income each Year. The Applicants say so with the effect that creating a trust and thereafter not ending it does not involve any form of loan. The Commissioner says not ending the trust constitutes a loan and that Subdivision EA does not apply because the creation of the separate trust meant the entitlements to Gleewin's income had been paid. While the terms of clause 3(5) of the 2005 Trust Deed reproduced at [48] above state that '[a]ny amount set aside for any beneficiary… shall cease to form part of the Trust Fund and upon such setting aside… shall thenceforth be held by the Trustee on a separate trust for such person absolutely…', and clause 3(2) provides that determinations to pay, apply or set aside amounts for beneficiaries can be effectually made by passing a resolution or by placing such amounts to the credit of beneficiaries in the trust's books of account, and Gleewin on paper appears to have done both of these things, the Tribunal has some difficulty in accepting that a separate trust as conventionally understood arose in the present circumstances merely upon creation of a right to income. In conventional terms for a trust to exist there needs to be sufficient identity of the subject matter of the trust. In the present circumstances, notwithstanding these clauses, it is not clear that any separate trust in this sense could have arisen.

69. When needed to resolve issues concerning disputed responsibility for including shares of shares of s 95 net income in assessable income, Courts have frequently been called upon to determine whether a beneficiary is presently entitled to a share of the income of the trust estate. Carter's case is an example.^[51] F. C. of T. v Carter [2022] HCA 10 , (2022) 399 ALR 521 . It is said that the s 97 condition is satisfied

if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.^[52] Carter at [2022] HCA 10 [3] Referring to and relying on Harmer v F. C. of T. (1991) 173 CLR 264 at 271 , and F. C. of T. v Bamford (2010) 240 CLR 481 At 505 [37] .

70.

ATC 11517

These expressions and formulations focus upon the question as to whether a beneficiary is sufficiently entitled to meet the s 97 threshold. At times these expressions and formulations are accompanied by remarks that give an appearance of describing the nature of the rights created when a beneficiary is said to be presently entitled to a share of the income of a trust estate. In Carter for example the joint reasons said:

Specifically, is a beneficiary's present entitlement under s 97(1) - the present legal right to demand and receive payment of a share of the income of a trust estate - to be determined immediately prior to the end of a year of income by reference to the legal relationships then in existence, or can events after the end of the year of income, which may affect or alter those legal relationships, be considered?^[53] Carter at [2022] HCA 10 [4].

71. These comments were the part of a formulation of a question as to when the s 97 threshold condition is to be tested, and whether events post that time could change taxable facts or assessment outcomes. These comments were not an analysis of the nature of rights created when trust income is distributed.

72. Accordingly, these and similar expressions of the threshold needed to meet s 97 are not necessarily an expression of the nature of the interest that is created in a beneficiary upon either an action being taken to vest income entitlements (e.g., a distribution resolution of the trustee) or a default styled vesting in the absence of any action. Viewed this way, it might be dangerous to assume that description of the s 97 threshold condition is necessarily the same as the nature and character of an entitlement to trust income.

73. Gageler J's analysis in Fischer v Nemeske^[54] Fischer v Nemeske Pty Ltd (2016) 257 CLR 615 , 650-651 at [96]-[100] and [104] . is more to the point. His honour was addressing the nature of entitlements created when discretionary vesting powers were exercised. There he said:

96. Once it is accepted - as it was in In re Baron Vestey's Settlement (121) and in Commissioner of Inland Revenue (NZ) v Ward (122) - that a trustee can 'apply' trust property to the advancement of a specified beneficiary by resolving to allocate trust property unconditionally and irrevocably to the benefit of that beneficiary, it is difficult to see any reason in principle why such an unconditional and irrevocable allocation of trust property must take the form of an alteration of the beneficial ownership of one or more specific trust assets. The allocations in each of those cases were of specified proportions of a single monetary amount which stood to the credit of a bank account which the trustee held as trust property at the time of the resolution. The allocations were held to be sufficient to result in the specified beneficiaries to whom the allocations were made each obtaining an immediate absolute beneficial entitlement to the sums so allocated. It appears that the sums in question in the first case were soon afterwards paid into separate bank accounts, but that fact does not appear to have been treated as relevant to the holding. The sums in question in the second case were not paid into separate accounts for many years.

97. In neither of those cases was there any suggestion that the trustee's exercise of the power to apply trust property involved a resettlement of trust property so as to result in the creation of a new trust. The exercise of the power by way of unconditional and irrevocable allocation of trust property was seen rather to result in the crystallisation of an immediate absolute beneficial entitlement in respect of property which, before and after the resolution of the trustee, remained property which the trustee held on trust under the terms of the existing settlement (123).

98. The trustee's power to apply trust property having been held in each of those cases to be available to be exercised by means of an unconditional and irrevocable allocation of trust property, the consequence that the exercise of that power effected an alteration of beneficial entitlements in property which the trustee continued to hold on trust under the terms of the existing settlement was orthodox as a matter of principle. It was also unremarkable as a matter of practice. The power to apply trust property, as interpreted in the cases, was but an example of a power conferred on a trustee by the terms of settlement to

ATC 11518
bring about an alteration of beneficial entitlements: the power was of such a nature that the exercise of the power was 'so to speak, to be read into' the existing settlement with the result that the beneficial entitlements as altered by the exercise of the power were to be recognised and administered by the trustee after the exercise of the power 'as if the settlement had actually provided' for them (124).

99. An absolute beneficial entitlement to some part of a fund of property that is held on trust need not be reflected in an absolute beneficial entitlement to the whole or some part of any specific asset within that fund (125). That must be so whether the absolute beneficial entitlement to some part of a fund of property that is held on trust is defined by the terms of the trust settlement itself, or whether such absolute beneficial entitlement to some part of a fund of property that is held on trust is defined by an exercise of a power conferred on a trustee under the terms of a trust settlement. Whether or not a particular beneficial entitlement to some portion of a trust fund is reflected in a beneficial entitlement to the whole or some part of a specific asset within that fund depends on the terms of the trust settlement.

100. Furthermore, an absolute beneficial entitlement to some part of a fund of property may be defined as an entitlement to be paid a sum of money out of the fund of property that is held on trust, irrespective of whether or not the assets within the fund are currently held in monetary form (126). Again, it depends on the terms of the trust settlement.…

…

104. … On and from the making of the resolution, the Trustee continued to hold such trust assets as might from time to time comprise the Trust Funds subject to an immediate unconditional obligation on the part of the Trustee to account to Mr and Mrs Nemes in the sum of $3,904,300 out of the Trust Funds. That obligation arose not outside the Deed but under the Deed. It was immediately enforceable in equity by Mr and Mrs Nemes against the Trustee in the same way as if an unconditional obligation to account to Mr and Mrs Nemes in that sum had been expressed as a term of the Deed. In order to perform that equitable obligation, the Trustee had at its disposal the powers conferred by cl 4(e), cl 4(f) and cl 8 of the Deed.

74. Rights can be created in beneficiaries to monetary sums to be met, or satisfied, from the assets of a trust by exercising powers to pay, apply, or set aside income (or capital) of a trust without changing beneficial ownership of any asset of the trust by way of, for example, re-settlement.

75. In circumstances where an 'entitlement to some part of a fund of property that is held on trust [is] not … reflected in an absolute beneficial entitlement to the whole or some part of any specific asset within that fund', as is the case presently, the beneficiary's interest in the income of the trust is thus 'an equitable obligation' on and of the trustee. That equitable obligation reflecting the beneficiary's interest in the income of the trust is not property the trustee owns or controls. Income is not property. At times income is a character given to a receipt, entitlement, or profit. And, at other times it is a measure of performance, of a fund divisible among a class, or of an entitlement. Cash or money, receivables, trading stock or some other blend of assets that represents the income are property. If any property is created by the resolution to distribute or vest entitlements to income, it is the property of the beneficiary, namely the right to be paid. Such a resolution does not create property held by the trustee. The trustee has an obligation, with corresponding rights of indemnity or exoneration.^[55] Harold Ford et al, The Law of Trusts (Thomson Reuters, last reviewed 26 July 2021) [13.030]; Gino Dal Pont, Equity and Trusts in Australia (Thomson Reuters, 8 ^th ed, 2022) [23.120].

76. In 'The Law of Trusts' the author's state.

'where the subject matter of a trust is a defined part of fungible property to which the settlor holds title, an issue may arise as to whether that subject matter is sufficiently certain to constitute trust property…

The required certainty will not be present where the words alleged to create a trust do not refer to any objective criterion by which to ascertain the part that is subject to the trust.'^[56] Harold Ford et al, The Law of Trusts (Thomson Reuters, last reviewed 26 July 2021) [4.9050].

77. The present circumstances are that Gleewin did not make any appropriation of any

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asset, nor any investment decision regarding the Trust Funds referrable to any income entitlements and has not identified any asset or property held on account of entitlements to income. At the end of each Year and thereafter there was on the facts of this case, no identifiable property that was held for Gleewin Investments absolutely.^[57] See [41] and [51].

78. The power contained in clause 6(5) does not assist to deem any investment in 'intermingled assets' to be held as corpus of any separate trust in the conventional sense for Gleewin Investments.

79. In the present circumstances, where it is not possible to identify any asset or property held on any separate trust as conventionally understood, notwithstanding the acceptance of the parties that a separate trust was created, what was created upon passing resolutions to distribute Gleewin's income was a right or entitlement for the beneficiary coupled with the corresponding obligation of the trustee of a nature contemplated by what Gageler J said in Fischer v Nemeske.

80. Accordingly, the Tribunal does not accept contentions that a separate trust in fact arose in any conventional sense that had the effect of discharging or replacing the obligation to pay entitlements to income. Those entitlements to be paid shares of Gleewin's income continued to exist.

81. Each party's contentions that were based on the concept of a separate trust having the effect that the entitlements to income were discharged or paid are not accepted.

The statutory context

82. The definition of a loan in s 109(3) of the 1936 Assessment Act uses very wide language. Similar language has been used in other statutory settings, and the authorities concerning those settings give a generous and wide construction to the term.^[58] Re Montgomery Wools Pty Ltd (As Trustee for Montgomery Wools Pty Ltd Super Fund) and F. C of T. (2012) 87 ATR 282; F.C. of T. v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 ; International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) 246 CLR 455 . Without more, a similar approach and construction could be expected in relation to s 109(3).

83. The statutory settings where a similar definition of loan has been given a wide or ambulatory construction do not have an equivalent to the former s 109UB and the current Subdivision EA. And those settings do not have a focus to tax the recipient of in-substance distributions of company profits in the hands of the recipient of those in-substance distributions.

84. At the outset, the Tribunal does not accept a number of the Commissioner's contentions.

(a) First, and for two reasons, the Tribunal cannot accept the contention that Subdivision EA does not apply in the present circumstances because the relevant unpaid present entitlements were held on a separate trust, with the entitlement to Gleewin's income being satisfied or paid.
- (i) As noted above, the Tribunal is not satisfied that there was any separate trust in the conventional sense.
- (ii) Secondary trust circumstances are specifically contemplated as within the Subdivision EA ambit: they referred to in the EM.^[59] EM [9.82]. Even in a secondary trust circumstance, the party intended to be taxed is the party in receipt of the in-substance loan funds, here Mr Bendel, through the Subdivision EA mechanism because, in substance, corporate profits are being provided by way of loan to a shareholder via the trust.
(b) Second, the press release of 27 March 1998 does not indicate that an unpaid present entitlement of a corporate beneficiary is intended to be a loan by the corporate beneficiary to the trustee of the relevant trust. It is a misleading half-truth to contended ^[60] See [68(c)] above that this it does. What is revealed by the media release is a focus on a combined circumstance of an unpaid present entitlement and a contemporaneous loan by the trustee to the shareholder (or associate of the shareholder) in the corporate beneficiary. The release acknowledges that these circumstances are in substance a loan, but not a loan to the trust. Rather, the in-substance loan is from the private company to the shareholder (or associate) effected via the trust. The proposed manner by which that situation was intended to be dealt was by s 109UB (and now Subdivision EA), not s 109D. The loan from the trust is taxed in these circumstances on the same basis as would a loan from its corporate beneficiary directly to the shareholder.

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(c) Third, the proposition Subdivision EA not being otiose because some unpaid present entitlements might not be a loan because there is no consensual arrangement that leaves the entitlement unpaid, e.g., because the corporate beneficiary is unaware of the entitlement, is not to the point. The relevant contextual point, and question, is the role and operation of Subdivision EA when there is a consensual arrangement that leaves the entitlement unpaid, which the Commissioner contends makes the unpaid entitlement a loan, and there is a separate loan by the trustee to a shareholder (or associate of a shareholder) of the corporate beneficiary. Demonstrating that Subdivision EA and s 109D can have independent operation does not exclude the proposition that they can have simultaneous operation. Just because there may be circumstances where, on the Commissioner's construction of s 109D(3), Subdivision EA applies when s 109D does not, does not exclude circumstances, more likely to occur in closely held arrangements (as here) with all relevant entities controlled by the same individual/s, where on that same construction both s 109D and Subdivision EA would operate in relation to the same UPE.
(d) Fourth, and similar to, or overlapping with, the third, that on the Commissioner's contended for correct construction of s 109D(3), there is no overlap between s 109D and Subdivision EA.

85. The task of the Tribunal in construing s 109D(3) requires it to:

(a) consider, if not begin with, the context in which s 109D(3) appears;^[61] See R v Jacobs Group (Australia) Pty Ltd [2023] HCA 23 Kiefel CJ, Gageler, Gordon, Steward, Gleeson and Jagot JJ at [29] referring to Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381 [69] . and
(b) construe potentially competing provisions in a manner which 'give[s] effect to harmonious goals''.^[62] See ENT19 v Minister for Home Affairs [2023] HCA 18 at [87] Gordon, Edelman, Steward and Gleeson JJ, referring to Project Blue Sky (1998) 194 CLR 355 at 381-382 [70] .

86. The evident purpose of Division 7A is to ensure that shareholders of private companies are not able to enjoy effective distributions of company profits in a tax-free form. That purpose is set out in s 109B of the 1936 Assessment Act. That purpose is also amply demonstrated by the range of operative provisions which identify various means by which corporate resources can be passed to, or enjoyed by, shareholders and associates of shareholders, and then quantify taxable amounts by reference to the benefit enjoyed and the relevant distributable surplus, which is a surrogate a company's realised and unrealised profits. This purpose is also buttressed by the range of supplementary provisions which seek to ensure that the primary rules are not avoided, e.g., through back-to-back or tripartite arrangements etc.

87. Beyond the text of Division 7A, if there is any further need to demonstrate its purpose, that purpose was explained in the EM ^[63] Explanatory Memorandum, Taxation Laws Amendment Bill (No. 3) 1998. as ' …to ensure that private companies will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payments or loans'.^[64] EM, [9.2]. Former s 108 was perceived to have had problems because it ' … operate[d] only when the Commissioner form[ed] the opinion that the amount loaned, paid or otherwise credited, represent[ed] a distribution of profits [which required him to] … consider many factors and analyse much information, which usually [was] not … available unless the Commissioner conduct[ed] an audit … [leaving] … many loans which should be taxable as dividends [not taxed].'^[65] EM, [9.10]. The new set of rules would operate ' … automatically to deem advances, loans and amounts otherwise credited by private companies to shareholders (and their associates) to be assessable dividends to the extent that there are realised or unrealised profits in the company.'^[66] EM [9.11]. The policy is also manifested in the Assistant Treasurer's press releases of 9 and 27 March 1998 ^[67] Referred to at EM [9.12]. explaining the need for introduction of integrity measures so as to ensure that the proposed rules could not be avoided in ways that facilitated distribution of corporate profits without bearing taxation liability.

88. Section 109UB was explained by Senator Kemp in the following terms:^[68] The Hon Rod Kemp MP, ‘Taxation of Distributions Disguised as Loans from Private Companies’ (Media Release, 27 March 1998).

Media release, 27 March 1998:

Taxation of Distributions Disguised as Loans from Private Companies

I am announcing today additional amendments to proposed Division 7A of the Income Tax Assessment Act 1936 which was introduced into the House of Representatives in Taxation Laws

ATC 11521
Amendment Bill (No.7) 1997 on 4 December 1997.

The new Division 7A is intended to ensure that payments, loans, or debts forgiven by private companies to shareholders (and associates of shareholders) are treated as assessable dividends to the extent that there are realised or unrealised profits in the company (unless they come within specified exclusions).

On 9 March 1998 I announced the Government's intention to amend the Bill to ensure that the proposed legislation will not apply to payments by private companies to, or on behalf of, shareholders in their capacity as employees. I also announced that the Government was considering representations received on other aspects of the proposed legislation. In response to those representations the Government will make further amendments to the proposed legislation to ensure that the provisions operate as intended.

Accordingly, the following amendments (which are attached to this press release) will be moved when the Bill is debated in the House of Representatives.

…

Trust distributions to corporate beneficiaries: It has been argued that the proposed legislation does not apply to arrangements where a corporate beneficiary has become presently entitled to net income of a trust and the amount is not paid by the trustee to the corporate beneficiary, but continues to be held by the trustee who then provides a loan to a shareholder (or their associate) of the corporate beneficiary. These sorts of arrangements should be caught by Division 7A because, in substance, a loan of money from the private company to the shareholder (or their associate) has been effected via the trust. The proposed legislation will be amended to deal with this situation.

89. Subdivision EA replaced s 109UB. The background to the replacement Subdivision EA can be traced to the Board of Taxation's Taxation of Discretionary Trusts Report ^[69] Board of Taxation, Taxation of Discretionary Trusts (Report, November 2002). which included 'addressing any tax abuse in the trust area.'^[70] Taxation of Discretionary Trusts Report, [3].

90. The Taxation of Discretionary Trusts Report noted 'The ambit of the deemed dividend rules is extended to trusts by section 109UB … which applies… to a private company that is a beneficiary of a trust estate.'^[71] Taxation of Discretionary Trusts Report, [78]. The Report then described concerns with the sections 'effectiveness'^[72] Through the distribution of unrealised capital gains as capital distributions and not as loans. and its 'unfairness'.^[73] Taxation of Discretionary Trusts Report, [78].

91. On the same day of the Taxation of Discretionary Trusts Report was released (12 December 2002) the Treasurer announced that the government intended to legislate new provisions in replace of section 109UB in accordance with the Boards recommendations.^[74] The Hon Peter Costello MP, ‘Taxation of Discretionary Trusts’ (Media Release, 12 December 2002).

92. The 2004 EM ^[75] Explanatory Memorandum, Tax Laws Amendment (2004 Measures No. 7) Bill 2004. referenced the above media release and the Board of Taxations recommendations and stated that the new Subdivision was 'designed to ensure that a trustee cannot shelter trust income at the prevailing company tax rate by creating a present entitlement to a private company without paying it and then distributing the underlying cash to a shareholder of the company.'^[76] 2004 EM, [8.2].

93. Under a heading 'Application to loans' the 2004 EM provided,

Application to loans

8.18 New subsection 109XA(2) applies where:

• a trustee makes a loan to a shareholder (or their associate) of a private company (other than to a shareholder or associate that is a company); and

• the private company is, or becomes, presently entitled to an amount from the net income of the trust; and

• all or part of that present entitlement remains unpaid before the earlier of the due date for lodgement and the date of lodgement of the trust's return for the income year in which the loan takes place.

[Schedule 8, item 3, subsection 109XA(2); item 5, paragraph 109XA(2)(b)]

• … .

Example 8.4

A private company has a present entitlement to $5,000 of accounting income of a trust estate that remains unpaid.

ATC 11522
The trustee makes a non-commercial loan to a shareholder of the private company of $20,000. The loan is not repaid by the earlier of the due date for lodgement and the actual date of lodgement of the trustee's return of income for the trust in the year in which the loan was made.

The loan will attract the operation of the new rules and, subject to the operation of the remainder of the rules contained in new Subdivision EA and Division 7A, a deemed dividend of $5,000 will arise in the hands of the shareholder.

94. Former s 109UB and Subdivision EA particularly focus on a situation with two features: an entitlement to trust income vested in a corporate beneficiary and a contemporaneous loan to a shareholder (or an associate of a shareholder) of the corporate beneficiary made by the trustee bearing the outstanding obligation to the corporate beneficiary. These provisions address a situation of the corporate beneficiary being regarded as in substance lending corporate funds to a shareholder (or associate) of the company.

95. The existence of this statutory setting cannot be ignored and needs to be accommodated in affording a construction to the term loan in s 109D(3). As noted, a construction that gives effect to harmonious goals is to be preferred.

96. Further, the uncertainty associated with the relationship created by a vesting of an entitlement to income without paying any or all of that vested entitlement to the beneficiary and without separating out any assets of the trust so as to satisfy that entitlement is consistent with a Parliamentary intention to deal with unpaid present entitlements owed to corporate beneficiaries of discretionary trusts in a particular way. Consistent with Division 7A's policy of taxing shareholders (or associates) of companies who enjoy the benefit of company profits in informal ways, that intention is only raise a tax liability on an amount taken to be a dividend in circumstances where there is both an unpaid present entitlement to a corporate beneficiary and a loan made by the Trustee to a shareholder or an associate of a shareholder of the relevant company.

97. The Commissioner contends that Subdivision EA is a belts and braces provision 'to put it beyond doubt that Division 7A applied'. The proposition that Division 7A was intended to apply to some unpaid present entitlements of corporate beneficiaries of trusts can be accepted. Section 109UB and its successor Subdivision EA were enacted to effect that purpose.

98. To accept the Commissioner's proposition that there is a loan to the Trustee meeting the terms of s 109(3) feeding into an assessable dividend through the combined operation of Division 7A and s 44 and Division 6 of the 1936 Assessment Act, raises the spectre of taxing two people in respect of precisely the same underlying circumstance, namely the same UPE. Two people would be taxed, one through Division 6 and the other through Division 7A, where a trustee has an unpaid present entitlement to a corporate beneficiary of the trust and within the prescribed time frames the trustee has lent money to a shareholder of that corporate beneficiary (or to an associate of such a shareholder). If that same shareholder or shareholder's associate were the relevant beneficiary of the trust, and properly taxed under Division 6, that person would have two amounts included in assessable income, and, for the reasons set out in relation to Issue 2 below, would not be saved by s 6-25. There are known problematic or inappropriate outcomes with the Division 6 system of taxing trust income.^[77] See Davis v F. C. of T. (1989) ALR 195 at 230 Hill J endorsed in F. C. of T. v Bamford (2010) 240 CLR 481 at [17] French CJ, Gummow, Hayne, Heydon and Crennan JJ. Those outcomes have been accepted as problematic, but a matter for the Government to fix. However, the Tribunal is not aware of any similar acceptance of problematic or inappropriate outcomes extending to permit the system to tax two people as a consequence of events starting in the same circumstance and allowing the Commissioner to choose which taxpayer is assessed, or to assess and collect from both.^[78] See Hyder v F. C. of T. [2022] FCA 264 , Greenwood J., where a like proposition in a similar circumstance was rejected. Nowhere is there any evidence of any relevant intention that there be two assessable dividends in respect of the same unpaid present entitlement. There are two relevant absences from Division 7A, at least one of which would be needed to accept the Commissioner's contentions. First, Division 7A does not have any tie breaker provision that produces a single outcome among two otherwise operative provisions that might

ATC 11523

arise from precisely the same unpaid present entitlement relationship.^[79] C.f. 1997 Assessment Act, s 974-5(4). The s 109RD relieving discretion is not such a provision. That relieving discretion has a precise gateway threshold, an honest mistake, or an inadvertent omission. Section 109RD is not directed to fairness considerations outside those gateways. For example, s 109RD is not directed to relieving a person from tax liability when they did not receive any benefit of the sum taxed. Second, Division 7A does not have any express rule allowing multiple deemed dividends arising out of the same UPE circumstance between trustee and corporate beneficiary.

99. The Subdivision EA pathway to a Division 7A assessable dividend was not intended to create a second taxable dividend in addition to a s 109D dividend arising out of the same unpaid present entitlement. Nor is Subdivision EA expressed or intended to operate in a limited way, only taxing those circumstances that fall within its terms which do not otherwise fall within s 109D, for example because the corporate beneficiary is unaware of the UPE and therefore cannot be said to have taken any step that might be said to be a loan attracting s 109D. Section 109B is not a limiting section that prevents Subdivision EA from operating in circumstances where its clear terms are met. Section 109B simply reveals that Subdivision EA is an additional pathway to cause an amount to be taken to be a dividend, an additional pathway to supplement other pathways that on their own do not deliver the intended outcome. Further, that pathway required particular additional circumstances to be present before taxable dividends arose such that not all unpaid present entitlements are to be taken to be dividends.

100. Testing the Commissioner's construction of the definition of loan in s 109D calls for a search for a discernible criterion that would identify any circumstance where Subdivision EA does not apply when an unpaid present entitlement of a corporate beneficiary exists concurrently with a loan by the trustee to a shareholder (or shareholder's associate) of that corporate beneficiary. The existence a separate trust reflecting the UPE cannot be that criterion. The extrinsic materials describe this circumstance as one where Division 7A, through Subdivision EA, is to apply when the trustee has made or makes a loan to the corporate beneficiary's shareholders or their associates. A corporate beneficiary's knowledge, or lack thereof, of the UPE is not a criterion that could make a difference given it is not expressed to be a limiting factor in Subdivision EA, or anywhere else. There isn't a discernible criterion in Division 7A to prevent Subdivision EA from operating in accordance with its terms. Because Subdivision EA is specific to a circumstance, when that circumstance is present, Subdivision EA is the lead provision.

101. Having regard to:

(a) the policy of Division 7A to tax those who in substance enjoy the benefit of corporate profits without bearing taxation that would arise had the company paid dividends in the usual way;
(b) statutory construction principles that call for
- (i) regard to statutory context and legislative history; and
- (ii) potentially competing provisions to be construed in a manner which 'gives effect to harmonious goals';
(c) there being no tiebreaker provision which mandates which of two competing assessing provisions would apply if an unpaid present entitlement constituted a loan within the meaning of s 109D(3);
(d) the s 109RB discretion not being designed to allow relieving discretions to be exercise outside the s 109RD(1)(b) gateways of honest mistakes and inadvertent omissions and thus not a discretion that would relieve inappropriate double taxing;
(e) Subdivision EA being a specific, and therefore lead, provision containing an express set of rules that can be regarded as a particular path has been chosen to deal with the taxation effect of unpaid present entitlements in favour of corporate beneficiaries in prescribed circumstances;
(f) the lack of clarity as to the nature of an unpaid present entitlement and the separate trust concept often broached in conjunction with the unpaid present entitlement topic;
(g) the expressed explanation accompanying s 109UB, the predecessor of Subdivision EA, to the effect:
- ATC 11524
  (iii) that an unpaid present entitlement in favour of a corporate beneficiary and a contemporaneous loan by the trustee to a shareholder in the corporate beneficiary (or associate) is in substance a loan by the company to the shareholder; and
- (iv) that an amount to which a company is entitled 'held on a secondary trust for the benefit of the company' is regarded as unpaid and within the ambit of s 109UB;
(h) the operation of Subdivision EA which taxes the shareholder in the foregoing circumstances as if the company had lent money directly to that shareholder which falls squarely within the Division 7A policy framework;
(i) there being no provision in either of the Assessment Acts that anyone points to that expressly allows assessment of two people arising out of the same circumstance with one of those people potentially not enjoying any benefit of the corporate profits that are the underlying cause of the assessment,

the necessary conclusion is that a loan within the meaning of s 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust.

102. For the foregoing reasons the answer to the question in Issue 1 is no.

ISSUE 2 IF GLEEWIN INVESTMENTS DID MAKE LOANS (ISSUE 1) DOES S 6-25 APPLY

103. It is strictly unnecessary to address this issue. Being fully argued and not involving any discretions, it is appropriate in the circumstances to do so.

104. The Applicant's submission focuses on the use of the term's 'amount' and 'same amount'. The submission used as an example the Commissioners 2015 adjustments.

'Under the Commissioner's approach, Gleewin Investments was taken to have made a loan to the 2005 Trust of $840,529 but some of that amount was paid to Gleewin Investments which the Commissioner treats as repayments of the 'loan'. He therefore says a deemed dividend of $807,417 arose during the 2016 income year.

The result of that deemed dividend is that $807,417 is included in the assessable income of the 2005 Trust for the 2016 income year. But that $807,417 is part of the $840,529 that was the 2005 Trust's trust income for 2015, all of which was included in assessable income for that year. In other words, the $807,417 would be included in the 2005 Trust's assessable income twice, once in 2015 and once in 2016. That is contrary to s 6-25, which provides that the amount should be included in assessable income only in the first year (2015) and not in any other income year.

That the $807,417 included in 2016 is the 'same amount', or part of the 'same amount', as that included in 2015 can be seen by considering what has happened to the $807,417. It was derived as income by the 2005 Trust in 2015 and, appropriately, included in assessable income in that year. It was then set aside for the benefit of Gleewin Investments and held on separate trust. It is purely because it was set aside, and not paid to Gleewin Investments, that the Commissioner says that a 'loan' and therefore a deemed dividend arose. Nothing happened to the $807,417, other than it being set aside, to change its character or to turn it into a different amount. It remained the same amount as was initially included in the 2005 Trust's assessable income.'

105. When it was introduced s 6-25 was explained in the following way:

Relationships among provisions about assessable income [Clause 6-25]

An amount of income may be included in assessable income by more than one provision of the law.

Under the existing Act, there are no express rules about what happens in such cases, although there is a presumption against double taxation.

The new law will specifically state the rules for when this happens.

ATC 11525
If an amount falls within 2 or more provisions, it can only be assessable once. In such a case, the amount would be assessable under the most appropriate provision. You would determine the most appropriate provision taking into account, where relevant, the rule about the effect of specific assessable income provisions on ordinary income (see discussion about subclause 6-25(2) below).

If an amount is both ordinary income, and included in your assessable income by a specific provision, the specific provision will apply rather than the court-developed rules about ordinary income. However, this will not be the case if a contrary intention is apparent [subclause 6-25(2)].

An example of a contrary intention is in the calculation of a capital gain, in a case where the disposal of an asset would also produce ordinary income assessable under clause 6-5. In that case, section 160ZA of the Income Tax Assessment Act 1936 provides that the rules about ordinary income prevail, so that a capital gain is reduced by the amount that is assessable under the ordinary rules. Thus, the capital gains provisions only have a residual operation.^[80] Explanatory Memorandum, Income Tax Assessment Bill 1996.

106. Section 6-25 uses the compound term 'same amount'. That compound term requires the relevant amount to be the same in its identity, for example a dividend of a particular amount paid by a particular company on a particular date to a particular shareholder in respect of a particular shareholding that might be assessable as a consequence of both s 6-5 of the 1997 Assessment Act and s 44 of the 1936 Assessment Act. The compound term 'same amount' does not embrace amounts of a different identity that may have a historical connection. A dividend paid by a company from a profit derived by a company is not the same amount as the profit notwithstanding the closeness of the historical connection and values of the amounts.

107. In the present circumstances there are two amounts, not the same amount.

(a) First there was an amount that has been assessed as a share of s 95 net income having its origins in entitlements to distributable income of a trust estate.
(b) Second, there was a different, and presently disputed amount assessable because, by reference to further events, the 1936 Assessment Act required a further calculation of a separately identified amount to be included in assessable income.

108. The amount taken to be a dividend paid by Gleewin Investments to Gleewin was not the same as the amount determined to be assessable income by operation of ss 95 and 97 for Gleewin Investments. The threshold condition for s 6-25 to apply does not arise in the present circumstances.

ISSUE 3 - IF THE ANSWERS TO ISSUES 1 AND 2 ARE YES AND NO, RESPECTIVELY, WILL THE TRIBUNAL EXERCISE THE S 109RB DISCRETION?

109. For Gleewin Investments, the outcome concerning Issue 1 makes it necessary to consider Issue 3 only to the extent of the effect of the $42,252 and $9,431 loans from Gleewin Investments to Gleewin. It is clear that Gleewin retained amounts belonging to Gleewin Investments outside the UPE context. No basis has been advanced for exercise of the discretion in relation to these non UPE amounts.

110. For Mr Bendel, these matters ought be held pending the Commissioner's reconsideration.

ISSUE 4 PENALTY

111. For Gleewin Investments, the outcome concerning Issue 1 again makes it necessary to consider Issue 4 only to the extent of the effect of the $42,252 and $9,431 loans from Gleewin Investments to Gleewin. It is clear that Gleewin retained amounts belonging to Gleewin Investments outside the UPE context. No basis has been advanced concerning penalty or remission discretions in relation to these non UPE amounts. Mr Bendel is a registered tax agent to whom the outcome of retaining amounts belonging to a company should have been obvious. Any tax shortfall as a consequence of these loans should attract penalty at the same rate and not be remitted.

112. For Mr Bendel, again, these matters ought be held pending the Commissioner's reconsideration.

ATC 11526

DECISION

113. The objection decisions are set aside.

(a) Gleewin Investments' income tax objections are remitted to the Commissioner for reconsideration by the Commissioner having regard to loans of $42,252 and $9,431 which do not have their origins in unpaid present entitlements to income of the 2005 Trust.
(b) Gleewin Investments' objections to its penalty assessments be recalculated at the same rate without remission based on any reduced tax shortfalls with respect to loans of $42,252 and $9,431.
(c) Mr Bendel's objections be remitted to the Commissioner for reconsideration by the Commissioner having regard to the findings of fact and reasons herein, including the loans of $42,252 and $9,431 which do not have their origins in unpaid present entitlements to income of the 2005 Trust, with such consideration to include whether Mr Bendel has established that the amended assessments that were the subject of the objections were excessive having regard to the provisions of Subdivision EA of Division 7A of the 1936 Assessment Act, and the principles articulated in
Australian and New Zealand Savings Bank Ltd v Federal Commissioner of Taxation (1993) 42 FCR 535;
Federal Commissioner of Taxation v Wade (1951) 84 CLR 105 and
Federal Commissioner of Taxation v Reynolds (1981) 34 ALR 463.

[ CCH Note: Annexures A, B and C have not been reproduced]

Footnotes

^[1] Income tax Assessment Act 1936 (Cth).
^[2] Lodgment day within the meaning of 1936 Assessment Act, s 109D(6).
^[3] The Steven Bendel 2005 Discretionary Trust, created by deed of settlement of 24 June 2005 (“2005 Trust Deed”) between Benjamin Nathan Orbach as settlor and Gleewin Pty Ltd (ACN 075 582 535) as trustee.
^[4] Gleewin Pty Ltd. Unless the context suggests the contrary, all references to Gleewin are a reference to Gleewin in its capacity as trustee of the 2005 Trust, and references to Gleewin’s assets, liabilities, expenses, income, financial statements, obligations, entitlements, and activities etc., are references to the assets, liabilities, expenses, income, financial statements, obligations, entitlements, and activities etc., of Gleewin in that capacity.
^[5] Gleewin Investments Pty Ltd.
^[6] A Year being a year of income, normally (as is applicable in the present circumstances) a 12-month period that ends on 30 June in a calendar year.
^[7] Mr Bendel was also described as the public officer in Gleewin Investments’ tax returns.
^[8] Distributed in the sense that the Trustee has exercised a discretionary power to pay, apply or set aside amounts to and/or for Gleewin Investments.
^[9] Applicants’ Statement of Facts, Issues and Contentions dated 6 June 2022 (“ASFIC”) [28(a)]. The Applicants’ submissions dated 26 August 2022 (“AS”) at [22(a)] express the issue in a slightly different way without any substantive change in meaning.
^[10] Respondent’s Statement of Facts, Issues and Contentions dated 24 December 2021 (“RSFIC”) [5(a)].
^[11] Respondent’s submissions dated 26 September 2022 (“RS”) [2].
^[12] RS [54].
^[13] Income tax Assessment Act 1997 (Cth).
^[14] T axation Administration Act 1953 (Cth).
^[15] See Devaynes v Noble (Clayton’s case) (1816) 35 ER 781 .
^[16] Gleewin Investments T Documents GI-T48 Audit Position Paper dated 21 December 2018.
^[17] The 2005 Trusts Financial Statements included an asset ‘Beneficiaries Current Account Steven Bendel’ at GI-T17.
^[18] GI-T42.
^[19] It was accepted by the parties that the date was a typographical error and should read 16 December 2009.
^[20] An account maintained in Gleewin’s financial records called ‘Beneficiaries Current Account Steven Bendel’.
^[21] Offword Bunby 2007 Unit Trust was wound up.
^[22] Distributions were also made from the Port Sorell Shopping Centre Unit Trust and the Bendel 1992 Trust which had previously borrowed from the 2005 Trust. The closing current asset from these trusts was after adding the distributions less than the borrowed amounts. A running balance account was kept in 2016. Although the accounting for the UPEs is unclear, payments were made in excess of the distributions.
^[23] GI-T17, see 30 June 2016 Balance Sheet showing current assets of Bendel 1992 Trust, Bendel 2009 HJ Trust, Bendel Partners Unit Trust.
^[24] An account maintained in Gleewin’s financial records called ‘Beneficiaries Current Account Gleewin Investments Pty Ltd’.
^[25] The Share of Profit amounts in Table 4 are the same as the amounts of the 2005 Trust’s income to which Mr Bendel became entitled as shown in Table 3. No significance should be attached to the different nomenclature as they are the same amounts.
^[26] The account in Gleewin Investments is entitled ‘Current Assets Steven Bendel 2005 Discretionary Trust.
^[27] Further Supplementary T Documents FST-11.
^[28] See [39(c)] above.
^[29] $100 in each Year. The paid-up capital of the company was 100 ordinary shares of $1.
^[30] GI-T35.
^[31] Transcript p 56 lines 28-31.
^[32] AS [50]-[54].
^[33] AR [9]-[10].
^[34] AS [2].
^[35] AS [44]-[45].
^[36] AS [47]-[49].
^[37] RS [57].
^[38] RSFIC [61(b)].
^[39] RS [58].
^[40] RS [59].
^[41] RS [61].
^[42] RS [65]-[71].
^[43] RSFIC [25].
^[44] RSFIC [26].
^[45] Transcript p 182 lines 35-46; p 183 lines 1-18 and 37-45.
^[46] RS [57].
^[47] RS [80].
^[48] RS [81].
^[49] RS [82], referring to Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at 519 [39] (French CJ and Hayne, Crennan, Bell and Gageler JJ).
^[50] RS [83].
^[51] F. C. of T. v Carter [2022] HCA 10 , (2022) 399 ALR 521 .
^[52] Carter at [2022] HCA 10 [3] Referring to and relying on Harmer v F. C. of T. (1991) 173 CLR 264 at 271 , and F. C. of T. v Bamford (2010) 240 CLR 481 At 505 [37] .
^[53] Carter at [2022] HCA 10 [4].
^[54] Fischer v Nemeske Pty Ltd (2016) 257 CLR 615 , 650-651 at [96]-[100] and [104] .
^[55] Harold Ford et al, The Law of Trusts (Thomson Reuters, last reviewed 26 July 2021) [13.030]; Gino Dal Pont, Equity and Trusts in Australia (Thomson Reuters, 8 ^th ed, 2022) [23.120].
^[56] Harold Ford et al, The Law of Trusts (Thomson Reuters, last reviewed 26 July 2021) [4.9050].
^[57] See [41] and [51].
^[58] Re Montgomery Wools Pty Ltd (As Trustee for Montgomery Wools Pty Ltd Super Fund) and F. C of T. (2012) 87 ATR 282; F.C. of T. v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 ; International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) 246 CLR 455 .
^[59] EM [9.82].
^[60] See [68(c)] above
^[61] See R v Jacobs Group (Australia) Pty Ltd [2023] HCA 23 Kiefel CJ, Gageler, Gordon, Steward, Gleeson and Jagot JJ at [29] referring to Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381 [69] .
^[62] See ENT19 v Minister for Home Affairs [2023] HCA 18 at [87] Gordon, Edelman, Steward and Gleeson JJ, referring to Project Blue Sky (1998) 194 CLR 355 at 381-382 [70] .
^[63] Explanatory Memorandum, Taxation Laws Amendment Bill (No. 3) 1998.
^[64] EM, [9.2].
^[65] EM, [9.10].
^[66] EM [9.11].
^[67] Referred to at EM [9.12].
^[68] The Hon Rod Kemp MP, ‘Taxation of Distributions Disguised as Loans from Private Companies’ (Media Release, 27 March 1998).
^[69] Board of Taxation, Taxation of Discretionary Trusts (Report, November 2002).
^[70] Taxation of Discretionary Trusts Report, [3].
^[71] Taxation of Discretionary Trusts Report, [78].
^[72] Through the distribution of unrealised capital gains as capital distributions and not as loans.
^[73] Taxation of Discretionary Trusts Report, [78].
^[74] The Hon Peter Costello MP, ‘Taxation of Discretionary Trusts’ (Media Release, 12 December 2002).
^[75] Explanatory Memorandum, Tax Laws Amendment (2004 Measures No. 7) Bill 2004.
^[76] 2004 EM, [8.2].
^[77] See Davis v F. C. of T. (1989) ALR 195 at 230 Hill J endorsed in F. C. of T. v Bamford (2010) 240 CLR 481 at [17] French CJ, Gummow, Hayne, Heydon and Crennan JJ.
^[78] See Hyder v F. C. of T. [2022] FCA 264 , Greenwood J., where a like proposition in a similar circumstance was rejected.
^[79] C.f. 1997 Assessment Act, s 974-5(4).
^[80] Explanatory Memorandum, Income Tax Assessment Bill 1996.

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