Bendel v Commissioner 

In this decision of the High Court, the taxpayer succeeded against the Commissioner (ATO) in a 5 to 2 Majority joint Judgment that an unpaid present entitlement (UPE), which was not called or demanded for by the recipient beneficiary, would not give rise to any loan or financial accommodation to trigger taxation under Division 7A of the ITAA 1936 (Div 7A). At the time of writing, the ATO was considering but had not yet published its decision impact statement (DIS) on this High Court Judgment.

The Distributions

Gleewin Pty Ltd (GPL) as trustee of the Steven Bendel 2005 Discretionary Trust (SBDT) resolved to "set aside" four annual distribution amounts ranging from $149,513 to $840,529 for another group company Gleewin Investments Pty Ltd (GIPL) and Steven Bendel controlled SBDT and GIPL. And much of the net income set aside for GIPL was, “in fact”, lent to Steven Bendel [the author did not find mention if the loan(s) to Steven Bendel were made under Division 7A compliant terms]. 

The Commissioner contended that the amounts set aside for GIPL by the Distribution Resolutions (referred to as the "UPEs") constituted the "provision of credit or any other form of financial accommodation" by GIPL to SBDT, or were "in substance" loans from GIPL to SBDT and captured under the meaning of "loan" under section 109D(3) of Div 7A. 

Path to the High Court

The Administrative Appeals Tribunal decided in 2023 that the UPEs of GIPL were, in substance, lent to Steven Bendel, and so should have been taxed in the hands of Steven Bendel under Subdivision EA of Div 7A (headed "Unpaid present entitlements") and therefore that the Commissioner had taxed the wrong taxpayer in assessing GIPL rather than Steven Bendel.

The Commissioner appealed to the Full Court of the Federal Court, which unanimously dismissed the Commissioner’s appeal, leading to the proceedings before the High Court. 

Trust Deed

The Trust was established by a discretionary trust deed dated 24 June 2005 and was described as a "discretionary trust". At paragraph 9 the High Court commented:

That usage is "descriptive rather than normative" and is an expression that has sometimes been used loosely to describe cases where there is a power rather than a duty to distribute and "the power involved is a trust power rather than a bare power". 

The High Court described what appears to be standard discretionary trust drafting at paragraphs 9 and 10 (bold emphasis added):

The terms of the 2005 Trust Deed are important. [...] there is no duty to distribute any of the income of the [Trust Fund …] By cl 3(1)(a) of the [...] Trust Deed, the trustee has a discretion to "determine ... to pay apply or set aside [all or any part or parts of the net income of the Trust Fund] to or for any one or more" of the discretionary objects. 

The terms used in cl 3(1)(a) are defined in the [...] Trust Deed [...] The term "pay" is defined in cl 1(18) to include "transfer convey and assign". The term "set aside" is also defined, in cl 1(19), to include, "in relation to a beneficiary ... placing sums to the credit of such beneficiary in the books of account of the Trust Fund"; the term "apply", however, is not defined. 

And at paragraph 12 the High Court described that clause 3(5) in the trust deed provided that amounts set aside for a beneficiary would cease to be part of the Trust Fund and be held upon separate trust (bold emphasis added):

Clause 3(5) is important, as it addresses specifically what is to occur if there is a determination to set aside a portion of net income. It stipulates that such net income is to be held in a "separate trust ... pending payment" and invested in the meantime in the manner set out in cl 6(5). Clause 3(5) relevantly provides:

 "Any amount set aside for any beneficiary and any amount held by the [t]rustee in trust for any person ... shall cease to form part of the Trust Fund and upon such setting aside or becoming subject to such trust (as the case may be) shall thenceforth be held by the [t]rustee on a separate trust for such person absolutely with power to the [t]rustee 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." 

Resolutions

The High Court also showed the general form of the Distribution Resolutions at paragraphs 18 and 38 (bold emphasis added):

"Distribution of Income: RESOLVED THAT, in exercise of the power of the Trust Deed and every other power enabling in that behalf, the following classes or categories of income of the Trust for the year ending 30 June ... are hereby set aside for the benefit of the following beneficiaries, and in the following amounts and/or proportions [...]

The Resolutions provided that the amounts were "hereby set aside". [...] The term "set aside", as already mentioned, is defined in the 2005 Trust Deed to include the crediting of sums to a beneficiary in the books of account, rather than actually distributing such sums. Each of the Resolutions triggered an application of cl 3(5). That had three consequences. First, the amounts set aside "cease[d] to form part of the Trust Fund". Secondly, "upon such setting aside" the amounts "thenceforth" came to be held by the same trustee "on a separate trust". [...] The legal effect was therefore that the amounts set aside were no longer impressed only with a fiduciary power in favour of objects including Gleewin Investments but became the subject of a fixed trust (the separate trusts) [...]

The High Court held that such “setting aside” of net income under the Trust Deed did not create an unconditional duty to pay that income under the Resolutions stating at paragraph 37: 

[...] did the Resolutions here create an unconditional duty to pay Gleewin Investments the unpaid present entitlements? Correctly construed, they did not. 

And the High Court held at paragraph 39 that the phrase "pending payment" in cl 3(5) “signifies that following the creation of the separate trust, there is a state of affairs which is anterior to payment, namely the holding of income by the trustee on that separate trust” and stated at paragraphs 40 and 41 (bold emphasis added): 

The phrase "pending payment" is significant for another reason. It makes clear that something more must occur before payment must be effected, and before there arises an unconditional duty to pay. If the trustee does not choose to pay, and unless it otherwise admits an indebtedness to the beneficiary, what must occur is a call for payment by the beneficiary of the new trust in circumstances where the beneficiary is entitled to call. Until then, the continued holding of the net income on a separate trust, and the investment of that income, is mandated by the deed. 

[...] The 2005 Trust Deed does not use the word "distribute" in describing the powers of the trustee under cl 3. In such circumstances, the use of that word in the Resolutions should be seen as a generic way of describing one of the three ways of dealing with the money comprising the trust's net income in fact authorised by cl 3(1)(a) – namely, to "pay apply or set aside" the net income. 

[...] Here, the method chosen was to set aside the net income, and no more. Put in different terms, it is apparent by the use of future tense ("shall be distributed"), and the words "for the avoidance of doubt", that the reference in the Resolutions to distribution is recording an obvious future consequence of setting aside the amounts. 

[...] It does not change the fact that, until the call for payment, Gleewin retained the amounts and had no unconditional duty to pay that income. The fact that the Resolutions are labelled "Distribution of Income" cannot change the fact that the text provided for setting aside, not distribution. 

[...] The label "Distribution of Income" can be read as referring to distribution in a general sense – namely, the obvious future consequence of the setting aside – but it cannot alter the express operation of the Resolutions. 

Separate Trust

“Given that” the High Court’s finding that the Resolutions did not create an unconditional duty for SBDT to pay GIPL, the High Court found that clause 3(5) caused the amounts set aside to cease from being part of the SBDT Trust Fund and to be held on separate trust.

But earlier in 2023, the Tribunal found that it was "not possible to identify any asset or property held on any separate trust". At paragraphs 75 and 77 of the Tribunal’s Decision:

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 [...]

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

Then the High Court Majority disagreed with at paragraphs 50 and 48 (bold emphasis added):

[...] the answer to that contention is that those receipts could be calculated at the year end as net income, and that that calculation identified the proportion of Gleewin's trust account which was the subject matter of the trust. Although the expenses would vary from year to year and the balance of Gleewin's trust account would fluctuate from year to year, the "net income" was ascertainable as a proportion of Gleewin's trust account at the end of each year of income. There was no suggestion on this appeal that Gleewin was in breach of trust by any failure to segregate the ascertained amounts of the separate trusts at each year end. 

“the Resolutions identified with sufficient certainty the property which would be the subject of the separate trusts created by setting aside all of the net income of the 2005 Trust in defined percentages as between Gleewin Investments and Mr Bendel in each of the years of income in question. [...] There is nothing ambiguous or uncertain about the identification of the property the subject of the trust using this language.” 

And in dissent Justice Jagot of the High Court disagreed with the Majority noting that this issue was then not raised on appeal to the Full Federal Court and that whether or not a separate trust was formed doesn’t determine if there was or was not a loan or financial assistance by GIPL’s failure to call for the net income for Div 7A purposes, stating at paragraphs 164, 165 and 166:

[...] neither party challenged that conclusion on appeal to the Full Court, a fact which the respondents frankly described as representing a "forensic decision" they had made. Yet the respondents now contend that, although it is not determinative of the appeal, this Court should find that such a separate trust was created. In these circumstances, revisiting the question whether a separate trust was created by operation of cl 3(5) of the Trust Deed is unappealing to say the least. 

The respondents' acceptance that the question whether separate trusts were constituted is not determinative of the appeal accords with the fact that, if a separate trust for the sole benefit of Gleewin Investments had been constituted, then Gleewin Investments would have had the right as sole beneficiary to require Gleewin to pay the amount held in that separate trust to it at any time, thereby terminating the trust, in accordance with the rule in Saunders v Vautier. 

In that event, the Commissioner's case, in accordance with the Commissioner's position before the Tribunal, was that Gleewin Investments provided financial accommodation to Gleewin by not exercising that right when, at the least, Gleewin Investments must be taken to have known that it could call for the amount to be paid to it at any time. 

[...] The better reading of cl 3(5) is that which the Commissioner proposes. Clause 3(5) operated so that, by reason of Gleewin's determinations effected by the resolutions to set aside amounts or portions of the Trust's net income, there was effected an irrevocable alteration of the beneficial entitlements in the Trust Fund as a whole. [...]

Justice Beech-Jones, separately dissenting to the Majority of the High Court, noted the Tribunal’s finding at paragraphs 214 and 220 (bold emphasis added):

As noted, the effect of the AAT's finding that no separate trust was created was that there existed an unconditional immediate equitable obligation on the part of Gleewin to account to Mr Bendel and Gleewin Investments for the amount that was the subject of the resolutions (ie, the entitlements). Of itself, that equitable obligation did not necessarily create a debt enforceable at law by way of an action for money had and received against Gleewin. 

[...] However, consistent with the above, either or both of the 2005 Trust's financial accounts or the admission by the respondents (which, as between the parties to these proceedings, extends to Gleewin) in the Full Court evidenced the unconditional and irrevocable allocation of an amount out of the 2005 Trust's fund such that a debtor-creditor relationship arose and rendered, as between the parties to these proceedings, Gleewin liable at common law for an action for money had and received. That is not to exclude the possibility that the resolutions, including those which resolved to "distribute" those amounts, also had that effect. 

Otherwise, had the issue been properly open to review by this Court, it would have been necessary to determine whether resolutions that both "set aside" and "for the avoidance of doubt ... distributed" amounts engage cl 3(5) of the Trust Deed such that a separate trust was created, or otherwise constituted a determination to "pay" or "apply" those amounts to Gleewin Investments in a manner that does not engage cl 3(5) and instead created an unconditional and irrevocable entitlement to account to Gleewin Investments for the relevant amount. As Mr Bendel wore every conceivable hat in these events simultaneously, his actions in not establishing separate trusts pursuant to cl 3(5) were capable of bearing upon a determination as to the true effect of the resolutions he procured. 

Accounts Labelling

The High Court covered the argument that the labelling of the ledger accounts as loan accounts could give rise to an admission of a debt arising as a point of evidence. However the High Court noted at paragraphs 53 and 52:

[...] The fundamental difficulty for the Commissioner is that the Tribunal did not find as a fact that the accounts expressed such an admission, and the evidence before the Tribunal did not make an inference that the accounts expressed such an admission inevitable. 

[...] This was said to be the expression of an admission by Gleewin as trustee that there existed as between it and Gleewin Investments an unconditional relationship of debtor and creditor. [...] Whether or not the accounts can be read as expressing such an admission is, of course, a question of fact. 

The High Court made brief observations that the accounts used for the UPEs did not give any indication at all that they were recorded as loans at paragraph 54:

First, the "Beneficiaries Current Account" stood alone in the balance sheets. It was specifically not listed as a current liability or as a non-current liability but was otherwise apparently counted as a liability. 

Secondly, no expert evidence was led as to what the amounts included in the "Beneficiaries Current Account" represented. It may be accepted that the entries represented a diminishment in some way of the assets of the general fund of the 2005 Trust, but the legal form of that reduction is not revealed. 

Thirdly, no evidence was led as to whether this form of accounts complied with an applicable accounting standard and, if so, what that standard might have been. 

Fourthly, what is called the "Beneficiaries Current Account" might be no more than a recognition of the setting aside of an amount in a given year of income, subject to a separate trust, which could be called for at any time by Gleewin Investments. 

Given the equivocal nature of this evidence, the Commissioner cannot get from the accounts of the 2005 Trust the admission he seeks. 

Div 7A

The High Court’s reasoning focused on the capture of a “transfer of value” concept as an essential trigger for Div 7A to apply, stating at paragraphs 59 and 72:

Three different kinds of transfer of value are deemed by Div 7A to be dividends paid by a private company to a shareholder, as follows: 

[...] the payment of an amount by a company to a shareholder, or shareholder's associate (s 109C); 

[...[] he loan of an amount by a company to a shareholder, or shareholder's associate (ss 109D, 109E); or

[...] the forgiveness by the company of an amount of debt [...] (s 109F).

As already mentioned, Div 7A is directed at the transfer of value from a private company to a shareholder, or an associate of that shareholder. Implicit in its structure is that the private company does something to effect that transfer of value.  

[...] In each case, the legislation requires that the private company is actively doing something to move value from it to someone, which is analogous with the payment of a dividend. But here, Gleewin Investments did nothing. It did not "provide" Gleewin with time to pay; 

[...] It follows that the Commissioner's case in reliance upon s 109D(3)(b) must fail. 

The Commissioner relied on (3)(b) and (3)(d) for which the High Court rejected the Commissioner’s submissions at paragraphs 68, 72 and 74:

Plainly, Gleewin Investments' forbearance here did not fall within this traditional understanding of a loan; indeed, it did not even meet the substance of such a concept, as no promise of repayment was ever given. [...]

Contrary to the Commissioner's contentions, there is no "provision ... of financial accommodation" for the purposes of s 109D(3)(b) when a private company does nothing. [...]

[...] Simply doing nothing, or acquiescing to the retention of funds, is not a transaction which in substance effects a loan. [...] That conclusion is buttressed by the fact that the relationship between Gleewin as trustee and Gleewin Investments remained one of trustee and beneficiary and not one of debtor and creditor. 

[...] Moreover, if the Commissioner were correct, it would mean that a private company beneficiary in the position of being able to invoke the rule in Saunders v Vautier would be taken to have made a loan to a trustee for the purposes of s 109D(3) for the period during which the beneficiary could have called for the trust to be terminated, but did not. That is a highly improbable outcome. 

And the High Court ultimately found against the Commissioner that the Commissioner should have focused instead to tax Steven Bendel not GIPL stating at paragraph 75 (bold emphasis added):

There are strong contextual factors that reinforce the foregoing conclusion that Gleewin Investments' forbearance did not constitute a loan for the purposes of s 109D. Those factors support both the construction of s 109D(3) by the Full Court, and the conclusion of the Tribunal that the Commissioner has taxed the wrong taxpayer. 

Concluding point - Subdiv EA 

The High Court noted at paragraph 64 that Steven Bendel should have been taxed, not GIPL, under Subdivision EA of the ITAA 1936:

[...] Under Subdiv EA, an amount is included in the assessable income of a shareholder of a private company, or in the assessable income of an associate of a shareholder of a private company, as if it were a dividend where that private company has an "unpaid present entitlement" to the income of a trust, and the trustee makes a payment or loan to, or forgives a debt of, the shareholder or associate of the shareholder of that private company. [...]

[...] In the years of income in question much of the money to which Gleewin Investments was presently entitled was lent by the 2005 Trust to Mr Bendel. Thus, the facts here broadly correspond with the circumstances to which Subdiv EA is addressed. 

The final point of the High Court to reject the Commissioner’s submissions came out of the legislative history behind Subdivision EA which the Commissioner did not rely on in the High Court proceedings. At paragraphs 82 and 83 (bold emphasis added):

It is apparent that, by 2002, s 109UB was perceived to be defective because it did not address a case of an unpaid present entitlement where the trustee simply made a payment to the shareholder, as distinct from a loan. The Board of Taxation, a government-appointed advisory body, prepared a report to the Treasurer of Australia entitled Taxation of Discretionary Trusts which, amongst other things, addressed this problem. What is significant is one of its proposed alternative amendments to Div 7A which Parliament did not adopt. It was described in the following terms:

"Alternatively, section 109UB could be repealed, and replaced with a section setting out the consequences where a trustee makes a company presently entitled to the income of a trust, but does not pay the funds to the company within a reasonable period. The consequences could be either that the trustee would be assessed on the amount of the income as if there had been no distribution, or that the company would have to pay a top-up tax (which could create franking credits in the company)." 

This solution, which taxes either the trustee or the private company beneficiary "as if there had been no distribution", was not adopted. This is also, of course, effectively the outcome sought in this case by the Commissioner. [...]

Take away points

Given this significant High Court decision to conclude (for now) a long-running UPE topic of debate and some uncertainty, in drafting trust distribution resolutions at this time, subject to considering any ATO DIS on this subject, one should further consider:

• Closely reviewing the definition of “set aside” in every discretionary trust - it generally does not expressly include any reference to a debt obligation to then pay, and whether it allows a separate trust to be created by distribution resolution or automatically creates the separate trust without needing that wording in the distribution resolution. Another clause often allows for setting aside to be carried out by allocating accounting records for the recipient beneficiary to a separate trust ledger account.

• The actual use of the trust fund assets set aside - particularly if they can be seen to have more than a clear single purpose, as indicated by Beech-Jones J dissenting Judgment paragraph 220 “Mr Bendel wore every conceivable hat”, this could lead to additional attention as to why the extra purpose appears present.

• Considering the name of the account for the discretionary trust used for the UPE amounts (e.g. loans or assets, liability or separate trust, or even the location of the account being listed within the chart of accounts - see Beech-Jones J dissenting Judgment para 204, “The account was listed between the sub-headings "Current Liabilities" and "Non-Current Liabilities").  

• Ensuring the trust distribution resolutions are worded to express the intention to allocate a UPE to a beneficiary that is set aside under a separate trust, the use of “pending payment” is not as often seen and should only be used if the payment is actually intended to be made from set aside liquid funds.

  • This useful High Court Judgment provides a broad and detailed example that there can either be: (1) a UPE distribution resolution with a call for payment made by the beneficiary; (2) a UPE that has not been called as in this case; or (3) a distribution resolution that distributes actual cash (putting to the side loan forgiveness as a separate topic). 

  • In ordering distribution resolutions from a document provider (especially in bulk) don’t just order a distribution resolution without ensuring the trust deed is always checked and ensuring that the labelling of the amounts in the trust accounts, and that the labelling of the accounts used for the separate trust amounts, are aligned with the intended outcome.