Division 7A was first introduced into the Tax Act in 1997. Prior to its introduction, it was considered much easier for company shareholders to extract wealth from companies in the form of interest free loans that may stay outstanding for substantial periods of time. This would have the effect of avoiding ‘top up tax’ in the hands of shareholders on franked dividends.
Division 7A was then introduced as an anti-avoidance division to discourage obvious wealth extraction from companies in what some would argue were disguised loans that were effectively dividends.
Division 7A has had numerous changes over the years, resulting in some of the most complex tax laws that exist today. Many business owners need to navigate Division 7A each year.
In late 2009, to use ordinary Australian vernacular, the ATO changed the goal posts. The ATO updated their view in relation to a certain aspect of Division 7A. A key focus of the change was to classify an unpaid yearly distribution from a trust to a company as falling within Division 7A.
The changes in interpretation made by the ATO at this time were controversial and many senior Tax Practitioners disagreed with the ATO’s interpretation. The ATO’s interpretation was unfortunate for business owners as the ATO views caused tax planning practices to change at cost to the business owner.
On 19 February 2025, the Full Federal Court of Australia handed down the Bendel decision. The Full Federal Court rejected many of the ATO’s views that resulted in a change in ATO administrative practice.
The ATO has a short period of time to seek special leave to appeal the Full Federal Court’s decision to the High Court. There is some doubt as to whether the High Court will grant such leave given the Full Federal Court’s unanimous judgement.
It should be noted that the issue at hand focuses on a particular aspect of Division 7A. The decision does not mean that the ATO does not generally have other ammunition at hand to argue Division 7A, or another anti-avoidance rule such as section 100A could apply.
Given the potential appeal to the High Court, the current status of the Division 7A issue in question, remains clouded. As such, there is still some water to go under the bridge.
Ultimately all business owners will require tailored advice into the ramifications of the ATO’s Full Federal Court loss in Bendel case. The granting of special leave by the High Court would cloud the matter. If special leave is not granted, one would expect the ATO to issue a Decision Impact Statement.
Finally, it is noted that the complexity and muddy waters associated with Division 7A interpretation was previously proposed to be reformed. These proposals have been delayed in previous years. Ideally, introduction of reform expeditiously would provide business owners with greater guidance. Of course, in a Federal Election year, where the government is likely to go into caretaker mode, may put reform on the backburner for some-time yet.
Should you have any queries, please contact your Fordham Partner.