Bendel and Commissioner of Taxation (Taxation)

This matter concerned an appeal by Mr Bendel and Gleewin Investments (the Applicants) against amended assessments issued by the Commissioner of Taxation. The dispute arose from the Commissioner's determination that unpaid present entitlements of Gleewin Investments to the income of the Gleewin trust estate constituted loans made by Gleewin Investments to the Gleewin trust, which were then deemed dividends under Division 7A of the *Income Tax Assessment Act 1936* (Cth). The Applicants contended that these unpaid entitlements were not loans within the meaning of section 109D(3) of the Act, and alternatively, that if they were loans, section 6-25 of the *Income Tax Assessment Act 1997* (Cth) prevented the deemed dividends from being included in their assessable incomes. The case was heard by Deputy President F D O’Loughlin KC.

The primary legal issues before the court were whether an unpaid present entitlement to trust income could be considered a "loan" for the purposes of section 109D(3) of the *Income Tax Assessment Act 1936*, and the role of Subdivision EA of Division 7A in interpreting this definition. The Applicants argued that the statutory context, including Subdivision EA, indicated that such entitlements were not loans. They also contended that if a loan was deemed to have been made, section 6-25 of the *Income Tax Assessment Act 1997* would preclude the deemed dividends from being assessed.

The court considered the Commissioner's submissions that the wording of section 109D(3) did not expressly exclude trust entitlements from being loans and that the existence of Subdivision EA did not render the definition of loan superfluous. The Commissioner relied on legislative history, including a media release and explanatory memorandum, which suggested an intention for unpaid present entitlements to be capable of giving rise to a loan. The court noted that for section 109XA to apply, a company must be presently entitled to trust income that is not paid, a condition not met in this case as the trust deed provided for amounts set aside to cease forming part of the trust fund and be held on a separate trust. The court found that no separate trust had been established in practice, as Gleewin Investments had not reported any separate assets or interests corresponding to the unpaid entitlements.

The court determined that the unpaid present entitlements of Gleewin Investments to the income of the Gleewin trust estate did not constitute loans within the meaning of section 109D(3) of the *Income Tax Assessment Act 1936*. Consequently, the Commissioner's amended assessments, which treated these entitlements as loans and deemed dividends, were set aside. The court found that the Applicants had not established a separate trust in respect of the unpaid entitlements, which was a prerequisite for the Commissioner's argument to succeed.