The Full Federal Court has ruled in Commissioner of Taxation v Bendel [2025] FCAFC 15, confirming that unpaid present entitlements (UPEs) owed to corporate beneficiaries are not loans for Division 7A purposes. This decision has significant implications for trust structures and tax planning, potentially overturning the ATO’s long-standing position.
What Was the Issue?
Since December 2009, the ATO has taken the stance that when a trustee appoints income to a corporate beneficiary but leaves some or all of this amount unpaid, the UPE should be treated as a loan under Division 7A (see TD 2022/11 for the ATO’s latest guidance). Under this interpretation, if the UPE was not addressed properly, it could trigger a deemed unfranked dividend for the trust, even if no actual funds were transferred to shareholders or their associates.
This issue was contested in the Bendel case, which examined whether UPEs arising between 2014 and 2017 should be treated as Division 7A loans under section 109D(3) of the ITAA 1936.
The Court’s Ruling
The Full Federal Court has now dismissed the Commissioner’s appeal, upholding that:
- A UPE balance should not be treated as a loan for the purpose of Division 7A.
- While appointing income to a corporate beneficiary creates a debtor-creditor relationship, this alone does not satisfy the definition of a loan under section 109D(3).
- The crucial distinction made by the Court is that an obligation to pay a UPE is not the same as an obligation to repay an amount, which is a key characteristic of a loan.
What Happens Next?
The ATO has strongly supported its interpretation of Division 7A for over a decade, so the fallout from this decision could be significant. The following outcomes are possible:
- ATO Appeals to the High Court – The ATO may attempt to overturn this ruling by taking the case to the High Court.
- Legislative Changes – The Government may intervene by amending the legislation to explicitly bring UPEs under Division 7A, aligning the law with the ATO’s prior interpretation.
- ATO Revises Its Position – If no appeal is lodged or legislative change occurs, the ATO may have to update its guidance to reflect the ruling.
What Should Businesses and Advisors Do Now?
For businesses and tax professionals, this decision could offer opportunities to rethink their tax planning strategies. Key actions to consider include:
- Reviewing existing UPEs and assessing their treatment under this ruling.
- Waiting for further guidance from the ATO before making significant structural changes.
- Seeking professional advice to understand how this impacts trust distributions and corporate beneficiaries.
The Bendel decision challenges over a decade of ATO policy on Division 7A and UPEs, but the situation remains fluid. Business owners and advisors should keep a close eye on further developments, as an appeal or legislative change could alter the landscape again.
If you’re unsure how this ruling affects your business, reach out to our team for expert advice on trust structures, corporate distributions, and tax compliance.
