Implications of Commissioner of Taxation v Bendel: UPEs Are Not Loans Under Division 7A

Today’s decision of the Full Federal Court of Australia in Commissioner of Taxation v Bendel [2025] FCAFC 15 marks a significant shift in the interpretation of unpaid present entitlements (UPEs) and their classification under Division 7A of the Income Tax Assessment Act 1936 (Cth). 

The Court has ruled that UPEs are not loans for the purposes of section 109D(3), effectively challenging the Australian Taxation Office’s (ATO) long-held position that UPEs could be treated as deemed dividends under Division 7A, a decision that has profound implications for corporate beneficiaries, trustees, and tax practitioners.

The ATO may issue new guidance, seek legislative amendments or appeal the decision. 

1.The Core Issue: Payment vs. Repayment

The Court's reasoning hinged on a critical distinction between an obligation to pay and an obligation to repay. While acknowledging that a debtor-creditor relationship can exist between a trustee and beneficiary (as established in cases like Chianti and Fischer), the judgment emphasises that section 109D(3) requires more than just this relationship to classify an arrangement as a ‘loan’. It specifically requires an obligation to repay, which a UPE, representing a present entitlement to trust income, simply does not possess.

2. Background of the Case

The case involved Gleewin Investments Pty Ltd, a corporate beneficiary of the Steven Bendel 2005 Discretionary Trust, which had unpaid entitlements to trust income (UPEs) over several financial years. The ATO, applying their long-held practice, sought to classify the UPEs as loans under section 109D(3), arguing that the corporate beneficiary had provided financial accommodation to the trust by allowing the entitlement to remain unpaid. This interpretation would have resulted in deemed dividends, triggering tax liabilities under Division 7A.

In September 2023, the Administrative Appeals Tribunal (AAT) ruled in favour of the taxpayer, leading to the Commissioner’s appeal to the Federal Court. 

In a judgment released today, the Full Federal Court upheld the AAT’s decision, concluding that a UPE does not constitute a loan within the meaning of Division 7A because the debtor-creditor relationship between the trust and beneficiary did not have the essential characteristics of a loan – as there was no payment of money made by or at the direction of the beneficiary that was required to be repaid.

3. Key Findings of the Federal Court

The Court's ruling was based on a detailed examination of the statutory language and legal precedents, concluding that:

• UPEs Lack an Obligation to Repay: The Court determined that a loan under section 109D(3) requires an obligation to repay. A UPE, by contrast, represents an obligation to pay an amount (i.e. a debt as distinct from a loan).
• Narrow Interpretation of Financial Accommodation: The Commissioner argued that the retention of UPEs by the trust with the consent of the beneficiary amounted to ‘financial accommodation’ being provided by the beneficiary (the provision of ‘credit or any other form of financial accommodation’ being specifically included in the meaning of ‘loan’ by s 109D(3)(b)). The taxpayer had argued that a ‘provision’ requires a positive act to be taken by the taxpayer. The Court did not clarify whether a positive act is required, but instead relied on the fact that there was no payment of a sum by or at the direction of the beneficiary that was required to be repaid. 

4. Implications of the Decision

     a. Reduced Division 7A Exposure for Corporate Beneficiaries

Prior to this ruling, corporate beneficiaries with unpaid entitlements risked having those amounts classified as loans under Division 7A, resulting in deemed dividends. Following Bendel, UPEs will no longer automatically trigger Division 7A consequences.

     b. Compliance and Structuring Considerations for Trustees

Trustees must now reassess their treatment of UPEs, ensuring compliance with Subdivision EA. While UPEs no longer fall within section 109D (3), trustees should still consider whether related-party transactions - such as payments or loans from trusts to shareholders or associates of those shareholders or forgiveness of debts owed by shareholders or associates of those shareholders to trusts - could give rise to Division 7A implications under Subdivision EA.

     c. Changes to ATO Administrative Practices

The ATO may need to revise its approach to UPEs, potentially issuing new guidance on how UPEs should be treated in light of Bendel. This could include reconsideration of previous positions set out in rulings such as TR 2010/3 and PS LA 2010/4, which treated UPEs held on sub-trust as loans for Division 7A purposes.

     d. Potential Legislative Response

Given the significance of the ruling, there is potential for legislative amendments to re-align Division 7A with the ATO’s prior administrative stance. The Government may consider revising the definition of a loan under section 109D(3) or introducing additional provisions to capture the retention of UPEs as a form of financial accommodation.

5. Conclusion

The Federal Court’s decision in Commissioner of Taxation v Bendel affirms the pivotal shift in the treatment of UPEs made by the Administrative Appeals Tribunal, clarifying that UPEs are not loans under Division 7A. 

This ruling provides certainty to corporate beneficiaries and trustees, reducing the risk of deemed dividends in relation to unpaid entitlements. However, we recommend that taxpayers continue to monitor ATO guidance and potential legislative changes to ensure compliance with Division 7A, including in particular Subdivision EA. While the decision alleviates some tax burdens, careful trust structuring remains essential to manage the tax implications of UPEs effectively.

At Jackson McDonald, our Tax and Finance teams are well placed to help you navigate the implications of this decision, and we encourage you to reach out to discuss how we can help you.