The Bendel Decision: A Landmark Ruling on Unpaid Present Entitlements

Mar 31, 2025 at 10:51 pm AWST

The Australian tax landscape has been significantly altered by the recent Full Federal Court decision in Commissioner of Taxation v Bendel [2025] FCAFC 15, a case that challenges the Australian Taxation Office’s long-held position on unpaid present entitlements (UPEs) in family trusts.

This ruling has far-reaching implications for family trusts, corporate beneficiaries, and self-managed superannuation funds (SMSFs).

Background and Legal Reasoning

The case centred on whether UPEs, i.e. amounts a trust owes to a corporate beneficiary, constitute loans under section 109D(3) of Division 7A.

The ATO had argued that such UPEs amounted to “financial accommodation,” thereby triggering Division 7A’s deemed dividend provisions.

However, the court determined that a UPE represents an obligation to pay, not to repay, and thus does not meet the definition of a loan under the Act. This interpretation aligns with the earlier Administrative Appeals Tribunal decision, which the ATO had appealed.

The court considered whether a UPE was a “provision of credit or any other form of financial accommodation” under the expanded definition of ‘loan’ in section 109D(3) of the Income Tax Assessment Act 1936^[2].

In applying principles of statutory construction and interpretation, the Court examined the text, context, and purpose of the Division 7A provisions. It held that the definition of ‘loan’ entails an obligation to repay, noting that the concept of a loan involves the provision of a principal sum with an obligation to repay^[2].

The Court found that although there existed a debtor-creditor relationship between the trustee and corporate beneficiary, the UPE conferred on the corporate beneficiary was not contingent on repayment – there was only an obligation to pay, not repay^[2].

the Bendel Case and family trusts

Family trusts have long been a popular vehicle for managing wealth and investments in Australia due to their flexibility.

However, the ATO has kept these structures under close scrutiny, particularly when a trust makes a corporate beneficiary entitled to trust income but doesn’t actually pay it – creating what’s known as an “unpaid present entitlement” or UPE^[1].

The Bendel case specifically examined whether such UPEs should be treated as loans under Division 7A of the Income Tax Assessment Act 1936.

The Full Federal Court found that unpaid entitlements should not be treated as loans and therefore are not required to be put on complying loan terms^[1].

This ruling directly contradicts the ATO’s long-standing position that UPEs should be considered a loan for taxation purposes and subject to Division 7A loan terms with the ATO’s benchmark interest rate^[1].

The ATO’s Response

The Commissioner of Taxation has not accepted this decision.

On March 18, 2025, the ATO applied to the High Court for special leave to appeal the Full Federal Court decision.^[3][4]

The following day, the ATO updated its Interim Decision Impact Statement (DIS) outlining its view on the decision and impact on taxpayers^[4].

In the DIS, the Commissioner advises that:

The ATO will continue to administer the law in line with its published views in Taxation Determination TD 2022/11 until the appeal process is finalized^[4][5]
Unpaid entitlements may be subject to another tax provision, section 100A^[1][5]
The ATO does not plan to finalise objection decisions in relation to objections to past-year assessments (for which no settlement was reached)^[4][5]
If a decision is required (for example, because the taxpayer’s period of review will lapse), any objection decision will be based on the existing ATO view of the law^[4][5]

Section 100A: The ATO’s Alternative Approach

With the Bendel decision challenging the ATO’s position on Division 7A, tax experts are warning that the ATO is likely to adopt section 100A as an “alternative weapon” for addressing UPEs^[6].

In the updated DIS, the Commissioner specifically highlighted that where a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the “green zone” described in Practical Compliance Guideline PCG 2022/2^[4][5].

In such situations, the ATO may engage with taxpayers to better understand their arrangement, including the risk of section 100A applying^[5].

Implications for SMSFs

The Bendel decision has significant implications for self-managed superannuation funds as well.

The SIS Act contains a similarly broad and inclusive definition of ‘loan’ under section 10(1), providing that a loan “includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings”^[2].

Legal experts suggest that the reasoning in Bendel could extend to the SIS Act.

It’s reasonable to surmise that courts would likewise interpret the phrase “any other form of financial accommodation” in the SIS Act context to mean an arrangement that involves the advancement of principal with an obligation to repay – not applying to a mere creditor and debtor arrangement like a UPE^[2].

This could affect how section 65 of the SIS Act (which prohibits lending to members) is interpreted and applied to SMSFs^[7].

Practical Implications for Family Trusts

The Bendel case is a landmark tax case that will have significant impact on future trust income distribution decisions.

Depending on whether the Federal Government decides to change the law and the ATO’s response to the Bendel case, trust vehicles are potentially more attractive if unpaid entitlements to a corporate beneficiary can be retained in the trust as working capital or reinvestment^[1].

The case has profound implications for the use of discretionary trusts and corporate beneficiaries, potentially allowing distributions to remain unpaid without triggering Division 7A consequences^[8].

The Broader Context

The UPE treatment has been a contentious issue since late 2009, when the ATO first took the controversial view that UPEs owed by a trust to a company can be treated as if they were loans for Division 7A purposes^[3].

This can lead to a deemed unfranked dividend being triggered for tax purposes if appropriate action isn’t taken to prevent this, even if no funds are provided by the trust to shareholders of the company or their associates^[3].

The Bendel decision represents a significant challenge to this position, with both the Administrative Appeals Tribunal and now the Full Federal Court holding that this view is incorrect and that a UPE balance should not be treated as a loan for the purpose of Division 7A^[3].

What Happens Next?

The tax community is now watching closely to see whether the High Court will grant special leave to hear the ATO’s appeal. If special leave is not granted, or if the High Court upholds the Full Federal Court’s decision, it could force the ATO to revise its position on UPEs or prompt legislative change.

Meanwhile, the ATO has made it clear it will continue to administer the law according to its published views until the appeal process is complete^[4][5].

Conclusion

The Bendel decision represents a significant victory for taxpayers in challenging the ATO’s long-held position on UPEs.

However, with the ATO seeking special leave to appeal to the High Court and signalling its intention to potentially use section 100A as an alternative approach, the final chapter is yet to be written.

Anyone with a family trust or SMSF will need to consider how the Bendel case will impact them both retrospectively and in the future.

Sources for this article:

This article is a summary of the published opinions of experts. Links to further commentary can be reviewed here: click “Bendel“

Frequently Asked Questions: The Bendel Case and Unpaid Present Entitlements (UPEs)

1. What is the significance of the Commissioner of Taxation v Bendel decision?

The Full Federal Court’s ruling in Commissioner of Taxation v Bendel [2025] FCAFC 15 represents a major shift in the interpretation of Division 7A of the Income Tax Assessment Act 1936 (ITAA36).

It overturns the long-standing view of the Australian Taxation Office that an unpaid present entitlement (UPE) from a trust to a corporate beneficiary could be considered a “loan” or “financial accommodation” under section 109D of Division 7A.

This decision has significant implications for businesses utilizing trust structures with corporate beneficiaries and opens up new considerations for tax planning.

2. What was the ATO’s previous interpretation regarding UPEs and Division 7A?

Prior to the Bendel decision, the ATO’s position, outlined in rulings like TD 2022/11 and TR 2010/3, was that when a trust made a corporate beneficiary presently entitled to income, and that amount remained unpaid, the corporate beneficiary was effectively providing “financial accommodation” (a form of loan) to the trust.

This interpretation meant that such UPEs could be subject to the deemed dividend rules of Division 7A if not managed in a Division 7A compliant manner, such as through a complying loan agreement or sub-trust arrangement.

3. What did the Full Federal Court decide in the Bendel case?

The Full Federal Court unanimously dismissed the Commissioner’s appeal, concluding that a UPE owed by a trustee to a corporate beneficiary does not constitute a “loan” for the purposes of section 109D(3) of the ITAA36.

The Court reasoned that the definition of a loan under Division 7A implies an obligation to repay an identifiable principal sum, whereas a UPE merely creates an obligation to pay the entitled amount.

The Court also considered the potential for double taxation if UPEs were treated as loans under Division 7A, as the corporate beneficiary is already taxed on the trust income it is entitled to.

4. What are the immediate practical implications of the Bendel decision for businesses?

Businesses with trust structures and corporate beneficiaries holding UPEs need to:

Revisit Trust Structures: Assess how existing UPEs have been treated and whether prior Division 7A loan agreements are still necessary based on the Court’s interpretation.
Optimise Tax Strategies: Explore potential new tax-efficient distribution strategies in light of UPEs not automatically being classified as Division 7A loans.
Ensure Compliance: While UPEs may no longer be automatically subject to Division 7A as loans, other tax provisions, particularly Subdivision EA of Division 7A and broader anti-avoidance rules like section 100A and 99B, may still have implications. Trustees must reassess UPE management to ensure full compliance with all relevant tax laws.

In view of the Commissioner’s intention to appeal against the Federal Court’s judgement, professional advisers caution against taking immediate action to alter current arrangements in response to the Court’s decision.

5. Does the Bendel decision provide a complete exemption for UPEs from Division 7A?

No. While the Bendel decision clarifies that UPEs are not automatically “loans” under section 109D(3), it does not provide a blanket exemption from all Division 7A consequences.

Subdivision EA of Division 7A specifically addresses UPEs and can still deem dividends in certain circumstances, particularly when profits related to the UPE are ultimately distributed to individual taxpayers.

Complex UPE arrangements still require careful review to determine potential Division 7A implications under other provisions.

6. What actions should taxpayers with existing UPEs consider in light of the Bendel decision?

Taxpayers with UPEs should consider the following:

Review Prior Arrangements: Determine if Division 7A might still be triggered under the law as interpreted by the Full Federal Court and assess other potential implications, such as under section 109T.
Consider Objections: Taxpayers who have not yet objected to prior year assessments based on the ATO’s treatment of UPEs as Division 7A loans should consider lodging protective objections, keeping in mind that the ATO may delay decisions pending further developments.
Evaluate Section 109RB Applications: Explore the possibility of applying for the Commissioner’s discretion under section 109RB to overlook Division 7A consequences arising from inadvertent errors or honest mistakes made in reliance on previous ATO guidance.
Exercise Caution with Existing Loan Agreements: Arrangements entered into based on previous ATO rulings (TR 2010/3 and PS LA 2010/4) that created an obligation to repay may still be subject to Division 7A. It’s generally advisable to maintain compliance with existing repayment obligations for now and await potential administrative solutions from the ATO.
Continue to Consider Other Anti-Avoidance Provisions: UPEs may still trigger other integrity measures outside of section 109D(3), such as sections 100A and 99B of the ITAA 1936, which require ongoing consideration.

This is not tax advice, but an indication of relevant matters you may wish to take up with a qualified tax advisor.

7. How might the ATO respond to the Bendel decision?

The ATO has several potential avenues of response:

Special Leave Application to the High Court: The Commissioner has applied for special leave to appeal the Full Federal Court’s decision to the High Court. If granted, the High Court’s ruling would be the final judicial determination on the matter.
Decision Impact Statement (DIS): The ATO is expected to issue a DIS outlining its position on the Bendel decision, how it will address historical issues, and its approach to administering Division 7A in the interim. The ATO has already released an interim DIS stating it will maintain its current views pending the outcome of the appeal process.
Legislative Amendments: The government could introduce legislative changes to clarify or alter the treatment of UPEs under Division 7A. However, with a federal election on the horizon, immediate legislative action may be less likely.

8. What is the best course of action for businesses with UPEs moving forward?

Given the ongoing uncertainty, particularly with the Commissioner’s appeal to the High Court, businesses with UPEs should:

Seek Professional Advice: Consult with tax advisors to understand the specific implications of the Bendel decision for their circumstances and to develop an appropriate strategy for managing existing and future UPEs.
Stay Informed: Keep abreast of any updates from the ATO, including Decision Impact Statements, and any potential legislative changes.
Review Documentation: Ensure all trust deeds, distribution resolutions, and related documentation accurately reflect the intentions of the parties.
Exercise Caution with New Arrangements: While the Bendel decision provides clarification, it is crucial to carefully consider all potential tax implications, including Subdivision EA and other anti-avoidance rules, when structuring future trust distributions to corporate beneficiaries.

Filed under: SME & Family Business, Superannuation, Tax - General, Tax Office