On 19 February 2025, the Full Court of the Federal Court handed down a highly anticipated ruling in Commissioner of Taxation v Bendel [2025] FCAFC 15. This case tackled a key issue in private group structures—whether an unpaid present entitlement (UPE) to a corporate beneficiary qualifies as a “loan” under Division 7A of the Income Tax Assessment Act 1936 (Cth) (1936 Act).
The decision? A unanimous rejection of the Commissioner’s appeal, with the Court ruling that a “loan” under s 109D(3) must create an obligation to repay an amount, not just an obligation to pay it. This means a UPE owed to a corporate beneficiary is not considered a loan or a deemed dividend under Division 7A.
Background: The ATO’s Longstanding Approach
Since 2010, the ATO has maintained that a UPE to a corporate beneficiary—if left unpaid—could be treated as “financial accommodation” and, therefore, a “loan” under Division 7A. This interpretation was formalised in Taxation Ruling TR 2010/3 and reinforced in TD 2022/11.
The Bendel case involved a common scenario: a discretionary trust distributing income to a corporate beneficiary, with the corporate beneficiary not immediately calling for payment. The Commissioner assessed the UPE as a Division 7A “loan,” resulting in a deemed dividend and additional tax liabilities. The taxpayers objected, won at the Administrative Appeals Tribunal (AAT), and then faced the Commissioner’s appeal to the Federal Court.
Key Arguments in the Case
The Commissioner argued that:
- The AAT had incorrectly framed the statutory question, failing to consider whether a UPE is a loan.
- The definition of “loan” in s 109D(3) should be interpreted broadly.
- The AAT’s interpretation conflicted with the legislative intent of Division 7A.
The taxpayers countered that:
- A “loan” under s 109D(3) requires an active transaction, not just inaction by the corporate beneficiary.
- Division 7A should not deem a dividend from a UPE when there is no repayment obligation.
- A broad interpretation of “loan” would create inconsistent and unintended tax consequences.
The Full Court’s Decision
The Full Court focused on statutory interpretation, considering the text, context, and purpose of Division 7A. It found that:
- The definition of “loan” in s 109D(3) requires a repayment obligation.
- The phrase “a provision of credit or any other form of financial accommodation” should be read in harmony with the rest of Division 7A.
- If a UPE were treated as a loan, it could lead to double taxation—first when income is taxed at the corporate level and again when included in the trust’s net income the following year.
Ultimately, the Court ruled that a UPE alone does not constitute a loan under Division 7A. This decision aligns with the purpose of Subdivision EA, which already addresses concerns about company profits being distributed inappropriately.
What’s Next for the ATO?
The ATO now faces a decision on how to proceed. There are a few possible paths:
- Appeal to the High Court – While an option, the Full Court’s unanimous and well-reasoned decision makes this an uphill battle.
- Legislative Amendment – The ATO may work with Treasury to amend the law and clarify the treatment of UPEs.
- Accept the Decision – The ATO could update its guidance and focus on existing integrity measures rather than pursuing UPEs under Division 7A.
Regardless of what happens next, this ruling is a significant shift in how UPEs are treated under Division 7A. Advisors and private groups should take note and keep an eye on any further developments from the ATO.
Need guidance on how this impacts your structure? Reach out to your tax advisor or contact your Quantiphy representative for tailored advice.
