Unpaid Present Entitlements are Not Division 7A Loans: What Does the Bendel Case Mean?

On 19 February 2025, the Full Federal Court handed down its much anticipated decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Appeal Decision).

The Appeal Decision related to the Commissioner’s appeal against the landmark 2003 decision of the Administrative Appeals Tribunal (Tribunal) in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 (Tribunal Decision). In that case, the Tribunal decided that UPEs owing by a trust to a corporate beneficiary are not loans for Division 7A purposes.

The Tribunal Decision was a game changer. However, as the Tribunal is not a court, its decisions are, strictly speaking, not binding on the Commissioner. The Commissioner relied on this technicality to largely disregard the Tribunal Decision pending the outcome of the appeal, instead choosing to continue to treat UPEs as loans for Division 7A purposes.

For a recap on the Tribunal Decision, refer to our article here.

Appeal Decision

The Full Federal Court essentially agreed with the Tribunal that UPEs owed by a trust to a corporate beneficiary do not constitute loans by the corporate beneficiary to the trust for Division 7A purposes.

The technical issue the decision turned on was whether UPEs constitute ‘financial accommodation’ provided by the corporate beneficiary to the trust for the purpose of the definition of ‘loan’ in Division 7A.

The Full Federal Court held that, while the phrase ‘financial accommodation’ is capable of bearing a broad meaning, as a matter of statutory construction, its scope is significantly narrower. Specifically, it requires an obligation to repay an identifiable principal sum to the relevant entity, rather than simply an obligation to pay.

In the case of an UPE owed by a trust to a corporate beneficiary (being ‘an obligation to pay’), the Full Federal Court explained that the arrangement does not involve the payment of a sum by, or at the direction of, the corporate beneficiary to the trust which is required to be repaid by the trust. UPEs owed by a trust to a corporate beneficiary therefore do not constitute financial accommodation provided by the corporate beneficiary to the trust and are therefore not loans as defined.

Where To from Here?

There are a number of issues to play out from here. The key issues are as follows.

Court and Administrative Processes

The Commissioner may apply for special leave to appeal against the Appeal Decision to the High Court. Given what is at stake, this is very much a possibility.

In the meantime, the Commissioner cannot simply ignore the Appeal Decision and continue to administer the laws in accordance with his views as he has done since the Tribunal Decision in 2003 (given it is a court decision).

It is expected that the Commissioner will issue a decision impact statement on the Appeal Decision shortly in which he will announce how he will administer the law in view of the decision.

Legislative Change

Legislative change cannot be ruled out given the exposure to the revenue caused by the Appeal Decision, particularly in view of the current economic landscape.

In October 2018, the Treasury released a consultation paper setting out the former Coalition Government’s proposed changes to Division 7A. The proposed changes included a ‘clarification’ that unpaid present entitlements (UPEs) would come within the scope of Division 7A, from 1 July 2019.

Significantly, it was proposed that the changes to the treatment of UPEs apply retrospectively, with UPEs arising between 16 December 2009 and 30 June 2019 that had not already been put on complying loan terms or deemed to be a dividend needing to be put on complying terms by 30 June 2020 to avoid a deemed dividend from arising.

The proposed change to the treatment of UPEs is one among several proposed changes to Division 7A as set out in the consultation paper (which has not been progressed since 2018).

It remains to be seen whether there will be legislative change to the treatment of UPEs in line with the proposed changes in the consultation paper and, if so, whether those changes will have retrospective operation (which would be highly controversial) or will operate prospectively only.

The Federal election is due to take place in May 2025. It is highly unlikely that any changes to Division 7A will be announced (let alone made) prior to the election. As for after the election, the appetite for change may well depend on the outcome of the election.

Existing Objections, Audits and Rulings

Following the Tribunal Decision, the Commissioner generally placed all objections against assessments for prior years that turn on whether UPEs are loans for Division 7A purposes on hold pending the outcome of the appeal against the decision. In our experience, the Commissioner has similarly delayed the finalisation of investigations that relate, at least in part, to this issue.

Now that the Appeal Decision has been handed down, it can be expected that that the Commissioner will finalise these objections and investigations on the basis that UPEs are not loans for Division 7A purposes in accordance with the Appeal Decision.

Going forward, the Commissioner must administer Division 7A in accordance with the Appeal Decision. In view of this, it can be expected that the following public rulings and guidance materials issued by the Commissioner will be withdrawn in their entirety:

• Taxation Ruling 2010/3 ‘Division 7A loans: trust entitlements’;
• Practice Statement Law Administration PS LA 2010/4 ‘Division 7A: trust entitlements’;
• Practical Compliance Guideline PCG 2017/13 ‘Division 7A - PS LA 2010/4 sub-trust arrangements maturing in or after the 2016-17 income year’; and
• Taxation Determination TD 2022/11 ‘Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of 'financial accommodation?’

Prior Year Lodgments and Other Action Taken Based on the Commissioner’s Views

Taxpayers that have previously lodged tax returns, been issued with amended/default assessments or been issued with penalty assessments on the basis that UPEs owing to corporate beneficiaries are loans for Division 7A purposes should seek advice on the appropriate strategy to adopt in view of the Appeal Decision. Advice should also be sought by taxpayers who have taken other action based on the Commissioner’s view, for example, by entering into Division 7A compliant loan agreements or sub-trust arrangements or by making section 109RB applications.

The strategy may well involve objecting against the relevant assessment or varying Division 7A compliant loan agreements. It is important to take into account the potential operation of Subdivision EA and section 100A when deciding on the appropriate course of action to take.

Taxpayers generally have between 60 days and four years to object against an assessment depending on the circumstances. If the taxpayer is outside of time for lodging an objection, the taxpayer can request that the Commissioner extend the time for lodging the objection.

The Commissioner will need to weigh up all relevant factors in deciding whether to grant an extension of time to lodge an objection. The relevant factors will include those listed in Practice Statement Law Administration PS LA 2003/7 ‘How to treat a request to lodge a late objection’. One of the factors listed in PS LA 2003/7 is where the taxpayer thought that lodging the objection would be futile, but that a court decision handed down shortly after the time limit for lodgment of an objection makes their objection tenable.

Given the limited time period within which objections must be lodged and the factors that will be taken into account by the Commissioner in deciding whether to allow lodgment of an objection out of time, taxpayers should act quickly now that the Appeal Decision has been handed down to preserve their objection rights and maximise their chances of obtaining refunds.

Lodgments Going Forward

The Appeal Decision confirms that an UPE is not a loan for Division 7A purposes. However, it is still possible for the UPE to give rise to a deemed dividend by operation of Subdivision EA of Division 7A or adverse tax consequences under section 100A.

Subdivision EA is a complex provision and, until recently, little attention has been paid to it. Broadly, where a payment, loan or debt forgiveness is made by the trust in favour of a shareholder or associate of a shareholder of the corporate beneficiary while the UPE is in existence, a dividend can be deemed to have been paid by the corporate beneficiary to the shareholder/associate under Subdivision EA.

Section 100A is arguably a more complex provision than Subdivision EA and can potentially apply if the funds representing the UPE are retained in the trust. If it applies, the corporate beneficiary to whom the UPE is owed will be deemed to never been presently entitled to the income. In this event, the relevant income can instead be taxed in the hands of the trustee at the top marginal tax rate plus Medicare levy or in the hands of other beneficiaries (e.g. default beneficiaries under the terms of the trust deed).

Where UPEs are owing to corporate beneficiaries are not promptly paid after they are created, advice should be sought on the tax implications of the UPE to avoid any adverse tax consequences under Subdivision EA or section 100A (where possible) and to ensure that tax returns are correctly prepared.

Concluding Remarks

The Appeal Decision is a resounding victory for taxpayers. However, as can be seen from the above, there are a number of issues still to play out in the wake of the decision. Affected taxpayers should seek advice on the appropriate action they should take in view of the decision for both prior years and going forwards where UPEs owing to corporate beneficiaries are not promptly paid.

‍This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.