Division 7A update: High Court confirms Bendel decision on UPEs

The High Court has now handed down its decision in Commissioner of Taxation v Bendel, confirming the position for the taxpayer on Division 7A, unpaid present entitlements (UPEs), trust distributions, and private company loans.

This is a landmark outcome for the taxpayer. The High Court has dismissed the Commissioner’s appeal, confirming that UPEs arising from a trust’s setting aside of its distributable income to a private company beneficiaries will not be classified as a loan for Division 7A purposes. However, the decision of the High Court may only benefit a small number of taxpayers on the basis that:

• The decision appears to be limited to the particular fact pattern. Critical to the High Court’s decision was the specific terminology used in the distribution minute and deed to ‘set aside’ net income to be held in a ‘separate trust…pending payment’.
• There doesn’t appear to be an ability to unwind unpaid present entitlements that were previously converted to legal form complying Division 7A loans.
• The provisions of Subdivision EA within Division 7A could have applied to tax Mr Bendel, rather than the 2005 Trust.
• Section 100A must still be considered where there is a retention of funds by the trustee.
• The Federal Budget has introduced a proposed 30% minimum tax on discretionary trust distributions, expected to apply from 2028, which will eliminate the benefits of distributing to corporate beneficiaries from a discretionary trust.

In this alert, we outline the final decision and what this means in practice for clients with Division 7A exposures.

High Court outcome confirms position

The High Court has confirmed the earlier Full Federal Court decision, but found that:

• This UPE does not constitute a loan under Division 7A. However, central to this decision is the specific wording included in the trust deed and resolutions. The effect of the deed and resolutions was to create a fixed trust over the property representing the net income for each period and without further actions by Gleewin Investments, there was no debtor creditor relationship. However, if the trust deed and resolutions contained words to the effect that net income “be applied” and the “application [be] effected by crediting the said amounts to such beneficiaries in the books of the trust” there may have been a debtor creditor relationship.
• Leaving an amount unpaid under a separate fixed trust does not amount to the provision of financial accommodation unless the amount has been called for by Gleewin Investments.
• Subdivision EA was the appropriate provisions within Division 7A to tax the arrangement. Subdivision EA applies where a trust has an unpaid present entitlement to a corporate beneficiary and the trust subsequently makes a loan, payment, or forgives a debt to the shareholder or associate of the shareholder of the private company. In this particular case, the 2005 Trust had made loans to Mr Bendel, whilst there were subsisting unpaid present entitlements.

Why this matters

For more than 15 years, the ATO has treated UPEs as Division 7A loans, requiring taxpayers to:

• enter into complying loan agreements
• structure sub-trust arrangements
• make principal and interest repayments to avoid deemed dividends.

The High Court decision overturns this administrative approach, representing a fundamental shift in the application of Division 7A for particular trust structures.

We would recommend that a detailed review of the trust deed and resolutions is undertaken prior to seeking any amendments to assessments. As we mentioned at the beginning of this alert, there will be small number of taxpayers with a very particular fact pattern that will benefit from this decision.

It will be interesting to see whether there are legislative changes made prior to the commencement of the proposed budget changes and the ATO’s response. We will provide further alerts if this happens.

How SW can help

The High Court decision in Bendel creates an opportunity to revisit Division 7A positions, but it also requires careful consideration to manage risk and ensure compliance with broader anti-avoidance rules.

SW can assist by reviewing your trust structures and existing Division 7A arrangements, assessing the treatment of UPEs and any historical exposures, and advising on how the proposed 30% minimum tax may impact your overall structure.

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