Division 7A UPEs | Bendel decision challenges ATO’s views

Division 7A UPEs | Bendel decision challenges ATO’s views


The decision in Bendel1 could have significant implications to Division 7A application, challenging the Commissioner’s long-standing position to treat unpaid present entitlements (UPEs) as loans.

The Commissioner’s view is that where a company beneficiary of a trust has an UPE, this entitlement will generally be treated as a loan for Division 7A purposes, if it is not discharged within the required time frames. The Bendel and Commissioner of Taxation [2023] AAT 3074 decision held that a UPE was not a loan for Division 7A purposes. If upheld, the case could have significant implications to the application of Division 7A, although we would recommend caution at this stage.

ATO views on UPEs tax treatment

If UPEs are treated as loans under Division 7A, this gives rise to a deemed unfranked dividend to the trust unless the relevant arrangement was placed on complying Division 7A  loan terms prior to the lodgement date of the relevant trust. Originally, the prevailing view was that a UPE would not generally constitute or give rise to a loan.  

However, with the publication by the ATO of TR 2010/3 and Law Administration Practice Statement PS LA 2010/4, the ATO’s position was made relatively clear. The ATO’s stated view was that a UPE of a corporate beneficiary, prospectively from 16 December 2009 would be regarded as the provision of ‘financial accommodation’ and/or an ‘in substance’ loan in circumstances where:  

  • the funds representing the UPE were retained for use within the trust, and
  • the private company beneficiary allowed this use by acquiescing to this retention with knowledge of it.

This is on the basis that the definition of a loan for the purposes of Division 7A included arrangements involving the provision of financial accommodation and ‘in substance’ loans. The view of the ATO is that such arrangements would be treated as a Division 7A loan in the income year following the income year in which the UPE arose.

As an administrative concession, the ATO’s position was that UPEs placed on certain ‘interest only’ subtrust terms (in compliance with PS LA 2010/4) would not be treated as a loan for Division 7A purposes. 

The ATO’s approach to UPEs was changed further in 2022 with the withdrawal of TR 2010/3 and PS LA 2010/4 and issuance of TD 2022/11 which removed the ‘complying subtrust’ concession.

It is surprising that it has taken this long for a judicial challenge and decision to occur on the Commissioner’s views reagarding Division 7A UPEs.   

The Bendel Case decision

In the Bendel Case, the court held that the UPEs payable from a discretionary trust to a corporate beneficiary are not loans for the purpose of section 109D(3) of the Income Tax Assessment Act 1936.

The case essentially involved the taxpayer disputing assessments raised by the ATO against beneficiaries of a trust on the basis of a deemed dividend arising to the trust under Division 7A. Whilst there were a number of related issues considered in the judgement, the key issue was whether Gleewin Investments Pty Ltd, as corporate beneficiary of the relevant discretionary trust, had made a loan within the meaning of that term in section 109D(3) of the Income Tax Assessment Act 1936 to the trust.

Section 109D(3) defines the term ‘loan’ for the purposes of Division 7A and encompasses arrangements that involve the provision of financial accommodation or credit regarded as ‘in substance’ loans.

The taxpayer asserted that the extended definition of ‘loan’ for in section 109D(3) needed to be interpreted within the statutory context of Division 7A and other provisions included in Division 7A, the express purpose of which was to deal with arrangements involving UPEs. These provisions included former section 109UB and its more complex successor provisions, Subdivision EA of Division 7A. This was supporting evidence for the proposition that UPEs were not intended to fall within the definition of loan for the purposes of Division 7A. The taxpayer also stated that a contrary interpretation would mean that UPEs could effectively result in a duplication of tax outcomes and double taxing in effect. 

The Commissioner argued that the extended wording of the term loan in section 109D(3) was sufficiently clear to include a UPE, and the prospect of double taxation under the provisions were played down as a practical issue by the Commissioner.

The taxpayer’s claims were favoured by the Tribunal who agreed with the double-taxing propositions and the relevance of statutory context. The Tribunal found that the UPE owing was not a loan under section 109D(3), stating at paragraph 101 that:

the necessary conclusion is that a loan within the meaning of section 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust.

So what does this decision mean?

The decision, whilst being a relatively junior judicial decision, is a significant decision for private group taxpayers. The Commissioner will most likely lodge an appeal to the Federal Court. It is unlikely that the Commissioner will resile from his views in TD 2022/11 unless a more senior court rules similarly in favour of the taxpayer. The ATO will likely also shortly release a Decision Impact Statement (DIS) in response to the AAT’s decision. 

There are some caveats in relation to this decision. As noted by the Tribunal, Division 7A implications may still arise (under Subdivision EA) where any UPE remains outstanding in favour of a private company beneficiary and the relevant trust undertakes certain transactions in favour of shareholders or associates of the company (such as a loan).  In addition, the Commissioner has also recently highlighted that another anti-avoidance provision, section 100A could also play a role in relation to some UPEs.

Although the decision will be welcomed by many taxpayers, caution is still recommended in the treatment of UPEs. SW will be closely monitoring any developments in this space and will keep you informed.

How SW can help 

If you would like to discuss the Bendel decision or need assistance with your Division 7A matters, please reach out to us.


Ian Kearney

Ned Galloway

Mitchell Kenny

1 Bendel and Commissioner of Taxation [2023] AAT 3074  decision

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