Since the appeal application has been made, the Commissioner has released a decision impact statement outlining their approach to Division 7A in the interim, pending the outcome of the appeal process.

For more insight on the original decision of the Full Federal Court see our previous alert.

What the Commissioner states

The Commissioner states that they will:

• continue to apply the law as though an unpaid present entitlement (UPE) is a loan for Division 7A purposes
• consider the application of other provisions (for example section 100A) where UPE remain unpaid.
• not issue any amended assessments, private binding rulings or objection decisions. If such decisions are required to be made, decisions will be made in accordance with the ATO’s existing view.

What an appeal involves

An appeal to the High Court is a 2-step process.

1. There must be a special leave application accepted by the High Court (at this stage the Commissioner has only lodged an application) and
2. if the special leave application is accepted, there will be a full hearing. However, only 10 – 15% of special leave applications are accepted by the High Court.

How SW can help

There is going to be a period of uncertainty for taxpayers about how to treat an UPE given the Commissioner’s position and the Commissioner’s chance of success.

In the meantime, we encourage you to discuss the Bendel decision and its impact on your own group’s UPEs with your SW contact or the specialist tax contacts listed in this alert.

Contributors

Ned Galloway

The post Bendel decision | ATO appeals and updates Decision Impact Statement appeared first on SW Accountants & Advisors.

Background

The Full Federal Court has unanimously dismissed the Commissioner’s appeal from the AAT decision in the Bendel case in its judgement handed down on 19 February 2025. 

Full details of the original AAT decision and relevant background can be found in our previous alert here. 

The facts involved the Commissioner applying his long-standing view that an unpaid present entitlement (UPE) owed to a private company would fall within the definition of a ‘loan’ for Division 7A purposes.  In the Commissioner’s view (as first published in Taxation Ruling TR 2010/3 and Law Administration Practice Statement PS LA 2010/4 as subsequently refined in Taxation Determination TD 2022/11), a UPE owed to a private company will be a loan for Division 7A purposes in the year following that in which the distribution is made.

The term ‘loan’ has an extended statutory definition for Division 7A purposes and includes ‘the provision of credit or any other form of financial accommodation’ and ‘a transaction (whatever its terms or form) which in substance effects a loan of money’.  Prior to the Federal Court decision in Bendel, the Commissioner’s view has essentially been that a UPE that remains outstanding once the company has knowledge of the UPE would be a loan within the meaning of one or both of these elements of the extended definition. 

The decision

The basis of the Full Federal Court in Bendel is disarmingly straightforward. The Court placed particular importance on various statutory provisions in Division 7A that referred to the ‘repayment’ of a loan and noted the distinction between a transaction or arrangement that creates an obligation to repay an amount and a transaction or arrangement that creates an obligation to pay an amount.  Having regard to the language used in the relevant provisions of Division 7A, the Court concluded that to fall within the definition of ‘loan’ for Division 7A purposes the arrangement must be one that gives rise to an obligation to repay. A UPE is lacking this fundamental feature because the trustee of the relevant trust has an obligation to pay or discharge a UPE but does not constitute an obligation to repay the relevant amount.  The Court’s view is succinctly stated in paragraph 93 of the judgement as follows:

‘…..s 109D(3) requires more than the existence of a debtor-creditor relationship. It requires an obligation to repay and not merely an obligation to pay.’

Whilst the Full Federal Court decision confirms the correctness of the AAT decision, the reasoning of the Full Federal Court was different.  The AAT decision focussed less on interpretation of the relevant statutory provisions and more on the history of the relevant provisions and extraneous material.  The appeal judgement is much more conventional and based on the interpretation of the provisions of Division 7A itself. 

What does the decision mean?

This judicial decision is a major blow to the Commissioner and will potentially have widespread ramifications for private groups where the use of company beneficiaries is commonplace.  The emphatic Full Federal Court decision means that, as the law stands, a UPE is not a loan for Division 7A purposes.

Unless the Commissioner seeks and is granted special leave for a High Court appeal which then overturns the Full Federal Court decision, this decision will stand.  This would mean that the Commissioner would need to resile from his position that a UPE owed to a private company represents a loan made by the private company to the distributing trust.

A number of public rulings, practice statements and determinations are based on the premise that has been unanimously rejected by the Full Federal Court, including but not limited to those pronouncements referred to above. The decision will have potential implications not only for UPEs owing directly between a trust and a private company beneficiary, but also the Division 7A rules relating to transactions undertaken by trusts where there is a UPE owing to a company beneficiary (Subdivision EA of Division 7A). 

The original AAT Bendel decision was widely regarded as interesting but, being a decision of the AAT, was one that was viewed with some caution. The unanimous Full Federal Court decision is clearly quite a different proposition.

Practical issues – what to do with UPEs?

Until the matter of any further appeal process is determined, the practical question that requires consideration is how to deal with any UPEs affected by the decision in the meantime. This may affect UPEs that came into existence in the 2023 year that, in the Commissioner’s view prior to the latest Bendel decision, were regarded as loans in the 2024 year. It will also impact 2024 and subsequent years’ UPEs until the final outcome is known with certainty.  In addition, this important decision will clearly impact on some existing ATO reviews and disputes on foot relating to private groups.

It is unlikely that a decision with respect to the Commissioner’s special leave application (if made) would be known prior to lodgement date of the 2024 tax returns. It is possible that the ATO may approach the Federal Government for a legislative amendment in response to this decision.  However, given that an election is only months away, it is unlikely that any legislative change will happen in the near term.

We would expect the Commissioner would issue a Decision Impact Statement and/or a Practical Compliance Guideline on the current decision in the event that an appeal is sought.  Taxpayers and ATO officers will need guidance as to how to practically deal with UPEs owing to private companies in the event that the Commissioner seeks to (and is granted leave to) appeal the decision.

A further word of caution.

A further word of caution should also be noted.  As resounding a victory as this decision is for the taxpayer, assuming that the decision stands, it does not mean that UPEs owing to companies can be left on foot indefinitely without fear of challenge by the Commissioner. The Commissioner has other ‘weapons in his armoury’ that could be deployed to challenge long-standing UPEs owing to corporate (or, indeed, other) beneficiaries of a trust, including section 100A. The Commissioner’s views on the potential application of section 100A to trust distributions to beneficiaries. that remain unpaid also need to be borne in mind when considering trust distribution matters. The Commissioner’s views on section 100A are themselves the subject of some controversy and will presumably subject to judicial review at some future date, but for the present these views remain on foot.  

Furthermore, as noted above, if UPEs owing to companies are left on foot, Trusts will need to be cautious about lending to other associated entities due to the application of Subdivision EA.

How SW can help 

SW will continue to monitor and keep you informed on a timely basis of any further developments in this space. It will be important to closely monitor the ATO’s response to this decision and any appeal process that might be instigated by the ATO. 

In the meantime, discuss the Bendel decision and its impact on your own group’s UPEs with your SW contact or the contacts listed for this article.

Contributors

Ian Kearney

Richard Osborn

[1] Commissioner of Taxation v Bendel [2025] FCAFC 15.

The post Division 7A & UPEs | Federal Court rejects ATO view appeared first on SW Accountants & Advisors.

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.

Contributors

Ian Kearney

Ned Galloway

Mitchell Kenny

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

The post Division 7A UPEs | Bendel decision challenges ATO’s views appeared first on SW Accountants & Advisors.