On 19 February 2025, the decision of the Full Federal Court in FCT v Bendel (2025) FCAFC 15 (Bendel) was handed down. In this case, the Court overturned the long-held view of the Australian Taxation Office (ATO) that an unpaid present entitlement (UPE) of a corporate beneficiary is a loan for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936).
What happened in Bendel?
In Bendel, the Full Federal Court unanimously dismissed the Commissioner’s appeal against the decision of the Administrative Appeal Tribunal (AAT), which held that UPEs were not ‘loans’ for Division 7A purposes.
Broadly, in that case, Mr Bendel controlled several entities including Gleewin Investments Pty Ltd (Gleewin) and the corporate trustee, Gleewin Pty Ltd (Trustee), of the Steven Bendel 2005 Discretionary Trust (the Trust).
During each of the 2014 to the 2017 income years, Gleewin became entitled to a share of the net income of the Trust. Some of this income was distributed to Gleewin, but the majority of the income remained outstanding, creating UPEs totalling just over $1.383 million.
The Commissioner considered the UPEs constituted a loan from Gleewin to the Trustee, and were deemed dividends under Division 7A and included in the Trustee’s net income. This resulted in the Commissioner issuing amended assessments to Mr Bendel and Gleewin, as beneficiaries presently entitled to a share of the net income of the Trust.
The AAT held that the UPEs did not fall within the definition of ‘loan’ for the purposes of section 109D(3) of the ITAA 1936, with the Full Federal Court unanimously dismissing the Commissioner’s appeal against that decision.
Broadly, the Full Federal Court held that a deemed dividend only arises under Division 7A if the private company ‘makes a loan,’ as per section 109D(1)(a) of the ITAA 1936. The legislative definition of a loan requires an advance, provision, payment or transaction. Accordingly, a private company must take a positive action to ‘make a loan.’ Simply not calling for payment by a trustee, and leaving the UPEs outstanding, does not amount to a positive action as required under the definition of a loan. The Court stated that the phrase ‘makes a loan’… “connotes something more than the mere existence of a debt owed to a private company.” (at [79]).
This decision overturns the view of the ATO that, by simply not calling for payment of a UPE, a corporate beneficiary has made a loan to the respective trust.
This decision indicates that income allocated but which remains unpaid to a corporate beneficiary of a discretionary trust can be retained in the belly of the Trust and reinvested for the benefit of all beneficiaries without triggering the strict requirements of a Division 7A loan — a clear win for trusts and the taxpayer.
However, the consequences of this decision will need to be considered on a case-by-case basis. Where UPEs have arisen pre-1 July 2022, it will be necessary to consider the actions that have been taken in line with the Commissioner’s prior views under Practice Statement PS LA 2010/4 (e.g. by establishing sub-trust arrangements or where applications under section 109RB of the ITAA 1936 were made requesting the Commissioner to exercise discretion to disregard any deemed dividends). Where taxpayers have sought to comply with the Commissioner’s views by entering into Division 7A compliant loan agreements, it is questionable as to whether those arrangements can now be unravelled. Another issue is the potential application of Subdivisions EA and EB, which may also apply where a trust has UPEs.
When does Division 7A apply?
Division 7A operates to ensure that private companies do not make tax-free distributions of profits to shareholders or their associates in the form of payments, loans or forgiven debts.
A ‘loan’ for the purposes of Division 7A is defined in section 109D(3) of the ITAA 1936 to include an advance of money, a provision of credit, or ‘any other form of financial accommodation’.
A private company will be taken to pay an unfranked dividend if it makes a loan to a shareholder or their associate unless the loan is fully repaid or converted into a Division 7A complying loan by the company’s lodgement day for the income year.
What is a Division 7A complying loan?
When a loan is considered to be a complying loan where it meets the following three criteria:
- Minimum interest rate — the interest rate for each year of the loan must be at least equal to the benchmark interest rate (8.77% for the income year ended 30 June 2025).
- Term of the loan — the term of the loan must not exceed 25 years for a loan secured by a mortgage over real property, or otherwise 7 years for any other loan.
- Written agreement — the written loan agreement must be in place before the private company’s lodgment day for the income year in which the loan amount was paid.
Where a loan is on the above complying terms, it will be excluded from constituting a deemed dividend under Division 7A.
What was the ATO’s position?
In Taxation Determination TD 2022/11, the ATO took the view that the ‘provision of financial accommodation’ extends to circumstances where an entity, with knowledge of a trust entitlement, does not call for payment of this entitlement from the trustee.
Under the view in TD 2022/11, a private company may be considered to have made a loan, giving rise to a deemed dividend, in circumstances where:
- the private company is a beneficiary of a trust and is presently entitled to trust income;
- the amount of trust income is unpaid, constituting a UPE; and
- the company does not exercise its right to call for payment of the UPE.
The ATO considered that by not exercising its right to demand payment of the UPE, the company consents or acquiesces to the provision of financial accommodation to the trustee. Accordingly, the company makes a loan to the trustee when financial accommodation is provided.
This ATO view had particularly impacted private family groups, which utilise discretionary trusts as part of their business structure. Under these arrangements, the trustee will often appoint income to a related private company beneficiary (i.e. a ‘bucket company’), which is then assessed on its share of the trust’s net income, paying tax at the corporate rate rather than the higher marginal rates applying to individual beneficiaries.
Where the trustee appoints trust income to a corporate beneficiary but the entitlement is not paid, the company has a UPE owing from the trustee.
If the company has knowledge of this UPE and does not demand immediate payment by the trustee, the company is taken to have provided financial accommodation to the trustee. Under the ATO’s view, the company is taken to have made a Division 7A loan to the trustee, which may constitute a deemed dividend in the hands of the trustee.
Implications of the decision
We are aware that the ATO has been conducting investigations and audits in respect of UPEs and Division 7A compliance. In light of Bendel, clients who have been the subject of audit activity in respect of UPEs and who have received amended assessments may wish to lodge objections against these assessments. We expect to see many objections being lodged, following this decision.
It is likely that the Commissioner will apply for special leave to appeal to the High Court against Bendel. However, the success of such an appeal is unlikely, given the unanimous decision of the Full Federal Court.
We note that as part of the 2016-17 Federal Budget, the former Government announced that it would make legislative amendments to ensure that UPEs came within the scope of Division 7A. However, recent budgets have been silent on this reform, and it is unlikely we will see any legislative change in this space given the upcoming federal election.
How can Rigby Cooke help?
If you have received amended assessments following an ATO audit in respect of Division 7A compliance, we can consider if there are grounds to object against the ATO’s decision as a result of Bendel. We can represent you in all aspects of the objection process and would request full remission of penalties and interest on any purported tax shortfall.
If you are currently being audited or investigated by the ATO, please contact Tamara Cardan or Rachael Grabovic to make an appointment and discuss your situation.
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