Bendel appeal dismissed: UPEs are not loans

5 minute read 26.02.2025 Timothy Lynch, Jeremy Geale, Nicole Gordon, Aidan Kleynhans

The Full Federal Court confirms that UPEs owed by a trustee to a corporate beneficiary are not loans for the purpose of Division 7A.

Key takeouts

This decision upends the Commissioner's longstanding position on the treatment of unpaid present entitlements (UPEs) to corporate beneficiaries.

UPEs owed by trustees to corporate beneficiaries which have triggered tax liabilities under Division 7A should be reviewed – there may be an opportunity to object to prior assessments.

It remains to be seen whether the Commissioner will seek special leave to appeal to the High Court.

In our previous article, we discussed the decision of the Administrative Appeals Tribunal (AAT) in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074. The facts of the case are summarised in that article.

The key issue in the Bendel litigation was whether a private company can be considered to have made a loan for the purposes of subsection 109D(1) Income Tax Assessment Act 1936 (ITAA36) in circumstances where:

it is a beneficiary of a trust and is made presently entitled to an amount of trust income;
the amount remains unpaid (as an unpaid present entitlement (UPE)); and
it consents to the trustee retaining the amount of the UPE (whether by arrangement, understanding or acquiescence).

Whether a UPE to a corporate beneficiary constitutes a loan has significant consequences, since section 109D(1) can operate to deem a dividend to have been paid from the private company beneficiary to the trustee where a 'loan' is made and not fully repaid (subject various exceptions, such as where the arrangement is documented in a manner complying with section 109N).

The Commissioner's longstanding view (currently reflected in [TD 2022/11] has been that a UPE to a corporate beneficiary can constitute a loan. In particular, the Commissioner refers to the definition of 'loan' in section 109D(3) of the ITAA36 which includes 'a provision of credit or any other form of financial accommodation'. The Commissioner considers that the term 'financial accommodation' is to be understood as having a broad meaning, and that a beneficiary which does not exercise its right to demand immediate payment of an UPE can be considered to provide 'financial accommodation' to the trustee.

The AAT rejected the Commissioner's view, holding that:

…a loan within the meaning of s 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 an 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.

The Commissioner appealed from the AAT decision, which was heard by the Full Court of the Federal Court in [Commissioner of Taxation v Bendel [2025] FCAFC 15].

Commissioner of Taxation v Bendel [2025] FCAFC 15

The Full Federal Court delivered a joint judgment unanimously dismissing the Commissioner's appeal, concluding (at [79]) that:

Having regard to its context, s 109D(3)(b) is to be construed as referring to a provision of credit or any other form of financial accommodation which involves an obligation to repay an identifiable principal sum, rather than simply an obligation to pay. The creation of an obligation to pay an amount to a private company that does not result from a transfer of an amount from or at the direction of the private company is not a loan within the meaning of s 109D(3).

In forming this conclusion, the Court considered the following factors:

Obligation to 'repay' or 'pay'

In order for subsection 109D(1) of the ITAA36 to deem a dividend to have been paid, paragraph (b) provides that the loan must not have been 'fully repaid' before the lodgement day for the current year. The Court considered that, while subsection 109D(3) provides an inclusive definition of the word 'loan', there is no section which expands the meaning of the word 'repaid'. The Court indicated that, in order to be read harmoniously with the reference to 'fully repaid' in paragraph (1)(b), the term 'loan' should be read as containing an obligation to repay (as distinct from merely an obligation to pay).

'Debt' and 'loan'

The Court noted that the language used in other parts of Division 7A (in particular, subsections 109F(1) and 109G) shows a distinction between the use of the terms 'debt' and 'loan'. It considered that this indicates that the concept of a 'debt' is not to be equated with that of a 'loan', and that the concept of a 'loan' is narrower than a 'debt'. The Court further reasoned that this distinction supports the view that the term 'provision of credit or any other form of financial accommodation' should not necessarily be construed as extending to any form of debtor-creditor relationship (noting that the taxpayer conceded that a debtor-creditor relationship was created in this case).

Purpose

The Commissioner had referred to the case of International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) (2012) 246 CLR 455 (International Litigation Partners) in support of the view that the phrase 'financial accommodation' should be given very wide meaning. The Court noted that this case considered that term where it appeared in the Corporations Act, and in a context where it sought to achieve the regulation of activities in a corporate law context.

Noting that the purpose of the definition where it appears in Division 7A is to identify transactions to be treated as the payment of a dividend, the Court considered that it was inconsistent with that purpose to extend the meaning of 'financial accommodation' in the same way as was decided in International Litigation Partners.

What now?

Given the significance of this decision and the potential number of taxpayers impacted, there is reason to anticipate that the Commissioner will seek special leave to appeal to the High Court. In the absence of an appeal, legislative amendment is likely to be high on the Commissioner's agenda.
No doubt tax advisers and their clients will be closely watching to see how the Commissioner responds to this decision. The Commissioner has 28 days in which to seek special leave to appeal to the High Court. With an election on the horizon the Commissioner is unlikely to obtain traction from Treasury in relation to legislative amendments in the short term.

In the meantime, this creates a difficult situation for any taxpayers who have:

had UPEs treated as dividends by the ATO; or
put in place Division 7A-compliant loan agreements for UPEs on the basis of ATO guidance.

Pending confirmation of the Commissioner's response, the way forward for taxpayers is uncertain. Private company beneficiaries of trusts need to ensure that they seek advice in relation to the impact of the decision on their current and historical arrangements prior to lodgement of their 2024 and subsequent year returns. Taxpayers who have been assessed on the basis of existing UPEs should urgently consider objecting to prior year assessments, to best preserve their rights.

Please contact any member of the MinterEllison Tax Team if you would like any assistance in applying Division 7A of the ITAA36 post-Bendel.