In recent legal developments, the Full Federal Court of Australia delivered a landmark ruling on 19 February 2025, in the case of Commissioner of Taxation v Bendel [2025] FCAFC 15. This decision has shed light on an important aspect of trust distributions and the implications for Division 7A (Div7A) of the Income Tax Assessment Act 1936 (ITAA 1936).
For businesses and individuals involved with trusts, the key takeaway is that unpaid present entitlements (UPEs) arising from trusts allocating income to corporate beneficiaries, do no, under the circumstances outlined in this case, constitute loans for Div7A purposes.
What is a UPE?
Before diving into the specifics of the Bendel case, let’s define UPE. A UPE arises when a beneficiary of a trust is entitled to a share of the trust’s income, but that income is not immediately distributed in cash. Instead, the entitlement remains unpaid and is often recorded as a liability in the trust’s accounts.
The Bendel Case Overview
The Bendel case involved Gleewin Investments Pty Ltd, a corporate beneficiary of a discretionary trust, which was entitled to income distributions from the trust during the 2013 to 2017 income years. Although income was allocated to Gleewin Investments Pty Ltd, it was not physically paid out. The Australian Taxation Office (ATO) sought to apply Division 7A, maintaining that these UPEs should be treated as loans, potentially triggering adverse tax consequences.
The ruling clarified that a UPE allocated to a corporate beneficiary is not automatically considered a loan under Div7A, even if the amount remains unpaid. This decision has significant implications for businesses and individuals who operate trusts and use corporate beneficiaries to manage income distributions.
The Full Federal Court unanimously dismissed the ATO’s appeal, concluding that:​
- A “loan” under section 109D(3) of the ITAA 1936 requires an obligation to repay a sum, not merely an obligation to pay.​
- A UPE represents an obligation to pay, establishing a debtor-creditor relationship, but does not equate to a loan since there’s no obligation to repay an advanced sum.​
The Court emphasized that expanding the definition of “loan” to include UPEs would be inconsistent with the statutory context and could lead to unintended double taxation.
Implications for Your Business
Historically, UPEs were converted to Division 7A loans in Year 2 under the former TR 2010/2 and PS LA 2010/3, as this was the point at which they were considered to provide financial accommodation and therefore constituted loans under common law, triggering Division 7A.
Where such conversions were undertaken in compliance with the law as understood at the time, current legal and specialist opinion is that they cannot now be reversed to UPEs, as the loan conversion has already occurred.
For UPEs arising in the 2024 income year that have not yet been converted into complying Division 7A loans in the 2025 income year, there remains an opportunity to crystallise these UPEs without triggering a loan conversion and, for now, avoid Division 7A consequences.
That said, the ATO has been granted special leave by the High Court to appeal the relevant decision and has issued a Decision Impact Statement indicating its view that Division 7A continues to apply. Even if the appeal is unsuccessful, the ATO has flagged ongoing compliance activity regarding UPEs under section 100A of the ITAA 1936.
Our recommended approach is to crystallize the UPEs for now, defer lodgement of any 2025 income tax returns that may involve non-complying loans in the event the ATO succeeds, and await further expert commentary.
Commissioner of Taxation v Bendel [2025] FCAFC 15 (Published 19 March 2025) | Legal database
