A recent Full Federal Court decision has overturned 15 years of Australian Taxation Office (ATO) administrative practice regarding unpaid present entitlements (UPEs). This ruling has significant implications for more than 800,000 discretionary trusts across Australia. While it clarifies a critical aspect of tax law, it does not provide a blanket approval for UPEs moving forward.

The Bendel Decision Explained

In February 2025, the Full Federal Court ruled unanimously in Commissioner of Taxation v Bendel [2025] FCAFC 15 that a UPE from a trust to a corporate beneficiary is not a loan under section 109D(3) of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936). The core reasoning behind this decision is that section 109D(3) requires a transaction to create an obligation to repay. An obligation to pay does not meet this threshold, meaning that a UPE, without additional conditions, does not trigger Division 7A.

This decision directly challenges the ATO’s long-held administrative stance on the matter, causing considerable uncertainty for the tax paying community including corporate beneficiaries of discretionary trusts. The Commissioner of Taxation may seek a High Court appeal, legislative amendments, or issue an impact statement to clarify how historical cases will be managed.

Key Considerations Following the Bendel Decision

Lodging Objections Against Deemed Dividend Assessments

Taxpayers who have received deemed dividend assessments based on UPEs should consider lodging objections immediately if they are within the amendment period.

Handling Existing Division 7A Loan Agreements

• Existing Division 7A loan agreements cannot be unwound retroactively. These are commercial agreements, and their tax implications remain unchanged.
• Terminating a Division 7A loan agreement prematurely may create unforeseen tax consequences.

Reviewing Facility Agreements

Facility or umbrella agreements that cover loan-type transactions between trusts and private companies must be carefully reviewed. Their terms may still bring transactions within the scope of Division 7A.

The Role of Subdivision EA

Taxpayers must reassess their understanding of Subdivision EA, which specifically deals with UPEs in a Division 7A context. If company profits linked to a UPE reach an individual taxpayer (whether directly or indirectly through a trust) a deemed dividend may still arise.

Implications for Pending Company Tax Returns

Decisions regarding UPE treatment in pending tax returns should align with the taxpayer’s risk profile and the company’s filing deadline.

Proper Accounting and Documentation

All financial records must reflect a UPE correctly. Mischaracterising it as a loan can create compliance risks.

What Bendel Does Not Change

Complex UPE Arrangements

While Bendel provides clarity on simple UPEs, it does not prevent Division 7A from applying in more complex arrangements. Subdivision EA remains a key consideration in determining whether a deemed dividend arises.

Other Anti-Avoidance Provisions

UPEs may still trigger other integrity measures, including sections 100A and 99B of the ITAA 1936.

Immediate Unwinding of Arrangements

Taxpayers should notimmediately unwind arrangements entered into under TR 2010/3 and PSLA 2010/4, as they are likely to have created an obligation to repay and may still be subject to Division 7A.

Grandfathered UPEs Pre-16 December 2009

The Bendel decision does not provide any clarity about the treatment of Pre-16 December 2009 UPEs. These would therefore remain on current footing.

Recommended Actions for Taxpayers

Review Prior Arrangements

Determine whether historical UPE arrangements would be impacted under the law as interpreted in Bendel.

Lodge Protective Objections

Taxpayers with prior deemed dividend assessments based on UPEs should lodge objections as a protective measure, recognising that the ATO may delay decisions until the legal process is fully resolved.

Consider Section 109RB Discretion Applications

Section 109RB allows the Commissioner to waive Division 7A consequences due to honest mistakes or omissions. This may be relevant in cases where arrangements were entered based on prior ATO guidance.

Maintain Compliance with Existing Repayment Obligations

For arrangements entered with reference to the ATO’s view in TR 2010/3 and PSLA 2010/4, taxpayers should remain compliant with repayment terms while awaiting further ATO guidance.

Monitor Legislative and Judicial Developments

With the possibility of a High Court appeal or legislative amendment, taxpayers should stay informed on future ATO statements and potential law changes.

The Bendel decision marks a significant shift in how Division 7A applies to UPEs, rejecting the ATO’s long-standing position. However, it does not eliminate Division 7A risks entirely. Taxpayers must carefully assess their existing structures, potential objections, and compliance strategies in light of this decision while preparing for possible legislative changes.

For professional guidance on how Bendel may affect your specific circumstances, please contact us at Power Tynan.