Since 16 December 2009, the Australian Taxation Office (ATO) has maintained the view that when a family trust appoints income to a corporate beneficiary (referred to as the beneficiary company) without making a payment, the unpaid present entitlement (UPE) constitutes a “loan” for Division 7A purposes. As per this view, the UPE must either be paid or placed on complying Division 7A loan terms, or a deemed fully assessable dividend would arise.
This view, however, had not been tested in court until 28 September 2023, when the Administrative Appeals Tribunal (AAT) ruled in favor of Steven Bendel and his beneficiary company, Gleewin Investments Pty Ltd (Gleewin). The AAT’s decision concluded that the UPEs to Gleewin were not loans. The full details of the ATO’s historical stance, as well as the AAT case analysis, are outlined below.
The Commissioner of Taxation appealed this decision to the Full Federal Court, which issued its judgment on 19 February 2025 in the Bendel case. The Court, in a unanimous decision, ruled that UPEs do not qualify as “loans” under Division 7A.
What Does This Mean for You?
Private groups and family trusts are likely to have numerous questions about how the Bendel case will affect them, both retrospectively and in the future.
Currently, the ATO has not announced whether it intends to appeal the decision to the High Court, but this is expected in the coming weeks. In the meantime, the ATO is expected to release a Decision Impact Statement, which will outline their view on the case and its potential impact on taxpayers.
Until there are immediate filing obligations or further guidance from the ATO, our recommendation is to wait and see what the ATO’s next steps are. We suggest reaching out to review your arrangements in light of the case and the potential changes it could bring.
Have You Been Subject to ATO Review in the Past?
If the ATO has previously imposed additional tax, penalties, or interest in relation to UPEs within your family trust group, it may be worthwhile to review the ATO’s decision and discuss the possibility of filing an objection. Feel free to contact us for assistance in navigating this process.
Key Takeaways from the Bendel Case
Here are the key takeaways from the Bendel case and its implications:
- UPEs Arising After 30 June 2024: Depending on your company’s lodgment schedule, consider keeping UPEs as is until we receive more clarity on the matter.
- UPEs Already Converted to Loans or Sub-Trusts: We are awaiting guidance from the ATO through their Decision Impact Statement or subsequent updates. Without administrative concessions, these UPEs could continue to be subject to Division 7A.
- Loans from Trusts to Associates of a Company with UPEs: A separate section of Division 7A governs these types of arrangements and should be considered accordingly.
- Future Tax Considerations: If the government decides to amend the law or the ATO provides further guidance, trust structures could become more attractive if UPEs can be retained as working capital or reinvested within the trust.
Conclusion
The Bendel case represents a significant turning point in tax structuring for private groups, particularly in relation to family trusts. The decision challenges the ATO’s long-standing interpretation of UPEs under Division 7A, and its implications will likely affect future tax planning, structuring, and compliance. Taxpayers and advisers should carefully monitor any further developments, especially from the ATO, to ensure they are equipped to make informed decisions in the future.
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