For the past 15 years, tax practitioners and the broader business community have operated with the knowledge that the Australian Taxation Office (“ATO”) held the firm view that Unpaid Present Entitlements (“UPEs”) from discretionary (or ‘family’) trusts to related private company beneficiaries became a form of Division 7A loan if not placed on formal loan terms. This long-standing interpretation meant that discretionary trusts often faced practical challenges: growing businesses, repaying bank debt or acquiring investments or real property was complicated by the need to continually convert UPEs into complying loans, thereby incurring onerous repayment burdens. The ATO’s view meant that, practically speaking, taxpayers often shifted investments or businesses directly into private companies to simplify and reduce complexity, in exchange for losing access to the 50% CGT discount.
The Full Federal Court has clarified that UPEs are not loans for Division 7A purposes, meaning the ATO’s interpretation over the last 15 years has been incorrect. With the ATO lodging their application for special leave to the High Court of Australia on 18 March 2025, the uncertainty is not over yet. There is no guarantee the High Court will agree to hear the case, but that will not be known for some time either.
On 19 March 2025, the ATO issued its Interim Decision Impact Statement (“IDIS”) on the Bendel case.
In his IDIS, the Commissioner stated that the ATO “does not intend to revise its current views relating to private company entitlements to trust income as set out in Taxation Determination TD 2022/11”. Specifically, in terms of the Commissioner’s administrative approach on this issue he stated:
24. Pending the outcome of the appeal process, we are administering the law in accordance with the published views relating to private company entitlements and trust income in TD 2022/11.
25. Until the appeal process is finalised, where a decision turns on whether or not a UPE is a subsection 109D(3) loan, we do not propose to seek to finalise:
26. However, if a decision is required to be made (for example, because the taxpayer's period of review will elapse or a taxpayer gives notice requiring the Commissioner to make an objection decision), our decisions will be based on the existing ATO view of the law.
In his IDIS Commissioner also fired a warning shot regarding the potential for section 100A to be applied in relation to UPE’s to related corporate beneficiaries aside from the Division 7A considerations. In his Practice Compliance Guideline (PCG) 2022/2 concerning the risks of section 100A applying to various arrangements, the Commissioner identifies types of arrangements to fall within certain colour coded low or high risk “zones”. He states that arrangements in the highest “red risk zone” will attract the ATO’s attention and may result in an audit where appropriate. Arrangements in the low-risk “green zone” will not result in the ATO engaging its compliance resources other than to confirm the features of the arrangement. Relevantly, at paragraph 25 of this PCG, the Commissioner states that an arrangement whereby a corporate beneficiary is made entitled to income from a related trust and the trustee retains those funds by way of a loan on “commercial terms” for working capital to be within its low-risk “green zone” for the purpose of section 100A risk assessment. Specifically at subparagraph 25(e) the Commissioner states that a loan on complying Division 7A terms would be sufficiently commercial for this purpose.
The comments of the Commissioner regarding the potential operation of section 100A in his IDIS concerning the Bendel can only be interpreted as a clear indication of the direction the ATO might go with UPEs to related corporate beneficiaries should the Bendel decision stand.
The pending High Court appeal process means there is still practical uncertainty on how Division 7A should be applied to UPEs. Taxpayers are entitled to view the Bendel judgement as the correct interpretation of the law and the case itself is an important reminder that the ATO cannot create taxation laws and its role is to simply apply the law provided to us from the legislature and as interpreted by the courts. Until the High Court appeal process plays out, advisers will need to navigate a landscape where the ATO is clinging to a long-standing administrative approach that the Full Federal Court has ruled is an incorrect interpretation of Division 7A.
Whilst the decision provides a compelling rationale to treat UPEs on a ‘pre December 2009’ basis going forward, there is the distinct possibility that a legislative ‘fix’ might emerge post-election. Notably the 2016-2017 budget hinted at amending Division 7A to adopt prior recommendations (which included either aligning the treatment of UPEs with loans, or introducing an interest-only model). Given the length of time that has passed since then, it remains anyone’s guess as to what form a future amendment might ultimately take.
For many taxpayers who faithfully followed the ATO’s Rulings – converting UPEs into seven-year “109D complying loans” under TR 2010/3 and later TD 2022/11 – the Bendel decision will have little retroactive impact. Those historic actions, built on the assumption that UPEs constituted a form of ‘financial accommodation’ for Division 7A purposes, remain locked in. While one might argue that a loan agreement explicitly defining the loan amount in reference to section 109D could imply that the underlying UPE was never truly subject to a loan arrangement, such reasoning ultimately appears academic and is unlikely to succeed - especially when all parties have consistently operated under the ATO’s interpretation and treated the UPE as if it had been converted to a loan.
For taxpayer groups with UPEs that are subject to so called ‘sub-trust arrangements’ under the withdrawn PS LA 2010/4, a careful analysis will be needed to understand if such UPEs remain ‘UPEs’ that the Bendel decision can be applied to. For instance, there will be some taxpayers that have 30 June 2022 (and prior) UPEs that still have some time to ‘run’ on their 7 or 10 year 'sub-trust' arrangements.
Conversely, for those taxpayer groups that have incurred additional tax, penalties or interest by not converting UPEs in line with the ATO’s longstanding view in TR 2010/3 and later TD 2022/11, the Bendel decision offers a potential avenue for redress. Affected taxpayers should urgently seek specialist advice and consider lodging objections to previous assessments. Even if objections are outside the 4 year window that typically applies to Division 7A adjustments, the ATO has discretion to extend the timeframe and PS LA 2003/7 provides (among other reasons) that extensions would generally be allowed if “the taxpayer thought that lodging an objection was futile until a court decision - or a change in legislation or a public ruling - delivered shortly after the time limit expired made the objection reasonable”.
For taxpayers with a UPE that arose on 30 June 2023, the current ATO position (to avoid deemed dividends) requires entry into a complying loan agreement by the lodgement date of the 2024 return (typically as late as 15 May 2025) with the first minimum repayment due on 30 June 2025. Taxpayers currently in this situation may conceivably take these alternative positions:
Under one approach taxpayers could rely on Bendel and take no further action on the basis that Bendel is the law of the land that UPEs are not loans for Division 7A purposes. This will require taxpayers to consider if other provisions, including subdivision EA of Division 7A, or section 100A, have application.
If, after following this approach, the High Court finds in favour of the ATO, then the risk emerges that the entire balance of the 30 June 2023 UPE became a taxable (unfranked) dividend during the 2024 year. It is not clear that the Commissioner’s discretion in section 109RB would be available given the narrowness of ‘honest mistake’ or ‘inadvertent omission’. On the other hand, taxpayers may at least be protected from penalties on the basis that relying on Bendel constitutes a reasonably arguable position!
A possibility may emerge to enter into a tailored loan agreement before 15 May 2025 that narrowly defines the loan to capture only those amounts subject to 109D for the year ending 30 June 2024. If Bendel stands, then the loan agreement does not capture any amount. If the ATO succeed at the High Court, then the loan agreement should ensure that the 2023 UPE is subject to a complying loan agreement. If no ‘loan’ repayment is made by the apparent 30 June 2025 deadline, then the deemed dividend should be limited to the missed repayment (as opposed to the full UPE balance in the first scenario). This approach is not necessarily straight forward; one issue may be whether such an agreement is void for ‘uncertainty’ where the parties are not certain as to exactly what amount, if any, they are putting forward.
Of course, the third option is to adopt the Commissioner’s approach i.e. follow TD 2022/11 until Bendel has run its course. The risk is, of course, that the 2023 UPEs are irretrievably converted to Division 7A loans, and subject to repayment, and then, sometime after 30 June 2025, Bendel is upheld by the High Court (or special leave is declined).
Practitioners might be tantalised by the prospect of a return of the ‘good old days’ before December 2009 when the ATO’s approach to UPEs fundamentally changed.
However, even if Bendel remains the law, several key factors must be kept in mind:
There is a logical expectation that substantial tax revenue may be “at risk” from trusts accumulating assets eligible for the 50% CGT discount, while the tax on the income passed through remains at the flexibility of the lower company tax rate. This revenue dynamic could be a catalyst for future legislative changes – at least in the absence of any serious tax reform such as limiting the CGT discount.
For the foreseeable future, uncertainty surrounding UPEs is likely to persist. Practitioners and taxpayers alike will need to stay alert and watch for changes and administrative changes.
This document contains general information and does not constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.