On 19 February 2025, the Full Federal Court, in FCT v Bendel [2025] FCAFC 15 (Bendel), held that an unpaid present entitlement (UPE) with a corporate beneficiary is not a loan under subsection 109D(3) of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936).

Background

On 16 December 2009, the Australian Taxation Office (ATO) (in what was to become TR 2010/3) said that in many circumstances a UPE with a corporate beneficiary will be an in-substance loan under subsection 109D(3). TR 2010/3, together with the accompanying Practice Statement Law Administration PSLA 2010/4, set out an elaborate system of dealing with UPEs, including ‘grandfathering’ those that arose before 16 December 2009.

In 2022, the ATO withdrew TR 2010/3 and PSLA 2010/4, but doubled down in Taxation Determination TD 2022/11 on the view that a UPE with a corporate beneficiary can be a loan under subsection 109D(3). However, TD 2022/11 includes a simpler administrative system for dealing with UPEs that arose on or after 1 July 2022. TR 2010/3, while withdrawn, continues to apply for UPEs before 1 July 2022.

On 1 October 2023, the Administrative Appeals Tribunal (Tribunal) handed down its decision in Bendel v FCT [2023] AATA 3074 (Tribunal Decision) where the taxpayer challenged the ATO view that a UPE can be a loan under subsection 109D(3).

The Tribunal held for the applicant saying a UPE with a corporate beneficiary is not a loan under subsection 109D(3), concluding:

... the necessary conclusion is 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 Full Federal Court (Court), in a unanimous judgment, dismissed the ATO appeal.

What did the parties argue, and the Court say, in Bendel?

The key issue for the Court was did a corporate beneficiary of a discretionary trust make a loan within the meaning of subsection 109D(3) to the trust in circumstances where:

the corporate beneficiary (Glewin Investments) was presently entitled to a share of net income;
the corporate beneficiary had a vested interest in and present legal right to demand and receive payment of that share;
the corporate beneficiary had not called for payment of that share; and
the trustee (Glewin) had not set aside an amount equal to that share to hold it on separate trust.

Subsection 109D(3) provides:

What is a loan?

(3) In this Division, loan includes:

(a) an advance of money; and
(b) a provision of credit or any other form of financial accommodation; and
(c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and
(d) a transaction (whatever its terms or form) which in substance effects a loan of money.

The Commissioner argued that the Tribunal made fundamental errors in its construction of Division 7A:

The Tribunal addressed the incorrect statutory question by focusing on whether UPE is a loan, rather than whether a loan existed as defined in subsection 109D(3).
The Tribunal did not give effect to the plain meaning of subsection 109D(3), which defines a loan as including "a provision of credit or any other form of financial accommodation". The Commissioner argued that this definition is broad enough to encompass a corporate beneficiary allowing a trustee time to pay an amount due.
The Tribunal did not give effect to the legislative purpose of Division 7A, which is to prevent private companies from making tax-free distributions of profits to shareholders (and their associates) through payments and loans. The Commissioner contended that by allowing the trustee (Gleewin) to retain the benefit of amounts forming part of the profits of the corporate beneficiary (Gleewin Investments), the trustee was able to access the profits of that beneficiary.

The Commissioner further argued that the term "financial accommodation" is broad and can include arrangements like bills of exchange, guarantees, overdraft facilities, and instalment sales. The Commissioner also relied on paragraph 109D(3)(d), saying that Gleewin Investments provided Gleewin with temporary use of money, effectively creating a loan. The Commissioner's view was that the Tribunal erroneously limited the meaning of subsection 109D(3) by considering Subdivision EA of Division 7A, which concerns payments, loans, and debt forgiveness made by a trustee, not loans made by a private company.

The respondents argued that the Tribunal's construction of s 109D was correct. Their arguments can be summarised as:

Section 109D requires a positive act by the private company (Gleewin Investments). The respondents submitted that paragraph 109D(1)(a) is only satisfied if "the private company makes a loan". The inclusive definition of "loan" in subsection 109D(3) requires "an advance", "a provision", "a payment" or "a transaction", each of which necessitates a positive action. Simply not demanding payment and leaving the UPEs outstanding does not amount to a positive act.
Paragraph 109D(3)(d) did not apply because there was an entitlement to be paid, not repaid.
The "clear intention and operation of Subdivision EA is to only deem a dividend where there is both a UPE to a company and a loan made by the trustee to a shareholder of the company (or associate)" Construing s 109D to deem a dividend paid to the trust would undermine section 109XB's intention and could tax two parties for the same UPE.

The Court dismissed the Commissioner's appeal, emphasising the importance of the text, context, and purpose of Division 7A:

Definition of “loan": The Court held that subsection 109D(3) contains an obligation to repay. Section 109D(3)(d) refers to a transaction which in substance effects a loan of money and it should not be accorded a meaning that renders all other subparagraphs otiose. The Court held:

"Each of s 109D(3)(a), (c) and (d) encapsulate a concept of repayment. As the Court of Appeal observed in Prime Wheat at 512 (Gleeson CJ), an advance of money involves the making of a loan, where the concept of a loan involves the provision of a principal sum attendant with an obligation to repay. Thus, embedded in s 109D(3)(a) is an obligation to repay. By its terms, s 109D(3)(c) is engaged only if there is an express or implied obligation to repay."

Context of Division 7A: The Court held that, in its context, the phrase “provision of credit or any other form of financial accommodation” in s 109D(3)(b) could not be interpreted as broadly as that attributed to that phrase as used in the Corporations Act 2001. The Court also highlighted that Division 7A draws distinctions between a “debt” and a “loan”.
Purpose of Division 7A: The Court held that its interpretation of section 109D ensured a harmonious operation of the Division in its entirety, and the importance of giving operative effect to each of the provisions in Division 7A, including Subdivision EA, and without producing “absurd or irrational outcomes or leave unaddressed an obvious drafting error”.
Debtor-creditor relationship vs loan: Although based on the concessions made by the taxpayer – a debtor-creditor relationship was created by the trustee resolution and the entry in the trust accounts, there was no loan or creation of an obligation to repay an amount as opposed to an obligation to pay.
The consensual arrangement to refrain from calling for payment did not involve the payment of a sum by or at the direction of the corporate beneficiary that would require repayment. However, although a debtor-creditor relationship was created, there was no "loan" as defined in s 109D(3) because there was no obligation to repay an amount, merely an obligation to pay an amount.

Have the curtains closed?

Before taxpayers and advisors start to pop the champagne, Mark Twain famously said, “the reports of my death are greatly exaggerated”, so may be the case with UPEs as loans under section 109D.

Special leave

The ATO could apply for special leave to appeal to the High Court. The ATO has 28 days to do so.

While most commentators expect the ATO to apply for special leave, a unanimous decision makes the prospect of success more difficult as there is not a dissenting judgment from which to base the appeal.

Successful or not, at a minimum an application for special leave may defer decisions on what to do with existing UPEs, including those that arose in the 30 June 2023 income year, until after the lodgment period for the 30 June 2024 income year.

Legislative reform

Could the Government amend Division 7A to specifically include UPEs as section 109D loans? The (then) Coalition Government in the 2018-2019 Budget announced that it “will ensure that [UPEs] come within the scope of Division 7A”.

However, the Court in Bendel said that a UPE being a loan under section 109D may mean that double taxation could arise because of Subdivision EA. Would legislative reform have to extend further to Subdivision EA to prevent double taxation?

Further, with an election looming, announcing changes to Division 7A to include UPEs as loans under section 109D, may be a political ‘no-go zone’. Any application for special leave, even if unsuccessful, may defer announcements (if any) of legislative change to after the election.

Would a Labor, or minority-Labor government, be more or less likely to make legislative reforms than a Coalition government?

The ATO’s administrative approach

The Interim Decision Impact Statement on the Tribunal Decision said:

“Pending the outcome of the appeal process, the ATO is administering the law in accordance with the published views relating to private company entitlements and trust income in TD 2022/11.

Until the appeal process is finalised, the Commissioner does not propose to finalise objection decisions in relation to objections to past year assessments (for which no settlement was reached) where the decision turns on whether or not a UPE was a subsection 109D(3) loan. However, if a decision is required to be made (for example, because a taxpayer gives notice requiring the Commissioner to make an objection decision), any objection decisions made will be based on the existing ATO view of the law.”

Assuming an application for special leave is made, advisors and taxpayers will need to carefully consider how to manage any subsisting UPEs before lodgment day for the year ended 30 June 2024. The Court’s decision is binding on the Commissioner, and provisions apply to enable reductions of interest and penalties in the event the ATO successfully challenges the decision. However, taxpayers would not be protected against the payment of any underlying tax if the ATO were successful on appeal.

If the ATO unsuccessfully appeals, and there is no legislative amendment, then taxpayers and advisors are faced with “unravelling” existing arrangements. Entities entered into legally binding agreements or, if they did not, paid tax, penalties, and interest, based on ATO views that were not correct. The ATO will be out-of-time to amend some of those earlier assessments.

Before we get too excited

Bendel concerned whether a UPE with a corporate beneficiary was a section 109D loan. The Court said no, because there was not an obligation to repay. But that is not the end of the issues that advisors need to consider with respect to UPEs:

Bendel highlighted that the oft-forgotten Subdivisions EA and EB can apply when a trust has UPEs. While it is not always the case, the facts of Bendel did not give rise to the application of Subdivisions EA and EB.
Although based on the concessions made by the taxpayer, a debtor-creditor relationship existed in Bendel. Does this raise the spectre that if the UPE is forgiven or assigned, the private company could be taken to pay a dividend to the trust under section 109F that deals with debt forgiveness?
What if documentation, such as an Option 1 or Option 2 agreement under (former) PSLA 2010/4, included a form of obligation to repay as part of that agreement? Could that obligation cause the UPE to be a loan under subsection 109D(3)?
The Tribunal found, and both parties accepted on appeal, that the trustee did not hold the amount of the UPE on sub-trust, there being no separation of assets in its accounts or anywhere else. That acceptance will leave many to ponder the effectiveness of clauses enabling the trustee to set aside amounts for beneficiaries (see also the comments at paragraphs 75 to 80 of the Tribunal Decision on sub-trusts).

Finally, the ATO has indicated that in certain circumstances other provisions may apply to arrangements involving UPEs. Accordingly, regard needs to be had to other specific and general anti-avoidance provisions.

Conclusion

Bendel may have finished its last act, although there may be an epilogue in an unsuccessful special leave application, or a sequel in a High Court appeal. Whatever happens, the aftermath of the Bendel decision is likely to occupy the minds of the ATO, taxpayers, and their advisors for some time.

For more information please contact:

Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au