The recent Full Federal Court decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 has significantly reshaped the interpretation of unpaid present entitlements (UPEs) in relation to Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936). This ruling challenges the ATO’s long-standing position (post 2009) that a UPE to a corporate beneficiary constitutes a loan under subsection 109D(3). The decision has substantial implications for trustees and corporate beneficiaries navigating Division 7A compliance.
Background
For over a decade, the ATO has treated UPEs to corporate beneficiaries as in-substance loans under Division 7A, an approach initially established in Taxation Ruling TR 2010/3. These guidelines mandated that UPEs be managed under specific arrangements to avoid triggering deemed dividends under Division 7A.
In 2022, the ATO withdrew these rulings and issued Taxation Determination TD 2022/11, reaffirming its position that a UPE to a corporate beneficiary could constitute a loan under Division 7A. This interpretation was contested in Bendel v Commissioner of Taxation [2023] AATA 3074, where the Administrative Appeals Tribunal (AAT) ruled in favour of the taxpayer, rejecting the notion that a UPE equated to a loan. The ATO appealed this decision, leading to the Full Federal Court’s recent judgment.
Key Findings of the Full Federal Court
The Court’s decision rested on a critical distinction between an “obligation to pay” and an “obligation to repay”. Under Division 7A, a loan requires a repayment obligation, which the Court found was absent in the case of a UPE. While a corporate beneficiary is entitled to trust income under a UPE, it does not inherently impose a requirement for repayment by the trust.
This interpretation directly contradicts the ATO’s stance and takes us back to the good old days of 1998, when the ATO and the profession agreed on the application of subsection 109D(3) to UPEs, meaning that they cannot be deemed loans for Division 7A purposes.
The ruling has several significant consequences:
- Division 7A Exposure Reduced: Corporate beneficiaries no longer face the automatic risk of deemed dividends under Division 7A for UPEs.
- Potential ATO Response: The ATO may need to revise its guidance and policies regarding UPEs. Additionally, the Commissioner retains the option to seek special leave to appeal this decision to the High Court.
This decision significantly curtails the ATO’s attempt to classify all UPEs as loans under Division 7A. However, it does not provide blanket protection and taxpayers must ensure their trust distributions are structured correctly.