Div 7A and Unpaid Present Entitlements (UPEs)

The Bendel Case - Background

In the Bendel case, a discretionary trust made a corporate beneficiary presently entitled to trust income for the 2013–2017 income years, but the entitlements remained unpaid. Following an ATO audit, the Commissioner issued amended assessments and imposed penalties, asserting that the corporate beneficiary’s UPEs were deemed dividends under Division 7A, with tax liabilities proportionally assessed on each beneficiary.

The taxpayers objected to the assessments, arguing that a UPE is not a loan for the purposes of section 109D(3) of the Income Tax Assessment Act 1936 (ITAA 1936). The Administrative Appeals Tribunal (AAT) ruled in favour of the taxpayers, concluding that a UPE does not constitute a loan. The ATO appealed this decision to the Full Federal Court, which unanimously dismissed the appeal.

Full Federal Court Decision

In a joint judgment (Logan, Hespe, and Neskovcin JJ), the court ruled that the ATO’s interpretation of section 109D(3) was incorrect. Although the AAT failed to properly address the statutory language of section 109D(3), the court held that the Commissioner’s broad construction of the term “provision of credit or any other form of financial accommodation” was not supported by the legislation.

Key findings of the court:

• Loans under section 109D(3) must involve an obligation to repay an identifiable principal sum.

• A UPE does not constitute a loan simply because a trustee is allowed time to pay or a corporate beneficiary refrains from demanding immediate payment.

• The legislative intent of Division 7A does not extend to treating UPEs as loans in the manner argued by the ATO.

• The ATO’s reliance on the Corporations Act 2001 to support a broad interpretation of "financial accommodation" was misplaced.

  
  

Since the creation of a UPE does not involve a transfer of funds or an obligation to repay, it does not fall within the definition of a loan under section 109D(3).

ATO’s Response and Special Leave Application

On March 18, 2025, the Commissioner lodged a special leave application with the High Court of Australia to appeal the Full Federal Court’s decision. In response, the ATO released an interim Decision Impact Statement, stating that:

1. TD 2022/11 remains in force – The ATO will continue to treat UPEs as financial accommodation for Division 7A purposes, consistent with its existing position.

2. No immediate action on amended assessments – The ATO will not finalise amended assessments, private rulings, or objections directly related to this issue unless necessary (e.g., expiration of the taxpayer’s review period).

3. Potential implications under section 100A – The ATO warns that UPEs may still have tax consequences under section 100A (reimbursement agreements), even if they are not considered loans under section 109D.

   
   

The High Court’s decision on the special leave application will determine whether the ATO must reconsider its stance on UPEs and Division 7A.