The Full Federal Court’s decision in Bendel challenges the ATO’s long-held position on UPEs – raising the question of whether legislative reform is on the horizon.
Division 7A is a tax integrity measure which operates to ensure that a payment or loan made by a private company to a shareholder or associate, or the forgiveness of a debt owed by the shareholder or associate to the private company, is assessed in the hands of the shareholder or associate as an unfranked dividend, subject to certain exceptions.
On 21 October 2018, the Coalition Treasury published a consultation paper in relation to significant proposed Division 7A changes. It provided the following:
- A simplified loan model which, in comparison to the current 7 year (unsecured) and 25 year (secured) Division 7A loans, will have a maximum term of 10 years and begin at the end of the income year in which the advance was made;
- A self-correction mechanism to disregard a deemed dividend or allow it to be franked if the dividend arose as a result of an honest mistake or inadvertent omission;
- The introduction of new safe harbour rules for the provision of assets for use;
- Various technical amendments such as confirming that a deemed dividend is not an allowable deduction and harmonising the interaction between the FBT provisions and Division 7A; and
- Legislative clarification that unpaid present entitlements (UPE) (i.e. unpaid trust distributions) are within the scope of Division 7A and that, where a UPE remains unpaid at the lodgement day of the company’s income tax return, a UPE will be a deemed dividend from the company to the trust if it is not put on ‘complying loan terms’.
These proposed changes subsequently fell by the wayside during the remainder of the Coalition’s term. However, we may see renewed appetite to implement such reworks given the recent case of FCT v Bendel [2025] FCAFC 15 (Bendel), post the election.
Bendel
On 19 February 2025, the Full Court of the Federal Court handed down its decision in Bendel.
In Bendel, the Commissioner appealed against a decision of the Administrative Appeals Tribunal, which found that a UPE owed by a trust to a corporate beneficiary was not a ‘loan’ for the purposes of Division 7A.
The Court concluded in Bendel that a UPE owed by a trust to a corporate beneficiary was not a ‘loan’. Effectively, the private company must take a proactive step in order for a ‘loan’ to arise within the context of Division 7A; not calling for the payment of a UPE (even when the company has knowledge of the entitlement) is not such a step.
Given that the Bendel decision effectively overturns the 15-year-old ATO position that UPEs are loans, it is likely that the Commissioner will make a bid to the government post-election to revisit and implement the proposed changes above.
Are taxpayers ‘home free’ if a rework in relation to UPEs does not occur?
If, surprisingly, such a landmark decision does not prompt the government of the day to revisit the idea of a proposed Division 7A, then taxpayers should be careful to consider the remaining arsenal of integrity measures that the ATO has at their disposal in the context of UPEs. For example, it is possible that the ATO will seek to agitate another tax integrity provision (s 100A “Reimbursement Agreements”) on taxpayers in circumstances similar to that of Bendel given that Division 7A is presently deficient in that regard. It is currently the ATO’s view in their practical compliance guide that the retention of funds by a Trustee does not fall into a ‘Green Zone’ where a UPE to a corporate beneficiary is not put on complying Division 7A terms, however in light of Bendel’s case (and in absence of any legislative changes), that position may change.
If you have any questions or would like to take proactive steps to ensure that your tax affairs are managed appropriately, please reach out to a member of our Tax & Structuring team.
