For 15 years the Commissioner of Taxation has treated Unpaid Present Entitlements (UPEs) from a trust to a corporate beneficiary as “loans” for the purposes of Division 7A of the Income Tax Assessment Act 1936 (the ITAA).
In a landmark decision, the Full Court of the Federal Court has turned this on its head, potentially impacting discretionary trusts, a popular family and business planning tool, across Australia.
Since Tax Ruling TR 2010/3, the Commissioner’s position with respect to UPEs has been that where there was a UPE owing to a corporate beneficiary and it was left unpaid, it generally would amount to a “loan” for the purpose of s109D(3) of the ITAA and a deemed dividend.
The issue for the Court to determine in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel) arose in circumstances where the beneficiary was presently entitled to an amount of trust income and that amount remained unpaid (and so was a UPE), and the beneficiary had consented to the trust retaining the amount of the UPE. The Commissioner had applied its usual approach and deemed the UPE a Division 7A loan.
The Court’s determination was neat in its simplicity: the Court unanimously decided that to be considered to be a “loan”, there must be an obligation to ‘repay’ a principal amount and not merely an obligation to pay. The existence of a debtor-creditor relationship was not enough.
What does this all mean?
As a result of the Bendel decision, for now, UPEs paid to corporate beneficiaries are not themselves loans under Division 7A. Practically, this will mean that deemed dividends may not have arisen with respect to UPEs.
The decision may likely open up more flexible capital funding opportunities for private groups, although we expect more than one prudent accountant will be waiting to see if the decision is here to stay.
It is also possible that the Commissioner will appeal the decision, or that Treasury will implement legislative changes to reinforce the Commissioner’s position.
