The Commissioner of Taxation (Commissioner) has had a long-standing view that an unpaid present entitlement (UPE) by a trust to a corporate beneficiary is a form of “financial accommodation” where the beneficiary can (but does not) demand the entitlement. This meant that in the Commissioner’s view, a UPE could fall within the ambit of Subdivision B of Division 7A of the Income Tax Assessment Act 1936 (Division 7A).
On 28 September 2023, in Bendel and Commissioner of Taxation [2023] AATA 3074, the Administrative Appeals Tribunal (AAT) held that a UPE to a corporate beneficiary was not a loan under Division 7A.
The Commissioner appealed the matter to the Full Federal Court and on 19 February 2025, in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel), the court handed down a joint judgement upholding the AAT’s decision.
Key Takeaways
- Having regard to the relevant statutory material, UPEs paid to corporate beneficiaries are not themselves loans under Division 7A, thereby overturning the Commissioner’s long-standing view.
- Applying the view in Bendelwould mean:
- taxpayers no longer need to rely on the options described in TR 2010/3 and TD 2022/11 (depending on when the UPE arose);
- deemed dividends may not have arisen historically with respect to UPEs; and
- more flexible capital funding opportunities for private groups on a go-forward basis.
- It is likely that the Commissioner will apply for special leave to appeal the decision to the High Court; further, Treasury may implement legislative changes to effect the Commissioner’s views.
- Taxpayers may wish to exercise caution before immediately adopting Bendel, given the Commissioner previously stated (after the first instance decision) that he would continue administering the law in accordance with his views in TD 2022/11 until the appeal process is finalised.
What happened in Bendel?
Gleewin Investments Pty Ltd was a corporate beneficiary of a discretionary trust that was presently entitled to a share of the income of the trust for the 2013 to 2017 income years. These entitlements constituted UPEs.
The Tribunal held that a UPE to a corporate beneficiary was not a “loan” under subsection 109D(3) and therefore, could not be deemed a dividend. On Appeal, the Full Federal Court upheld the AAT’s decision, holding that a “loan” for the purpose of subsection 109D(3) requires an obligation to repay a principal sum and not merely an obligation to pay a debt under a debtor-creditor relationship.
In reaching this conclusion the Court noted that while the definitions of “loans” contained within subsection 109D(3) are “capable of bearing a broad meaning, as a matter of statutory construction, its scope will depend on the statutory context”. The Court indeed reminded the Commissioner of the need to derive the purpose of the legislation from the legislation itself, and not any assumption about the desired operation of the provisions. To that end, the Court considered the relevant statutory terms and context, including:
(a) relevant definition: the definitions contained within subsection 109D(3) reflect that in the present context, the term “loan” is limited to obligations to repay an amount;
(b) outline of Division 7A: section 109B contains a summary of items treated as dividends under Division 7A and further reflects a narrower definition of ‘loans’ under subsection 109D(3);
(c) “debt” vs “loans”: Division 7A itself draws a distinction between “debt” and “loans”, reflecting that the concept of loans under subsection 109D(3) is narrower than that of debt;
(d) operative provision: subsection 109D(1)(a), which is the operative provision, uses the phrase “makes a loan”, reflecting something more than the mere existence of a debt owed to a company; and
(e) mischief intended: the statutory context in Division 7A reflects that the legislature was not concerned with the mischief as perceived by the Commissioner’s broad construction of “loans” under subsection 109D(3).
Impact of Bendel and what comes next
Any UPE which arises in circumstances similar to Bendel should not constitute a “loan” for the purposes of Division 7A, unless they are otherwise caught under Subdivision EA (i.e. transactions also involving benefits paid by a trustee to a corporate beneficiary, its associates or shareholders).
The Court’s decision in Bendel also gives rise for the opportunity to consider amending prior returns if a taxpayer applied the Commissioner’s views and included a deemed dividend in their assessable income by reference to a UPE. This also provides more flexible capital funding opportunities going forward for private groups.
It is likely that the Commissioner will apply for special leave to appeal this decision to the High Court. Further, Treasury may implement legislative change to enshrine the views of the Commissioner. However, given it is an election year, this latter approach is unlikely to gain traction from either political party as a priority.
Accordingly, we would encourage taxpayers to continue to observe and comply with the Commissioner’s settled views in the short-term, particularly as he has previously stated (after the first instance decision in Bendel) that he would continue administering the law in accordance with TD 2022/11 until the appeal process is finalised.
Should you wish to discuss these matters, and how they may impact you, please contact us.
