Bend it like Bendel: How should trustees navigate the ATO’s interim decision impact statement?

Bend it like Bendel: How should trustees navigate the ATO’s interim decision impact statement?

On 19 February 2025, the Full Federal Court handed down its greatly anticipated decision in Commissioner of Taxation v Bendel[1] which considered whether unpaid present entitlements (UPEs) were ‘loans’ for the purposes of Division 7A.[2] The Court held that a UPE owed to a corporate beneficiary of a discretionary trust is not to be construed as a ‘loan’ for the purposes of Division 7A, overturning more than a decade of ATO practice.

While the decision was a win for taxpayers, on 18 March 2025 the Commissioner applied to the High Court for special leave seeking to appeal the decision. On the following day, the Commissioner issued his interim decision impact statement (DIS) clarifying that while he will delay making determinations on issues regarding whether a UPE is a ‘loan’ under Division 7A until the judicial process has been finalised, if a decision is required to be made he will continue to apply his current practice which may still result in a UPE being treated as a loan for Division 7A purposes.[3]

Given these developments, as the end of the 2024-25 financial year approaches there is significant uncertainty regarding the income tax treatment of UPEs. This article will briefly outline the Bendel decision and what it means for trust structures, as well as how to navigate the DIS and account for UPEs in the interim before the judicial process is finalised. This article will also outline other measures the Commissioner has at his disposal which is important to be aware of, such as section 100A and the general anti-avoidance rules in Part IVA.

What did the Federal Court decide in Bendel?

The facts of Bendel are common to many trust structures in Australia. In the case, the trustee of a discretionary trust from time to time resolved to distribute income to the corporate beneficiary. As the beneficiary did not call for payment of these entitlements, the entitlements were UPEs.

Consistent with the Commissioner’s longstanding position set out in Taxation Determination 2022/11 (TD 2022/11)[4] which followed the initial ruling dealing with this issue in Taxation Ruling 2010/3, the Commissioner:

• took the position that a UPE (that existed post 16 December 2009) was capable of being a ‘loan’ for Division 7A purposes; and
• the amount of the UPE could therefore result in a deemed dividend in the hands of the trustee assuming it was either a shareholder or associate of a shareholder of the corporate beneficiary and was not put on ‘complying Division 7A terms’.

The Full Federal Court unanimously upheld the original AAT decision to hold that a ‘loan’ for the purposes of Division 7A requires that a lender make or direct a payment to a borrower who must have a reciprocal obligation to repay the loan. A UPE, where it is held by a corporate beneficiary of a trust, is not a loan for Division 7A purposes as there is no payment from the beneficiary to the trustee which triggers an obligation for the trustee to repay the principal amount. While the Court agreed with the Commissioner that a creditor-debtor relationship exists between a beneficiary and trustee where there is a UPE owing to the beneficiary, the Court disagreed that this necessarily resulted in the arrangement being a ‘loan’ under section 109D of Division 7A.

Accordingly, as the UPE did not constitute a Division 7A loan, a deemed dividend under Division 7A did not arise.

What did the Commissioner say in the DIS?

Following the Full Federal Court decision, the Commissioner issued his interim DIS setting out that:

• he will not seek to finalise decisions on issuing amending assessments, private rulings applications or objections relating to past assessments if the issue turns on whether a UPE is a loan under section 109D until the judicial process has been finalised; and
• if a decision is required to be made by him, he will continue to treat a UPE as a loan which could result in assessable income under Division 7A in accordance with TD 2022/11 (despite the Bendel decision to the contrary).
  
  

What does this mean for trustees and corporate beneficiaries?

Given the Commissioner’s subsequent application for special leave and issue of the DIS in the wake of the Full Federal Court’s decision in Bendel, as at the date of writing there is significant uncertainty regarding the income tax treatment of UPEs in the Division 7A context. This uncertainty will remain until either the special leave application is rejected or, if the High Court grants special leave, until the High Court makes a decision on appeal.

Practically, during this interim period, trustees of discretionary trusts that have UPEs will need to make a decision as to whether to put them on Division 7A complying terms and a decision will also need to be made as to whether distributions are made to corporate beneficiaries that create new UPEs.

Taxpayers may also need to begin considering exercising review and objection rights to preserve their position prior to the judicial process concluding to deal with any historical UPE treatment.

The appropriate position and course of action will largely depend on the circumstances. If you are unsure how to proceed, we recommend that you seek advice.

What else should trustees and corporate beneficiaries be aware of?

Even if the Commissioner’s case is ultimately unsuccessful, the Commissioner has a suite of other measures which he may use to bring a UPE into account as assessable income in the hands of the trustee which taxpayers need to be cognisant of.

At a high level, these measures include:

• Section 100A – a specific anti-avoidance provision that, broadly speaking, applies where a beneficiary’s trust entitlement arises from a ‘reimbursement agreement’, such as where someone other than the beneficiary receives a benefit in connection with the arrangement;
• Part IVA – contains general anti-avoidance provisions that apply where there is an arrangement or scheme under which there is a dominant purpose to obtain a tax benefit; and
• Subdivisions EA and EB – benefits provided by a trustee in favour of shareholders of a private company with a UPE (including via interposed entities) may triggered the assessment of deemed dividends.

In the DIS, in particular, the Commissioner has specified that he will consider the application of section 100A in addition to the application of section 109D in Division 7A: ‘[where] a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A … we may engage [the trustee] to better understand your arrangement, including the risk of section 100A applying.’[5]

As a result, taxpayers should seek advice on the income tax treatment of UPEs if they seek to rely on the Bendel decision, especially while the judicial process remains on foot.

What are the Cleardocs products available?

Cleardocs offer the following relevant products:

• Division 7A Loan Agreement
• Company Registration
• Discretionary (Family) Trust
• Discretionary Trust Distribution Minute

Please read the Product Benefits, Product Information and Frequently Asked Legal Questions carefully and consider if it is appropriate in your circumstances before purchasing any Cleardocs product.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

• ATO watch on Division 7A circumvention - review on the use of guarantees for third-party loans
• Family Trusts and end-of-year distributions - Revisiting the benefits of the 'Bucket Company' structure
• 'Modernisation of Trust Administration Systems' (MTAS) comes into effect: new reporting requirements for trusts and beneficiaries

[1] [2025] FCAFC 15.

[2] Division 7A is contained in the Income Tax Assessment Act 1936 (Cth) and all legislative references in this article reference this Act.

[3] The DIS can be accessed on the ATO website via the following link: https://www.ato.gov.au/law/view/document?docid=LIT/ICD/VID903of2023/00001

[4] TD 2022/11 can be accessed on the ATO website via the following link: https://www.ato.gov.au/law/view/document?DocID=TXD/TD202211/NAT/ATO/00001&PiT=99991231235958

[5] DIS paragraph [23].