The Full Court of the Federal Court has handed down its much-anticipated decision in Commissioner of Taxation v Bendel [2025] FCAFC 15. This unanimous landmark decision is a resounding win for the taxpayer.
The Court found that an unpaid present entitlement (UPE) owed by a trust to a corporate beneficiary was not a “loan” for the purposes of Division 7A.
Background
Since 16 December 2009, the Commissioner has enforced his view that a UPE created by a trust in favour of a private company that is not called upon by the company for payment constitutes “financial accommodation” and therefore falls within the extended definition of a “loan” for the purposes of Division 7A.
The Commissioner’s basis for this view was initially set out in Taxation Ruling TR 2010/3 (which was replaced by Taxation Determination TD 2022/11).
This was, of course, until the Commissioner was put to proof on this issue for the first time in Bendel v Commissioner of Taxation [2023] AATA 3074. The Commissioner lost in the AAT with the finding in favour of the taxpayer.
The Commissioner then appealed the decision to the Full Court of the Federal Court whilst continuing to administer his interpretation until such time that the issue was decided by the Court (as opposed to the Tribunal).
Federal Court Decision and Potential Implications
The Court has rejected the Commissioner’s view that a UPE that subsists in favour of a private company amounts to a “loan” for Division 7A purposes.
Whilst there was a debtor-creditor relationship created by the trustee resolution and entry in the trust accounts, there was no loan or creation of an obligation to repay an amount as opposed to an obligation to pay.
The Court highlighted in this regard that the statutory definition of “loan” in section 109D(3) requires more than the existence of a mere debtor-creditor relationship. It instead requires an obligation to repay an amount, as opposed to an obligation to pay an amount. This is a critical distinction in the context of a UPE.
On the basis that the Court’s decision stands going forward, this will have major implications for taxpayers given that the decision unequivocally contradicts the Commissioner’s existing view in relation to which many taxpayers have reluctantly been required to comply.
If the interpretation adopted by the Court stands, existing practices could potentially be able to revert back to the pre-16 December 2009 position.
To this end, if a trust has an unpaid trust distribution in favour of a company, Division 7A should only apply if value is accessed from the trust resulting in a loan in favour of a shareholder/associate of the company (or other specifically identified transactions entered into by the trust in favour of the shareholder/associate).
Whilst the Federal Court’s position in Bendel may appear as a win for corporate beneficiaries with UPEs, taxpayer arrangements involving UPEs are still at risk of the ATO seeking to apply other taxation provisions to the UPE arrangement.
In particular, following the AAT’s decision and prior to the Federal Court’s judgement, the ATO released an Interim Decision Impact Statement flagging the potential for section 100A of the ITAA 1936 to apply where UPEs are in existence.
Section 100A is an anti-avoidance provision that applies when a beneficiary’s entitlement to trust income results from a “reimbursement agreement”. Broadly, a reimbursement agreement is an arrangement where a beneficiary becomes presently entitled to trust income, and:
- someone other than the beneficiary receives a benefit in relation to the arrangement, and
- at least one of the parties enters into the agreement with the intent of reducing tax.
Nonetheless, if the Court’s interpretation is maintained going forward, this will provide various opportunities for private groups adopting trust structures to more tax-effectively use retained earnings in companies to, for instance, fund acquisitions or meet working capital requirements without being burdened by Division 7A compliance.
It of course remains to be seen if the Commissioner will seek special leave to appeal the decision to the High Court of Australia, or if Treasury will seek to run the political risk and override the decision by way of legislative amendment.
Case overview
The taxpayers involved were discretionary beneficiaries of the Steven Bendel 2005 Discretionary Trusts (SB Trust). During the 2013 to 2017 income years, the trustee of the SB Trust resolved to distribute income to Mr Bendel and also to Gleewin Investments Pty Ltd (Gleewin Investments), with the unpaid income distributions owed to Gleewin Investments being the source of the disputed deemed Division 7A dividends.
The ATO issued amended assessments to Mr Bendel (for the 2015 to 2017 income years) and to Gleewin Investments (for the 2014 to 2017 income years) on the basis that the UPEs comprised loans made to the SB Trust by Gleewin Investments (within the meaning of section 109D(3) of the ITAA 1936) in the current year and the loans were deemed to be Division 7A dividends paid by Gleewin Investments to the SB Trust in the income year following the year in which the UPE was created.
The ATO contended that there was either a loan for section 109D(3) purposes as either there was:
- “a provision of credit or any other form of financial accommodation” by the corporate beneficiary, Gleewin Investments, and accordingly a “loan” within the meaning of section 109D(3)(b); or
- “a transaction (whatever its terms or form) which in substance effects a loan of money”, and accordingly a “loan” within the meaning of section 109D(3)(d).
In particular, the ATO relied on the following facts as the basis for a debtor-creditor relationship being created:
- Gleewin Investments had a vested and indefeasible interest in a net income amount of the SB Trust and had a right to call for payment of those amounts;
- the SB Trust retained the net income amounts for continued use as part of the trust fund, and did not hold those amounts on a separate trust for Gleewin Investments; and
- each of Gleewin Investments and the SB Trust recognised and accepted that the UPE amounts were owed by the trust to Gleewin Investments by the way each prepared its respective financial statements.
Please contact your accountant at LZR Partners if you have any questions or believe that this decision may impact you.
