A Hole in the Bucket Company? Bendel Seals the Deal on UPEs and Division 7A

In one of the most highly anticipated tax decisions in recent years, the Full Federal Court (FFC) comprising of Logan J, Hespe J and Neskovcin J handed down its unanimous decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel).

The Commissioner of Taxation (Commissioner) was of the view that unpaid present entitlement (UPE) to income or capital of a trust estate is a loan captured under the ambit of section 109D(3) for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA).

The FFC held that a UPE owed by a trustee to a corporate beneficiary could not amount to a loan, nor a deemed dividend under Div 7A. This landmark decision brings much-needed clarity to the application of Div 7A for private groups and discretionary trust structures.

Present entitlement and UPE

To understand the issues in Bendel, we need to firstly consider the relevant mechanisms of present entitlement and UPE.

Income derived from trust property will only be assessed in the hands of a beneficiary if they are, or are deemed to be, presently entitled to the income under the trust where they are typically taxed at their marginal tax rate on distributions. Otherwise, the income is assessed in the hands of the trustee.

A UPE is where a beneficiary is made presently entitled to trust income but the trustee does not discharge its obligation to pay that amount out to the beneficiary either by transfer or set-off.

The concept of UPE is aptly named because the beneficiary’s entitlement is allocated but not actually paid.

Division 7A ITAA and the Commissioner’s application of a UPE

Following the release of Taxation Ruling TR 2010/3, the Commissioner has construed Div 7A on the basis that a UPE owing to a corporate beneficiary, if left unpaid could amount to “financial accommodation” or a “transaction (whatever its terms or form) which in substance effects a loan”, and was therefore a “loan” as defined in s 109D(3) ITAA.

Where Div 7A applies, the recipient of the loan, payment or other benefit (i.e., the trust) is deemed to have received an unfranked dividend. Unfranked dividends are of course deemed dividends which will be treated as trust income and distributed to the beneficiaries and taxed at their marginal rates.

Fact pattern in Bendel

The trustee had made distributions to a corporate beneficiary, Gleewin Investments Pty Ltd in various income years and not all distributions had been paid by the end of the lodgement dates which created UPEs.

In accordance with the standard taxing provisions for trusts under section 97 of Division 6 ITAA, Gleewin Investments was taxed on the paid and unpaid entitlements.

However, the Commissioner also treated the UPE that remained outstanding at the relevant lodgement dates as loans from Gleewin Investments Pty Ltd back to the trust.

The Commissioner issued amended assessments that treated those loans as deemed dividends. Gleewin Investments and Bendel as beneficiaries that were presently entitled to the trust’s income, were then assessed on their proportional share of the deemed dividend. Bendel objected to these amended assessments to no avail.

The Full Federal Court’s decision

On 28 September 2023, in Bendel and Commissioner of Taxation [2023] AATA 3074, the Administrative Appeals Tribunal held that a UPE to a corporate beneficiary was not a loan under Div 7A. The Commissioner appealed the matter to the Full Federal Court leading us to the stage we are at now.

The Court found that a UPE did not meet the statutory definition of a “loan” under section 109D(3) ITAA 1936, which requires a genuine obligation to repay rather than merely an obligation to pay.

There is a distinct threshold to be made here which forms the core of this entire case. In other words, there was no expectation or requirement that the corporate beneficiary would return the funds to the company. Instead, the corporate beneficiary had an obligation to pay the amount which may mean an obligation to deal with the amount in some way, but not to return it like a loan repayment.

Accordingly, a UPE owed by a trustee to a corporate beneficiary could not amount to a “loan”, nor a deemed dividend.

This ruling safeguards the bucket company strategy from re-characterising a UPE as a loan subject to Div 7A’s stringent requirements – at least for now.

Where to next

The Commissioner has sought a special leave application to appeal to the High Court as it intends to maintain its view that UPEs to a company constitutes a Div 7A loan – only the Commissioner would have the audacity to appeal a 3-panel Full Federal Court appeal denial.

Legislative amendment is likely to be high on the Commissioner’s agenda if they do not get their way in the High Court leaving in its wake ultra cautious tax practitioners.

This ruling reinforces the importance of understanding the intricate relationship between trust distributions and tax obligations.

If you need assistance with trusts and how these matters may impact you, please contact DSA Law – Lawyers & Consultants (03) 8595 9580.