Introduction
In the February 2025 case of Commissioner of Taxation v Bendel, the Court ruled that when a Trust makes a distribution to a corporate beneficiary but does not actually pay the money (creating an "unpaid present entitlement" or UPE), this does not qualify as a "loan" under Division 7A of the Income Tax Assessment Act 1936 (Cth).
What happened?
The Court case resulted from the Commissioner of Taxation (i.e. the Australian Taxation Office) appealing a decision by the Administrative Appeals Tribunal (AAT) in 2023. Briefly:
- The matter involved the “Steven Bendel 2005 Discretionary Trust”.
- The Trust had a corporate beneficiary, Gleewin Investments Pty Ltd (“Gleewin Investments”).
- As a beneficiary of the Trust, Gleewin Investments, was presently entitled to a share of the income of the Trust from several years.
- The ATO considered that these UPEs amounted to a loan to the Trustee of the Trust, within the meaning of Division 7A. This meant that the amounts were deemed dividends and, accordingly, there was a tax liability. It had been the longstanding position of the ATO that UPEs owing to corporate beneficiaries fell within a broad meaning of “financial accommodation” for the purposes of Division 7A (see Taxation Determination TD 2022/11).
- The AAT did not accept the ATO’s position, stating that:
“…a loan within the meaning of s109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust.”
- Perhaps not surprisingly, the ATO appealed this decision to the Federal Court of Australia, where it was heard before the Full Bench.
What did the Court say?
The Court upheld the decision by the AAT and found that the UPEs did not amount to loans for Division 7A purposes.
The Court's reasoning essentially centered on a crucial distinction: a UPE creates an obligation for the trust to pay money to the corporate beneficiary, not for the corporate beneficiary to be repaid money it had provided to the Trustee of the Trust. This was a technical, but important, difference which meant that the UPEs fell outside of the scope of Division 7A.
What This Means for Family Trusts?
If you operate a Family Trust that distributes income to a corporate beneficiary, this ruling could have significant implications including greater flexibility in how Family Trusts can manage distributions without triggering deemed dividend provisions under Division 7A. This might make things simpler and less costly, as it may no longer be necessary to manage UPEs through complex loan arrangements
Further, there might also be an opportunity to consider amending prior tax returns for taxpayers who applied the ATO’s longstanding view and included their UPEs as deemed dividends in their assessable income.
However, a few words of caution!
While the Court’s decision seems like good news for Family Trusts, the matter is not yet settled. The ATO might seek special leave to appeal to the High Court or push for legislative changes to reverse the Court's interpretation. In our view, there is a strong likelihood of this, given the scope and impact of the Court’s ruling.
In the meantime, tread carefully and make sure you get expert advice before making any significant changes to the administration of, and distributions from, your Family Trust.
How Sharrock Pitman Legal can help
For advice on Family Trusts, estate planning and taxation for family offices, please do not hesitate to contact our Mitchell Zadow, Managing Principal and Accredited Specialist (Commercial Law).
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.
