The highly anticipated decision of Commissioner of Taxation v Bendel FCAFC 15 was recently adjudicated in the Full Federal Court. This case dealt with an appeal by the Commissioner of Taxation regarding whether unpaid present entitlements (UPEs) were considered loans for the purposes of section 109D of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and has significant implications for discretionary trust arrangements going forward.

Background

As the tax system in Australia developed over the decades, it’s become a common tax optimisation strategy to utilise corporate entities as “bucket companies” which receive income distributions from discretionary trusts. Many business owners maximise tax efficiency with such structures – while staying compliant with the ATO, as the rate of taxation is lower for companies than for higher earning individuals.

However, when such distributions are not accompanied by an actual transfer of funds to the company, they give rise to what is known as an unpaid present entitlement.

Originally these arrangements were subject to governance under subdivision EA of the ITAA 1936. However, in 2009 the ATO issued an interpretation that such UPE’s could be regarded as a loan under section 109D. This brought them into the scope of Division 7A measures, which treats certain payments, loans and debt forgiveness to company shareholders, and associates of shareholders, as a “deemed dividend”. This non-desirable tax outcome is often mitigated through the use of strict loan agreements requiring interest charged at a benchmark rate and mandated minimum repayments.

On the whole, taxpayers over the past 15 years have followed the ATO’s guidance in this area. However, whether this interpretation would withstand a challenge in the courts was frequently questioned in both the tax and legal professions.

The case

The Bendel case contested the ATO’s interpretation in this area, most recently being heard  in the Full Federal Court. The decision in this case revolved around whether UPEs owing by the Steven Bendel 2005 Discretionary Trust to a related Company, Gleewin Investments Pty Ltd, were considered loans for the purposes of s109D (ITAA 1936). The court ruled that such UPEs are not loans, finding that the specific issue was adequately addressed in subdivision EA (ITAA 1936).

Outcomes

This decision effectively reverses the ATO’s guidance from 2009 and subsequent years. However, on 18 March 2025, the ATO applied for special leave to appeal the decision to the High Court, so the saga continues. Unfortunately, until the final judgement is made on ATO vs Bendel, the tax system will not have the desired certainty in this area.

There is considerable conjecture in legal circles that the Bendel case – particularly if the High Court endorses the decision reached in the Full Federal Court – could necessitate legislative reform of Division 7A more broadly to explicitly include UPE’s within the scope of the provisions. Interestingly this concept was floated in the 2018/19 budget papers, but never progressed through parliament.

The ATO has subsequently updated its Decision Impact Statement on the Bendel case. Decision Impact Statements provide the ATO’s view on the implications of a court decision, including on related public advice or guidance. Taxpayers can trust such documents to provide them with protection from interest and penalties, if they can show that they reasonably relied on it in good faith. The ATO have stated that they believe Division 7A still applies to the aforementioned circumstances, notwithstanding the Full Federal Court’s decision. This means that taxpayers should be cautious of the ATO’s approach to applying the law in this area.

Importantly, the ATO decision impact statement now also includes a reference to another trust integrity measure, s100A (ITAA36). This section is a complicated provision that deals with reimbursement agreements between trusts and beneficiaries. The ATO had previously expanded guidance on this provision in 2022, providing a traffic light risk analysis. Whilst the ATO may be unsuccessful in applying s109D, they may have success under s100A or subdivision EA to certain arrangements.

Conclusions for clients

The decision in Commissioner of Taxation v Bendel has created some uncertainty and confusion among taxpayers and tax practitioners alike. The ATO’s interim decision impact statement and the pending High Court appeal only add to this uncertainty. We encourage taxpayers to stay informed about the ATO’s position on unpaid present entitlements and consider seeking professional advice to navigate the potential complexities and uncertainties arising from this decision.

LDB continues to consider each client’s circumstances regarding the ATO’s position, and will always seek to balance tax outcomes for clients with the risk (and cost) of ATO compliance action.

Until the High Court application is heard, the low-risk position for taxpayers will be to adhere to the ATO’s original guidance from 2009, despite the more recent decision in Federal Court.

If you have concerns about the impact of the Bendel case for your tax optimisation strategies, or would like to review the structure of your entities, LDB’s experienced tax accountants can help. We work with businesses and individuals across Melbourne and Australia to navigate complex tax issues, such as those raised in this case, to ensure the optimal outcome.

If you require any assistance, simply call us on 03 9875 2900 or submit your enquiry through the contact form on this page.