Court confirms UPEs are not subject to Division 7A

On 19 February 2025, in the appeal case of Commissioner of Taxation v Bendel [2025] FCAFC 15, the Federal Court affirmed the position held by the Administrative Appeals Tribunal (AAT) that an unpaid present entitlement (UPE) is not a “loan” for Division 7A purposes.

As discussed in our prior article, Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) aims to prevent private companies from benefiting shareholders or their associates from profits made in, and retained in, a company. Specifically, section 109D of the ITAA 1936 deems a private company to have paid a dividend where the company makes a loan to a shareholder or their associate and the loan is not repaid by the “lodgment day” of the company or otherwise made subject to a complying Division 7A loan agreement.

The ATO has to date consistently held the view (as most recently provided in Taxation Determination TD 2022/11) that a UPE of a corporate beneficiary from a trust is considered a loan under Division 7A, relying on the failure of the corporate beneficiary to call on payment of the UPE as amounting to “financial accommodation” which gives rise to a Division 7A loan.

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), such 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.

Decision of the Federal Court

The Federal Court relevantly held that a “loan” for the purpose of section 109D(3) requires a transaction which creates an obligation to repay an amount (not merely an obligation to pay) or which in substance effects an obligation to repay. The creation of an obligation to pay an amount is not sufficient.

The consensual UPE arrangement relied upon by the ATO to treat the UPE amounts as Division 7A loans did not involve the payment of a sum by, or at the direction of, Gleewin Investments that was required to be repaid.

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.

Possible implications

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.

In addition, it is also possible following the Bendel decision that Treasury may seek to amend the provisions of Division 7A to explicitly cover UPE arrangements within the definition of loans.

Author: Stephanie Flegg

Supporting partner: Chris Tsovolos