Federal Court dishes a blow for the Tax Office in Bendel Case

For over a year, taxpayers and tax professionals have been awaiting the Federal Court’s decision in the Bendel case, following the Administrative Appeals Tribunal’s (AAT) 2023 ruling in favour of the taxpayer that an Unpaid Present Entitlement (UPE) payable to a private company does not constitute a “loan” for the purposes of Division 7A.

On Wednesday, 19 February 2025, the Full Federal Court in Commissioner of Taxation v Bendel [2025] FCAFC 15 ruled decisively against the Commissioner’s long-held position that a UPE to a private company constitutes financial accommodation and is therefore subject to Division 7A. This outcome challenges years of ATO guidance and raises significant implications for taxpayers and advisers.

Broadly, a UPE arises where a trustee of a trust makes a beneficiary presently entitled to trust income, but the beneficiary does not receive payment for the entitlement.  

A key aspect of the Court’s reasoning was its interpretation of section 109D(3). The judgment clarified that for an arrangement to constitute a “loan,” there must be an obligation to repay an amount, rather than merely an obligation to pay an amount. This distinction is crucial because it differentiates a UPE from a traditional loan, reinforcing that a UPE does not inherently create a repayment obligation.

If this decision stands, it will have far-reaching consequences. Many taxpayers have structured their affairs in compliance with the Commissioner’s previous interpretation, often erring on the side of caution to avoid potential Division 7A implications. However, it is important to remain mindful that this ruling does not eliminate all risks associated with UPEs. The decision puts Subdivision EA back into focus, a provision that can still apply to deem a UPE as a dividend to shareholders and their associates in certain circumstances.

While this ruling represents a significant shift, it is unlikely to be the final word on the matter. Further developments, whether through appeal, legislative changes, or ATO guidance, are expected. For now, it would be prudent for taxpayers and advisers to carefully assess their existing structures before making any major changes to their tax planning strategies.

The team at Jaquillard Minns is well placed to assist in navigating the implications and planning issues associated with the recent decision.