ASF TAKEAWAYS: The case of Commissioner of Taxation v Bendel has significant implications for trusts in Australia. The reshaped interpretation that UPE's do not qualify as loans under section 109D(3) challenges the ATO's long standing views, and requires a crucial discussion about tax obligations, compliance, and the responsibilities for corporate beneficiaries and trustees.
WHAT IS THE BACKGROUND OF THIS CASE?
In Commissioner of Taxation v Bendel [2025] FCAFC 15, the Australian Taxation Office (ATO) challenged previous AAT rulings in favour of the the taxpayer. The case involved Gleewin Investments Pty Ltd, a corporate beneficiary of the Steven Bendel 2005 Discretionary Trust, which had unpaid entitlements to trust income (UPEs) over several financial years. The ATO, applying their long-held practice, sought to classify the UPEs as loans under section 109D(3), arguing that the corporate beneficiary had provided financial accommodation to the trust by allowing the entitlement to remain unpaid. This interpretation would have resulted in deemed dividends, triggering tax liabilities under Division 7A.
In September 2023, the Administrative Appeals Tribunal (AAT) ruled in favour of the taxpayer, leading to the Commissioner’s appeal to the Federal Court.
In a judgment released today, the Full Federal Court upheld the AAT’s decision, concluding that a UPE does not constitute a loan within the meaning of Division 7A because the debtor-creditor relationship between the trust and beneficiary did not have the essential characteristics of a loan – as there was no payment of money made by or at the direction of the beneficiary that was required to be repaid.
THE CORE ISSUE: PAYMENT VS REPAYMENT!
Central to the Court's reasoning was a critical distinction between an obligation to pay and an obligation to repay. While acknowledging that a debtor-creditor relationship can exist between a trustee and beneficiary (as established in cases like Chianti and Fischer), the judgment emphasises that section 109D(3) requires more than just this relationship to classify an arrangement as a ‘loan’. It specifically requires an obligation to repay, which a UPE, representing a present entitlement to trust income, simply does not possess.
THE KEY FINDINGS OF THE FEDERAL COURT
The Court's ruling was based on a detailed analysis and examination of the statutory language and legal precedents, concluding that:
UPEs Lack an Obligation to Repay: it was determined that a loan under section 109D(3) requires an obligation to repay. A UPE, by contrast, represents an obligation to pay an amount (i.e. a debt as distinct from a loan).
Narrow Interpretation of Financial Accommodation: The Commissioner argued that the retention of UPEs by the trust with the consent of the beneficiary amounted to ‘financial accommodation’ being provided by the beneficiary (the provision of ‘credit or any other form of financial accommodation’ being specifically included in the meaning of ‘loan’ by s 109D(3)(b)). The taxpayer had argued that a ‘provision’ requires a positive act to be taken by the taxpayer. The Court did not clarify whether a positive act is required, but instead relied on the fact that there was no payment of a sum by or at the direction of the beneficiary that was required to be repaid.
IMPLICATIONS OF THE DECISION
Reduced Division 7A Exposure for Corporate Beneficiaries
Taxpayers have been following the revised ATO views under TD 2022/11 prior to this ruling. Corporate beneficiaries with unpaid entitlements risked having those amounts classified as loans under Division 7A, resulting in deemed dividends. Following Bendel, UPEs will no longer automatically trigger Division 7A consequences.
Compliance and Structuring Considerations for Trustees
Trustees must now reassess their treatment of UPEs, ensuring compliance with Subdivision EA. While UPEs no longer fall within section 109D (3), trustees should still consider whether related-party transactions - such as payments or loans from trusts to shareholders or associates of those shareholders or forgiveness of debts owed by shareholders or associates of those shareholders to trusts - could give rise to Division 7A implications under Subdivision EA.
Changes to ATO Administrative Practices
The ATO may need to revise its approach to UPEs, potentially issuing new guidance on how UPEs should be treated in light of Bendel. This could include reconsideration of previous positions set out in rulings such as TR 2010/3 and PS LA 2010/4, which treated UPEs held on sub-trust as loans for Division 7A purposes.
Potential Legislative Response
Given the significance of the ruling, there is potential for legislative amendments to re-align Division 7A with the ATO’s prior administrative stance. The Government may consider revising the definition of a loan under section 109D(3) or introducing additional provisions to capture the retention of UPEs as a form of financial accommodation.
No recourse for prior year lodgements
Clients who followed the ATO's guidance since 2010 are unlikely to get much love from the decision. They were corralled into establishing loans or sub-trusts. If you're in that boat, don't expect ATO refunds any time soon, albeit you were likely materially disadvantaged from following the guidance.
The Bendel case represents a watershed moment for trust taxation in Australia, fundamentally reshaping how unpaid present entitlements are treated under Division 7A. By establishing that UPEs do not constitute loans under section 109D(3), the Full Federal Court has delivered a significant win for taxpayers who have long struggled with the ATO's expansive interpretation.
However, this is unlikely to be the final chapter in the story. While trustees and corporate beneficiaries can take immediate comfort from this decision, they should remain vigilant about potential legislative responses designed to reinstate the previous regime. The ATO will need to reconsider its longstanding position and issue revised guidance, creating a period of uncertainty as the dust settles.
As the tax landscape continues to evolve, the Bendel decision stands as a powerful reminder that even well-established ATO interpretations can be successfully challenged when they extend beyond the letter of the law.
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