Bendel and UPEs – taxpayer wins the battle but the war continues
On 19 February 2025, the Full Federal Court, in FCT v Bendel [2025] FCAFC 15 (Bendel), held that an unpaid present entitlement (UPE) with a corporate beneficiary is not a loan under subsection 109D(3) of Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936). The Commissioner has now applied for special leave to appeal the decision to the High Court.
Background
Subsection 109D(3) provides:
What is a loan?
(3) In this Division, loan includes:
an advance of money; and
a provision of credit or any other form of financial accommodation; and
a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and
a transaction (whatever its terms or form) which in substance effects a loan of money.
For many years the Australian Taxation Office (ATO) has held the view that in many circumstances a UPE with a corporate beneficiary will be an in-substance loan under subsection 109D(3). In particular, by the corporate beneficiary not demanding payment of the UPE and consenting to the trustee retaining the amount this constitutes the provision of financial accommodation within paragraph 109D(3)(b). The ATO’s views were set out in TR 2010/3 and PSLA 2020/4. These ATO products set out an elaborate system of dealing with UPEs, including ‘grandfathering’ those that arose before 16 December 2009.
In 2022, the ATO withdrew TR 2010/3 and PSLA 2010/4, and issued Taxation Determination TD 2022/11. In TD 2022/11 the ATO maintained its view that a UPE with a corporate beneficiary can be a loan under subsection 109D(3). However, TD 2022/11 includes a simpler administrative system for dealing with UPEs that arose on or after 1 July 2022.
On 1 October 2023, the Administrative Appeals Tribunal (Tribunal) handed down its decision in Bendel v FCT [2023] AATA 3074 (Tribunal Decision) where the taxpayer challenged the ATO’s view that a UPE can be a loan under subsection 109D(3).
In Bendel Gleewin Investments Pty Ltd (Gleewin) was made presently entitled to income of the Steven Bendel 2005 Discretionary Trust (Trust) for each of the 2013 to 2016 income years. These entitlements remained substantially unpaid by Gleewin’s lodgement day. The Commissioner issued amended assessments in the 2014 to 2017 income years on the basis that the UPEs represented loans from Gleewin to the Trust within the meaning of subsection 109D(3) that were taken to be dividends paid to the Trust under subsection 109D(1).
The Tribunal held for the applicant saying a UPE with a corporate beneficiary is not a loan under subsection 109D(3):
... the necessary conclusion is that a loan within the meaning of s 109D(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.
The Commissioner appealed to the Full Federal Court (Court) and in a unanimous judgment the Court dismissed the ATO appeal.
Full Federal Court decision
The primary issue for the Court was whether Gleewin made a loan within the meaning of subsection 109D(3) to the trust in circumstances where:
it was presently entitled to a share of net income;
it had a vested interest in and present legal right to demand and receive payment of that share;
it had not called for payment of that share;
the trustee had not set aside an amount equal to that share to hold it on separate trust; and
Steven Bendel controlled both the Trust and Gleewin.
The Court unanimously dismissed the Commissioner’s appeal. The Court held that subsection 109D(3) contains an obligation to repay. A UPE is essentially an obligation to pay an amount as opposed to an obligation to repay an amount advanced. The Court stated:
"Each of s 109D(3)(a), (c) and (d) encapsulate a concept of repayment. As the Court of Appeal observed in Prime Wheat at 512 (Gleeson CJ), an advance of money involves the making of a loan, where the concept of a loan involves the provision of a principal sum attendant with an obligation to repay. Thus, embedded in s 109D(3)(a) is an obligation to repay. By its terms, s 109D(3)(c) is engaged only if there is an express or implied obligation to repay.
…
It would be consistent with the context of s 109D(3) for s 109D(3)(b) to also be read as encapsulating a concept of repayment.”
The consensual arrangement to refrain from calling for payment did not involve the payment of a sum by or at the direction of Gleewin that would require repayment. However, although a debtor-creditor relationship was created, there was no "loan" as defined in s 109D(3) because there was no obligation to repay an amount, merely an obligation to pay an amount.
Where to now?
On 18 March 2025, the ATO applied for special leave to appeal to the High Court and on 19 March 2025, the ATO updated its Interim Decision Impact statement on the case (DIS).
In the DIS the ATO takes the position that:
pending the outcome of the appeal process, the ATO will administer the law according to its published views in Taxation Determination TD 2022/11 relating to private company entitlements and trust income;
it does not plan to finalise objection decisions in relation to objections to past-year assessments (for which no settlement was reached);
if a decision is required to be made (for example, because the taxpayer's period of review will elapse or a taxpayer gives notice requiring the Commissioner to make an objection decision), any objection decision the ATO makes will be based on the existing ATO view of the law; and
it does not plan to finalise decisions on issuing amended assessments and decisions on private ruling applications that go directly to the issue of whether UPEs are loans under the extended definition in section 109D.
In the DIS the ATO warns that the basis on which corporate beneficiaries deal with UPEs may have implications under other taxation laws such as section 100A. The ATO states:
Regarding section 100A, a commonly referred to exception to this provision applying is the arrangement being entered into as part of ordinary commercial dealing. In Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements – ATO compliance approach (broadly stated), we explain that:
Where a corporate beneficiary is made entitled to income from a related trust, and the trustee retains those funds by way of a loan on 'commercial terms' for working capital, we will not typically seek to apply compliance resources to consider the application of section 100A.
For these purposes, we accept that loans on Division 7A complying terms are sufficiently commercial. (See subparagraph 25(e) of PCG 2022/2.)
If instead, a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the green zone described in PCG 2022/2. In situations such as this, we may engage with you to better understand your arrangement, including the risk of section 100A applying. [Emphasis added]
It is this last paragraph that is most concerning. Further, depending on the facts, Subdivisions EA or EB of Division 7A could also apply.
If the Commissioner is not granted leave to appeal to the High Court, or if a High Court decision goes against the Commissioner, there is also the possibility of legislative change.
It seems taxpayers and their professional advisors will need to wait some time before there is certainty in this area.
Rob Warnock
Principal Lawyer
T: 03 5226 8541
M: 0419 892 115
E: rwarnock@ha.legal
