Unpaid present entitlements not a Division 7A loan: FFC

Update at 25 March 2025

The Commissioner has not surprisingly appealed the Full Federal Court's decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 that unpaid present entitlements, or UPEs, are not loans for the purposes of Division 7A.

Original post

The Full Federal Court yesterday ruled that unpaid present entitlements, or UPEs, are not loans for the purposes of Division 7A. The Court's decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 has been much anticipated by tax advisers and taxpayers with trusts in their group structure.

Why does this decision matter?

The issue before the Court was whether a UPE of a corporate beneficiary of a trust is a loan from the beneficiary to the trust for Division 7A purposes. According to the Tax Office, it is a loan and therefore deemed to be a dividend. The Tax Office has expressed this view in a number of rulings and determinations - relevant ones include TD 2022/11 and TR 2010/3 (now withdrawn).

One of the difficulties (among several) with this Tax Office view is that the company is subject to tax on the UPE and then the trust is required to include the dividend in its assessable income, which would then result in trust income that is taxable to the beneficiaries, and the cycle could continue infinitely. This looks like double (or infinite) taxation of the one amount of income.

It is common to have a corporate beneficiary in a trust structure. This decision will affect many, if not all, family groups and possibly larger trust structures.

Decision of the Court

The Court ruled in favour of the taxpayer:

• A loan for the purpose of Division 7A requires a transaction which creates an obligation to repay an amount or which in substance effects an obligation to repay.

• The creation of an obligation to pay an amount is not sufficient for there to be a loan.

• A debt does not attract the operation of Division 7A.

Is caution required?

Some commentators have reacted cautiously to the Court's decision, some suggesting that taxpayers disregard the decision in how they approach trust resolutions on present entitlement.

In our view, the decision is well reasoned and founded on long standing authority (unlike other recent decisions). Our assessment is shown below:

There is a low likelihood of success for the ATO if the ATO appeals.

There is a possibility of the Government changing the law to adopt the ATO's view. However, the Government has other priorities, would be acting contrary to an earlier legislative change and would be adopting a position that has created significant uncertainty and confusion.