Division 7A and UPEs | Full Federal Court decision in Bendel | Where to from here?

On 19 February 2025, the Full Federal Court of Australia handed down its long-anticipated decision in Commissioner of Taxation v Bendel [2025] FCAFC 15.

Why is this decision important?

The Bendel decision was long-anticipated because the Full Federal Court was asked to confirm whether the Commissioner has been correct in his administrative approach since 2009 of treating an unpaid present entitlement (UPE) of a trust to a corporate beneficiary as a ‘loan’ under section 109D of Division 7A of the Income Tax Assessment Act 1936 (Cth).

The Commissioner has applied Division 7A on the basis that an UPE owing to a corporate beneficiary, if left unpaid, could amount to a ‘loan’.  In instances where the taxpayer has not appropriately dealt with an UPE in accordance with the Commissioner’s views (such as converting the UPE into a complying interest-bearing Division 7A loan), this could give rise to a taxable deemed unfranked dividend as well as interest charges and penalties.  The Commissioner has maintained this view since 2009 through the publication of Taxation Ruling TR 2009/D8.  Not only that, he tightened his position in 2022 with the publication of Taxation Determination TD 2022/11.

The Full Federal Court unanimously decided in the taxpayer’s favour—that an UPE owed by a trust to a corporate beneficiary was not a ‘loan’ for the purposes of section 109D of Division 7A.  Therefore, the Full Federal Court has made the Commissioner’s views and administrative practice since 2009 untenable.

Where to from here?

The Full Federal Court decision is a landmark decision and win for the taxpayer.  Where to from here?  The Commissioner may appeal the Full Federal Court decision to the High Court.  One would expect that special leave appeal maybe sought, given the decision’s widespread ramifications although whether this is in the public interest is questionable, especially as it reinstates the view the Commissioner held prior to 2009.  However, with a unanimous full court decision, which had applied long-standing principles of statutory interpretation, this should be a difficult challenge.  Legislative change may also be made by Parliament—noting that Treasury had consulted on changes to Division 7A in 2018.  Time will tell.

In our view, however, the immediate question that must be determined is: What should taxpayers do now—in particular:

1. for taxpayers who have followed the Commissioner’s administrative approach since 2009, whether actions done to convert UPEs to Division 7A loans or put into a sub-trust can now be reversed;
2. for taxpayers who have deliberately chosen to ignore the Commissioner’s administrative approach, whether they are now freed from the risk of a costly tax assessment if the Commissioner had undertaken a review pre-Bendel—noting that UPEs can still be subject to Division 7A notwithstanding the Full Federal Court decision and subject to the Commissioner being out of time; and
3. for taxpayers who had been assessed by the Commissioner since 2009 for failing to comply with his interpretation of the tax law and had suffered financial loss, whether they can now revisit and challenge the Commisssioner’s decision and ask for a refund of taxes paid.

It would be prudent to determine the position for your clients sooner rather than later because a decision may need to be made ahead of the upcoming lodgement deadline for income tax returns or before the Commissioner’s time limit to make an amendment to the tax assessment runs (acknowledging that an out of time objection may still be appropriate).

We welcome the opportunity to speak to you and discuss the options that are potentially available.

If you’d like to discuss, please do not hesitate to contact King Tan and Peter Murray using the details below.