The tax profession may not be as exciting as the UFC, but it does have its moments.

The latest of which is the ATO’s application for special leave to the High Court to appeal the Full Federal Court’s unanimous decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (“Bendel Case”). In this decision, Justices Logan, Hespe and Neskovin state in unambiguous terms that unpaid present entitlements (“UPE’s”) owing from a trust to a corporate beneficiary do not constitute a loan for the purposes of Section 109D(3) of the Income Tax Assessment Act 1936.

This marks the beginning of the final round of the standoff between Steven Bendel (a.k.a. David) and the ATO (a.k.a. Goliath), which has been under the close eye of tax professionals across Australia since the Australian Appeals Tribunal (“Tribunal”) decision on the matter was handed down in 2023. Bendel’s contentions (which are similar to those quietly held by many tax professionals) are in stark contrast to the long-held ATO views on UPE’s first published on 16 December 2009 and then updated in TD2022/11, that UPE’s will manifest as financial accommodation when the entitled beneficiary becomes aware of it and doesn’t call upon it, and bringing it into the definition of a s109D(3) loan.

Overview of facts

Steven Bendel’s circumstances would look familiar to many tax professionals – both he and a company he controlled became presently entitled to income from a discretionary trust that he also controlled. The entitlements remained unpaid and manifested as financial accommodation in the ATO’s eyes, and the ATO issued amended assessments to reflect deemed dividends to Mr Bendel and the company in respect of the ‘loans’.

Mr Bendel, himself a tax agent, lodged objections contending UPE’s were not loans. After they were disallowed, he took the case to the Tribunal, where a thorough examination of the context surrounding s109D(3) was conducted. After having regard to several contextual factors (including policy intent, statutory construction principles, lack of tiebreaker provisions, design of Commissioner discretions, general lack of clarity surrounding UPE’s, just to broadly describe a few), it was decided s109D(3) didn’t “…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.”

Overview of decision

The Full Federal Court dismissed the ATO’s appeal, but in doing so took a step back from the Tribunal’s reasoning to directly “engage with the text of s109D(3)”, as it found the Tribunal had not done so. In doing so, it found s109D(3) was not satisfied on the following bases:

“…the equitable relationship of trustee and beneficiary can be overlayed with the legal relationship of debtor and creditor.” (paragraph 90)

“s109D(3) requires more than the existence of a debtor-creditor relationship. It requires an obligation to repay and not merely an obligation to pay.” (paragraph 94)

Impact of the decision

So what does this mean?

The AFR has previously published an article suggesting a potential “$1 billion” in claims in respect of approximately “971,000 family trusts that may have had their assessments amended to increase their tax since 2009.” However, it’s hard to see this manifesting in practice to anywhere near that extent in a swift manner for a number of reasons.

Appeal timing

The AFR’s legal sources have said it could take 3-4 months for the High Court to reach a decision on the special leave application alone, which would put us in June/July 2025. If leave for an appeal is granted, we could still be waiting for a decision this time next year. It’s worth noting the Full Federal Court case was heard in August 2024 and took six months for a decision to be published.

ATO response

The ATO’s interim decision impact statement in respect of the Bendel judgement indicates they will not be finalising any amended assessment decisions, private ruling applications or objection decisions in respect of the issue until the appeal process is fully exhausted. Any decisions they’re compelled to make will be based on their existing view of the law.

The same decision impact statement carries a warning regarding the application of Section 100A to unpaid present entitlement arrangements if Division 7A is taken not to apply. If Section 100A were to apply to an arrangement, the trustee would be assessed and punitively taxed on the income, as opposed to a deemed dividend being assessed to the beneficiaries via Division 7A.

Political considerations

If Bendel does win in the High Court, there are further questions surrounding legislative amendments – will they happen, when will they happen, what form will they take and when will they be effective from? It’s worth noting the Treasury’s “Targeted amendments to Division 7A” consultation papers in 2018 proposed some simplifications to Division which included bringing UPE’s directly within the scope of Division 7A as an amount that would need to either be repaid or converted to a complying 109N loan by the lodgement day for the year of income. Whilst chatter on those consultations has largely quietened in recent times, a win for Bendel in the High Court could be the defibrillation needed to breathe life back into the amendments (though we might need a powerful defibrillator at a time where smart money is on a minority government being formed on May 3).

Practical considerations

In practice, the vast majority of family trusts are administered by professional accountants who have managed UPE’s owned to corporate beneficiaries in a way that is consistent with the ATO’s views for the past 15 years. The bog-standard conversion of a UPE to a s109N compliant loan arrangement isn’t something that can simply be reversed on a whim – there are legal obligations requiring consideration. Prima facie, there is nothing in s109N that requires a loan to be irreversible in order to be compliant, and the ingenuity of commercial lawyers is never something you want to underestimate. In the most basic of cases however, it’s unlikely the conversion of a past UPE to a loan can be reversed.

Looking ahead however, many accountants are about to make decisions on what to do with UPE’s arising in the 30 June 2024 and 30 June 2025 years. You could either continue with the ATO’s view and look to manage it as a compliant loan, or you could follow Bendel’s example and simply not do so. The latter approach carries many risks, including a potential ATO victory in the High Court against Bendel and the possible application of Section 100A.

Additionally, UPE’s not being loans doesn’t stop them from being what they are – UPE’s. This means new life has been breathed into Subdivision EA, which operates to treat a trust as a ‘notional company’ for Division 7A purposes with the same shareholders as any company they owe a UPE to.

Final notes

With the High Court appeal in play, we are still very much in ‘watch this space’ territory for Bendel and his UPE’s. The unanimous Full Federal Court decision is a massive step in the right direction in respect of limiting the ATO’s role to an administrator of the law rather than a maker of law. Practically when it comes to managing your unpaid present entitlements, following the ATO’s recommended approaches still appears to be the easiest way to sleep at night. For some taxpayers however, there may be opportunities presented by Bendel that should be examined in coming months.

If you have any questions about how the Bendel decision could affect your affairs, please do not hesitate to reach out to your trusted Hall Chadwick advisor.