A recent court case involving the Australian Tax Office (ATO) could have a significant impact on the tax payable by beneficiaries of family trusts.
Since late 2009, the ATO has held the view that when a trust appoints income to a corporate beneficiary but doesn’t actually make the payment (known as an unpaid present entitlement, or UPE), this constitutes a ‘loan’ for tax purposes. Accordingly, the UPE must be paid or put on complying loan terms according to Division 7A tax rules. Otherwise, it is considered an unfranked dividend and will incur an extra tax burden.
Division 7A is part of the Income Tax Assessment Act 1936 which is intended to prevent profits or assets being provided to shareholders or their associates tax free. Division 7A extends the meaning of ‘loan’ to include:
- an advance of money
- a provision of credit, or any other form of financial accommodation
- a payment for a shareholder or their associate, if they have an obligation to repay the amount whether it's
- on their account
- on their behalf
- at their request
- a transaction (whatever its terms or form) that is the same as a loan of money.
Within Division 7A is Subdivision EA, which applies where a private company is entitled to a distribution from a trust but the amount remains unpaid and the trust makes a payment or loan a shareholder or associate of the private company. The ATO’s view has been that where the UPE remained unpaid Division 7A applied because of their interpretation of ‘loan’, regardless of Subdivision EA.
The ATO's view on UPEs had not been tested until 2023 when Steven Bendel appealed to the Administrative Appeals Tribunal (AAT) on behalf of his beneficiary company, Gleewin Investments Pty Ltd. The AAT found in favour of Mr Bendel and Gleewin, ruling that UPEs to Gleewin were not loans.
The ATO appealed the AAT’s decision to the Full Federal Court which subsequently handed down its judgement earlier this year, on 19 February 2025. In a unanimous decision, the Court ruled that UPEs do not fall within the definition of a ‘loan’ for Division 7A.
But that's not the end of the story. The ATO has since (on 18 March 2025) applied to the High Court for leave to appeal that decision and has released an Interim Decision Impact Statement.
In this statement the ATO has made it very clear that it still plans to treat UPEs as a loan while it waits to hear from the High Court about its leave to appeal, and that anyone failing to make payments of an entitlement will have those payments viewed as loans.
This has further been confirmed in a recent release on the ATO’s website ‘Deputy Commissioner Louise Clarke discusses Bendel decision’. In this release the Deputy Commissioner highlights that “where a UPE isn’t converted into a complying Division 7A loan, taxpayers face the prospect that other integrity provisions may apply to their arrangement (depending on the particular facts), for example Subdivision EA and section 100A”
What does it mean?
This is not an uncommon issue – we regularly see instances of UPEs, but we are all in limbo regarding how the Bendel case could impact private groups both retrospectively and in the future. There is no indication on how long it will take the High Court to decide whether or not to grant the ATO permission to appeal. It could take months or even years for the process to be completed.
What is of note in the Interim Decision Impact Statement is the ATO's intent to use another part of the law to maintain its position, in this case Section 100A.
Section 100A received some attention a couple of years ago, when the ATO said it knew of people who had been using their trusts to distribute to a range of family members, but the ultimate benefit of that cash was used by someone else. An example of this would be appointing income to adult children but taking the cash personally.
Section 100A refers to appointing income to a beneficiary but another person enjoys the benefit of that distribution. And if section 100A applies, the trustee of the trust is taxed at the top marginal rate, which is potentially an even worse outcome for trusts than Division 7A.
The Interim Decision Impact Statement is implicitly reminding us that in 2022, the ATO released a practical compliance guideline, as well as an updated ruling on section 100A. If it sees a trust appoint income to a corporate beneficiary and that's left unpaid, it might look to apply section 100A. If the unpaid entitlement is put on complying Division 7A loan terms, the chances of that happening are lower.
It seems fairly obvious that the ATO will pursue its position on UPEs and even look to other parts of the law if it is not granted leave to appeal by the High Court. If it is not able to appeal, or the appeal is rejected, the ATO is likely to formalise the interim decision impact statement into a decision impact statement.
This is hardly unsurprising given the potential for millions of dollars in refunds from the ATO if the family trusts that had been caught with UPE not under 7A Division loan requirements, demanded reassessments of excess tax paid.
There are legitimate reasons why UPE might arise in certain situations. Consider a trust that might have taxable income, but it might not get the cash. For example, it might invest in a public trust. And that trust makes income, but it reinvests it and doesn't actually pay the cash to the beneficiaries. It could have investments that require contributions of capital throughout time, and it has a call on that capital. The difficulty arises when the trust doesn't have that money available to distribute to the beneficiary.
What next?
As highlighted above, it looks like the ATO is set on maintaining its position. In its Interim Decision Impact Statement, it outlines that until the appeal process is finalised, where a decision turns on whether or not a UPE is a subsection 109D (3) loan, it does not propose to seek to finalise:
- decisions on issuing amending assessments
- decisions on private ruling applications that go directly to this issue, or
- objection decisions in relation to objections to past-year assessments (for which no settlement was reached).
"However, 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), our decisions will be based on the existing ATO view of the law," the statement says.
It is of course possible, and potentially likely, that it is not granted permission to appeal, but there is always Section 100A it could fall back on.
For now, we suggest clients, and anyone in this position with UPEs, wait and see. If you don't have a high-risk appetite, consider putting any UPE on Division 7A complying loan terms in order not to incur unnecessary tax. Note however that once a UPE is converted to a loan within the ordinary definition of ‘loan’, it will be subject to Division 7A regardless of the Bendel case outcome.
If the ATO has previously imposed additional tax, penalties or interest in relation to UPEs in your family group, we would suggest you watch this space closely or speak to your consulting accountant.
Peter Bardos is a tax partner at HLB Mann Judd, Sydney. This article is for general information only. It should not be accepted as authoritative advice and any person wishing to act upon the material should obtain properly considered advice which will take into account their own specific circumstances.