Since its 2010 public ruling, the Australian Taxation Office has treated unpaid present entitlements (UPEs) to private companies as loans for the purpose of the deemed dividend rules in Division 7A of the Income Tax Assessment Act 1936 (Cth) (1936 Act). That enduring view has finally been overturned by the Full Federal Court in Commissioner of Taxation v Bendel [2025] FCAFC 15. Although advisors and professionals have been buzzing about the case since it was handed down on 19 February 2025, what are the actual consequences of this landmark decision for taxpayers?
What do I need to know about Division 7A?
Division 7A was introduced to prevent private companies from making tax-free distributions to their shareholders (or their shareholders’ associates). Division 7A targets this mischief by deeming amounts (such as payments, non-commercial loans or debt forgiveness) between a private company and their shareholder as dividends and therefore subject to tax.
Back in 2010, the ATO took the application of Division 7A one step further and released taxation ruling TR 2010/3 and PSLA 2010/4 (later replaced by TD 2022/11). Those rulings and determinations said that UPEs owing to private companies from shareholder trusts would also be treated as loans for the purposes of Division 7A. The ATO relied on the phrase ‘a provision of credit or any other form of financial accommodation’ in section 109D(3)(b) of the 1936 Act to in effect expand what could be a deemed dividend under Division 7A.
That position was overturned in Commissioner of Taxation v Bendel [2025] FCAFC 15.
The decision
The facts of Bendel were relatively simple.
- Gleewin Pty Ltd (Gleewin) was the trustee of the Steven Bendel 2005 Discretionary Trust (Trust).
- Gleewin resolved to pay the beneficiaries (which included Gleewin Investments Pty Ltd (Gleewin Investments)) a distribution from the trust in FY2013 to FY2017.
- That distribution was not paid to Gleewin Investments, creating UPEs owed by the Trust.
- The Commissioner treated those UPEs as deemed dividends under Division 7A and issued amended assessments to Gleewin Investments and Mr Bendel (who were both beneficiaries of the Trust in the relevant income years).
Before the Administrative Appeals Tribunal, the taxpayer successfully argued that UPEs were not deemed dividends for the purposes of Division 7A, and on appeal, the Full Court (comprising of Logan, Hespe and Neskovcin JJ) agreed with that decision.
The Commissioner argued (consistent with his previous rulings and determinations) that section 109D(3)(b) (referring to a provision of credit or any other form of financial accommodation) encompassed UPEs.
Their Honours said that ‘financial accommodation’ could not be read in isolation and had to be understood in the context of the other items in section 109(3). In that context, it was clear that the financial accommodation involved an obligation to repay an amount (distinct from merely an obligation to pay an amount). Division 7A already draws a distinction between a loan (involving an obligation to repay) and a debt (involving an obligation to pay). As a UPE only involves an obligation to pay an amount, it was not financial accommodation for the purposes of section 109(3)(b).
After reaching that conclusion, the Full Court dismissed the Commissioner’s appeal and incidentally, effectively overruled the Commissioner’s position that he has applied since 2010.
What should I do now?
I was assessed for tax, interest and penalties under the ATO’s ruling. Can I get my assessment amended now?
Generally, there is a two or four year period within which the Commissioner can amend your assessment. If your amendment period has not expired, you can submit a request for the Commissioner to amend your assessment.
If, however, you are outside your amendment period, you may object to the amended assessments and ask the Commissioner to exercise his discretion to consider that objection even though it is out of time: see section 14ZX of the Taxation Administration Act 1953 (Cth).
That objection must be considered by the Commissioner in the way that Hill J described in Brown v Commissioner of Taxation [1999] FCA 563 (at paragraph 47):
While, therefore, the explanation for delay in lodging the objection will be an important factor, it is necessary to bear in mind that the decision maker should take into account all the circumstances of the particular case against the background that Parliament has enacted a procedure to permit extensions of time being granted. An extension should be granted where the justice of the case requires, cf Wedesweiller v Cole (1983) 47 ALR 528 at 531 per Sheppard J, cited with approval in the present context by Sweeney J in Fardon v Federal Commissioner of Taxation (1992) 92 ATC 4339 at 4348. Neither the Commissioner nor the Tribunal on review should approach the question of determining whether an extension of time should be granted on the basis that it will only be in an exceptional case that an extension is granted.
In circumstances where you have been assessed – particularly for penalties – because you failed to comply with the Commissioner’s view on UPEs being deemed dividends, you will have a stronger case for the Commissioner to consider your objection and amend your assessment.
What if I converted my UPE into a complying Division 7A loan?
Without specific ATO or legislative action, if you converted your UPE to a complying Division 7A loan to conform with the Commissioner’s position, you are unfortunately left with a loan; but you should seek advice about whether your documents converting the UPE to a loan actually transformed the obligation to pay to an obligation to repay. If your documents are ineffective, then you may just have a UPE.
However, even if you have a UPE, you cannot deal with it without considering other consequences in the tax legislation. Just because the UPE does not fall within section 109D (consistent with Bendel) does not mean that other provisions in the tax legislation do not apply to you. For example, you should consider how the following provisions in Division 7A could apply before dealing with your UPE:
- section 109F (dealing with debt forgiveness)
- subdivision EA and EB (dealing with UPEs specifically).
Is that the end of the story?
Unfortunately, this is not the end of the Bendel story.
The Commissioner may decide to make a special leave application to appeal Bendel to the High Court of Australia.
Outside of an appeal, Parliament may legislate to change the operation of Division 7A. However, this may largely depend on the results of the impending election.
Watch this space for more information about what happens in the aftermath of Bendel. However, don’t wait to speak with us about what the decision means for you. If you would like assistance on navigating these issues, please contact a member of our team or send us a confidential enquiry to discuss.
