The decision of the Full Federal Court of Australia in Commissioner of Taxation v Bendel [2025] FCAFC 14 marks a significant shift in the interpretation of unpaid present entitlements (UPEs) and their classification under Division 7A of the Income Tax Assessment Act 1938 (Cth).

Rewinding to 2023, the Administrative Appeals Tribunal (AAT) held that UPEs between corporate beneficiaries did not constitute ‘loans’ for the purpose of section 103D(3) and therefore would not be deemed to be a dividend under Division 7A.

The decision challenged the Commissioner’s view in the Taxation Determination TD 2022/11 and the previous but now withdrawn Taxation Ruling TR 2010/3 and Practice Statement Law Administration PS LA 2010/4, which treated UPEs as loans for the purpose of Division 7A, unless UPE was placed in a separate sub-trust solely for the benefit of the corporate beneficiary with an appropriate return on investment being provided through to the corporate beneficiary. On appeal by the Commissioner of Taxation, the Full Federal court has established that a “loan” for the purpose of Section 109D(3) of the Income Tax Assessment Act 1938 (Cth) requires a transaction that creates an obligation to repay an amount or which in substance effects an obligation to repay. As in the case of UPEs, the creation of only an obligation to pay an amount without an attendant obligation to repay is not sufficient.

For over a decade, the vast majority of private groups have been following the Commissioner’s view of its Rulings and Practical Compliance Guidelines that UPEs payable to private companies will fall within the extended meaning of the term “loan” for Division 7A. As such these have been put on compliant sub-trusts and/or governed by loan agreements that are compliant with Division 7A.

The decision of the Full Federal Court overturns a long-standing ATO administrative practice and has broad implications for Australian taxpayers and communities, in particular for those who have adopted trust structures. It is imperative to note that given the Full Federal Court’s decision is contrary to the long-standing ATO views, the Commissioner may seek special leave to appeal the decision to the High Court however, whether the High Court would grant a special leave is another matter entirely.

In the meantime, affected private groups that have adopted trust structures to consider the following:

• Where complying Division 7A loan agreements in relation to UPEs have been entered into, they should consult tax advisors before taking further action.
• Those who have been previously subject to ATO review or audit should consult with tax advisors to determine the opportunity and possibility to object to the ATO’s decision which may include a remission of taxes, interests and penalties.
• Consideration should carefully be given when dealing with existing UPEs from a trust to a company arising from 2023 or 2024 income years.
• Finally, a final note of caution – while UPEs to corporate beneficiaries may not be a loan, if the trust with UPE to a private company provides a loan to a non-corporate shareholder or associate of a shareholder of the private company, Division 7A may deem the loan from the trust to be a loan from the private company.

If you have entered into a complying Division 7A loan agreement in relation to a UPE, contact your Goenawan Widjaja CPA advisor for further guidance.