Key takeaways
Whether a trust beneficiary company’s UPE is treated as a loan under Division 7A, and therefore may trigger an assessable unfranked dividend, depends on the trust deed, resolutions and financial statements. Even if it is not a loan, integrity rules may still apply to tax a similar amount to the trustee or an associate.
Refunds of tax paid historically in relation to the ATO’s now discredited position may be available, although will depend on whether taxation assessments remain open and whether objections were lodged, as well as the ATO’s formal response to Bendel.
From 1 July 2028, at least based on the recent Federal Budget announcements, the use of corporate beneficiaries is likely to be rendered ineffective given the prohibitive effective tax rate that will arise from that time on distributions to those corporate beneficiaries (“bucket companies”).
The High Court (by a 5-2 majority) has dismissed the ATO's appeal against a Full Federal Court decision that a private company’s unpaid present entitlements (UPEs) to income of a trust of which it was beneficiary were not "loans" or other form of "financial accommodation" for Division 7A purposes: FCT v Bendel [2026] HCA 18.
Broadly, Division 7A is intended to ensure that the profits of private companies are not loaned to shareholders (or their associates) without being subject to the appropriate rate of tax.
Where an amount has been loaned to a shareholder, Division 7A can deem that an assessable, unfranked dividend arises for that shareholder.
As such, in Bendel, the majority of the High Court decided that no deemed (unfranked) dividend to the trust from the company arose under Division 7A in respect of which the trust’s beneficiaries (including the private company) could be assessable.
Background of the High Court decision in FCT v Bendel
Mr Bendel controlled the Bendel Group, which conducted a suburban accounting and registered tax agent practice and participated in commercial property syndicates which Mr Bendel operated with his brother.
In each of the years of income ending 30 June 2014 to 30 June 2017, Gleewin Pty Ltd (Gleewin) as trustee of the Steven Bendel 2005 Discretionary Trust (the 2005 Trust) resolved to "set aside" for the benefit of its discretionary objects, Mr Bendel and Gleewin Investments Pty Ltd (Gleewin Investments), defined percentages of the net income of the 2005 Trust.
Mr Bendel controlled each of Gleewin and Gleewin Investments.
The terms of the 2005 Trust required that the amounts set aside for Gleewin Investments be held on separate trust. Gleewin Investments did not call for payment of those amounts (UPEs) at any relevant time.
The Commissioner issued notices of amended assessment to Gleewin Investments for each of the relevant years of income on the basis that the amounts set aside for Gleewin Investments in those years were each a "loan" for the purposes of s 109D(3) of the ITAA 1936.
Therefore, the Commissioner considered that, under s 109D(1), the "loans" made by Gleewin Investments were deemed dividends to be included in the assessable income of Gleewin, and consequently that Mr Bendel and Gleewin Investments, as discretionary objects of the 2005 Trust, were liable to be taxed on their respective "shares" of the net income of the 2005 Trust.
The Taxpayers' objections to the amended assessments were disallowed by the Commissioner. The Taxpayers then sought review of the objection decisions in the AAT, which found in favour of the Taxpayers, holding that there was no "loan" for Division 7A purposes.
The Commissioner appealed the AAT's decision to the Full Court of the Federal Court. That appeal was unanimously dismissed.
High Court consideration of Division 7A
Commissioner’s contentions
The Commissioner contended that the Full Court erred in confining the meaning of "loan" in s 109D(3) to transactions involving an anterior transfer of money and an obligation to "repay".
He submitted that the inclusive limbs of s 109D(3) were impermissibly read down by the Full Court and instead included circumstances where a party entitled to payment does not insist on being paid.
Further, the Commissioner contended that a debtor-creditor relationship existed by virtue of Gleewin's admissions in its accounts, making much of how the UPEs were recorded on the balance sheet of the 2005 Trust.
Majority decision
The Court, by majority, rejected the Commissioner's contentions that the UPEs in question each amounted to a "loan" for Division 7A purposes.
In contrast to the Commissioner’s approach, the majority's approach was influenced almost solely by the terms of the relevant resolutions and the language of the Trust Deed.
In its preliminary considerations, the majority considered the questions of whether the Resolutions:
- "set aside" and then distributed the UPEs;
- gave rise to separate trusts; and
- created a debtor-creditor relationship.
1. Their Honours found that the resolutions had the effect of setting aside, but not distributing, the UPEs and the trust deed itself did not impose a duty to distribute any income.
2. The majority concluded that a consequence of setting aside the resolved amounts, “no unconditional duty to pay Gleewin Investments” arose, but that instead separate trusts arose.
3. As a result, no debtor-creditor relationship arose between Gleewin and Gleewin Investments, that would subsist where there was a loan.
Following their disposal of the preliminary questions above the court then embarked on an exercise of statutory construction around s 109D, holding that that Gleewin Investments' forbearance neither fell within the traditional understanding of a loan, nor the meaning of "financial accommodation" in s 109D(3)(b).
Instead, the court determined that "financial accommodation" requires some initial or anterior transfer of value; i.e. a bilateral activity. There was no provision of "financial accommodation" when "a private company does nothing".
Such inaction or forbearance also fell outside the scope of s 109D(3)(d), which includes transactions which "in substance" effect "a loan of money" within the statutory definition of a loan. To hold otherwise, the majority stated, would be to ignore the ordinary meaning of "transaction", which implies an interchange or interaction between entities.
Implications
The particular circumstances of every case will need to be considered before determining that UPEs do not give rise to a deemed dividend under Division 7A, including the terms of the trust deed, accompanying resolutions and financial statements.
Also, in certain cases, the implications of Subdivision EA of Division 7A would need to be considered, where loans or payments have been made by the trustee in the context of a subsisting unpaid entitlement.
Further, to the extent a beneficiary’s entitlement arises out of a “reimbursement agreement”, section 100A of the ITAA 1936 disregards it. This means that the net income that would otherwise have been assessed to that beneficiary is instead assessed to the trustee at the top marginal tax rate (currently 47%).
In the above regard, prior to the High Court’s decision, Deputy Commissioner Louise Clarke reminded taxpayers that the application of Subdivision EA and section 100A "does not depend on the outcome of the High Court appeal process in Bendel".
Also, given the Government's Federal Budget proposal for a minimum tax of 30% on trusts from 1 July 2028, a feature of which includes no credit for tax paid by a trustee for amounts distributed to companies, the effectiveness of the use of corporate beneficiaries after that time is very questionable, to say the least.
Finally, with the above cautionary notes set out, where UPEs have not previously been converted into complying Division 7A loans, in accordance with the Commissioner’s previous guidance, it may be possible for taxpayers to obtain refunds of tax paid under the ATO’s previously held position, although this will depend on whether taxation assessments remain open and whether objections were lodged, as well as the ATO’s formal response to Bendel.