Bendel and UPEs: Navigating Ongoing Uncertainty

Practitioners across the profession are eagerly awaiting the High Court judgement of the Bendel case. At the time of writing, it remains unclear when the judgment will be handed down.

In the meantime, the ATO has stated in its interim decision impact statement (DIS) on Bendel (see here) that the Commissioner will maintain its current position until the appeal is finalised. This position is set out in TD 2022/11 which addresses when an unpaid trust entitlement (UPE) or an amount held on sub-trust, constitutes provision of financial accommodation and thus a loan for Division 7A purposes.

The ATO’s current position on UPEs

Under the ATO’s current view, where a UPE owing to a corporate beneficiary remains on foot as a ’sub-trust’, but the sub-trust funds are used by, or for the benefit of, a shareholder or their associate (for example in the situation where the funds are retained for working capital purposes) this use constitutes the provision of financial accommodation and thus is a loan under the extended meaning of that term. This treatment applies even though a trustee may be permitted to hold a beneficiary’s entitlement under a sub-trust pursuant to the trust deed, and the use of the retained funds by the trustee is on commercial terms with a commercial return.

Practical uncertainty ahead of May 2026 lodgement deadline

With the lodgement deadline for FY2025 company tax returns fast approaching, taxpayers and advisors face ongoing uncertainty as to the appropriate treatment of UPEs owing to corporate beneficiaries as a result of FY2025 distributions. In particular, the question arises whether the UPE should be:

• converted to a complying Division 7A loan before lodgement day; or
• continued to be retained under sub-trust pending the High Court decision.

Other Integrity Provisions

Irrespective of the outcome of the High Court decision on Bendel, other integrity provisions are still relevant (e.g., Subdivision EA, or EB of Division 7A, and section 100A).

The ATO in its interim DIS has put taxpayers on notice, saying:

21. In addition to the application of section 109D, the basis on which private company beneficiaries deal with unpaid entitlements to trust income may have implications under other taxation laws, such as section 100A.
22. Regarding section 100A, a commonly referred to exception to this provision applying is the arrangement being entered into as part of ordinary commercial dealing. In Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements – ATO compliance approach (broadly stated), we explain that:

    Where a corporate beneficiary is made entitled to income from a related trust, and the trustee retains those funds by way of a loan on “commercial terms” for working capital, we will not typically seek to apply compliance resources to consider the application of section 100A.

    For these purposes, we accept that loans on Division 7A complying terms are sufficiently commercial. (See subparagraph 25(e) of PCG 2022/2.)

23. If instead, a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the green zone described in PCG 2022/2. In situations such as this, we may engage with you to better understand your arrangement, including the risk of section 100A applying. [emphasis added]

Although the Full Federal Court has confirmed that an UPE is not a loan for Division 7A purposes, the ATO seems to be indicating that when considering the application of section 100A it may require taxpayers to ‘convert’ the UPE to a loan which is ‘as commercial’ as a complying Division 7A loan. Consistent with the PCG, taking this step may help reduce the risk of the ATO applying compliance resources. By not doing so will increase the risk of an ATO review as the arrangement will fall outside the green zone. In this case, the onus is on the taxpayer to justify that the arrangement is explicable by commercial or family dealings.

In the context of a UPE due to a corporate beneficiary where the funds were retained by the relevant trust for working capital purposes, appropriate evidence will be critical. Because working capital reflects the net position of current assets and liabilities, the documentation from the time the UPE was created must clearly establish the commercial grounds for retaining the funds, that those funds will or have been directed towards genuine operational requirements and perhaps also that such arrangement is an ordinary family dealing. We are not aware of any public guidance released by the ATO indicating what documentation is required to show what constitutes an ordinary family dealing. In situations where small business groups are often run in a way that has a limited paper trail to support decisions made then it appears clear that there would be significant risk in relying on this exclusion from section 100A applying without properly considering how it applies in practice.

Ultimately, the appropriate treatment of an UPE owing to any beneficiary (including a corporate beneficiary) will largely depend on a taxpayer’s risk tolerance, the available evidence supporting a commercial and/or family dealing exception for section 100A purposes, a willingness to incur the time and cost associated with firstly being prepared before the ATO raises any queries, as well as the cost and effort involved in any ATO review/audit, and if necessary challenging the ATO’s position via objection and appeal. The Bendel decision may not materially change this.

As always, our Taxation team remains available to assist practitioners and their clients in navigating the complexities of the tax law, including section 100A.

——-