In the last edition of our newsletter, we touched upon the High Court’s Decision regarding Unpaid Trust Entitlements (UTE) aka the Bendel case. The Bendel case refers to the Full Federal Court decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel), which challenged the Australian Taxation Office’s (ATO) longstanding position on the tax treatment of unpaid present entitlements (UPEs) to corporate beneficiaries in trusts.
Deputy Commissioner Louise Clarke, who leads the Private Wealth Client Experience at the ATO, recently addressed some of the key concerns surrounding the High Court’s decision. The case, which marks a significant shift in the interpretation of unpaid present entitlements (UPEs) owed to corporate beneficiaries, has drawn considerable attention from private companies and their advisers.
Key Background Information
For over 15 years, the ATO has maintained a published view on the tax treatment of UPEs to corporate beneficiaries, in that an unpaid present entitlement (UPE) from a trust to a private company should be treated as a loan under the Division 7A deemed dividend rules. However, the Full Federal Court’s decision in the Bendel case in February 2025 challenges this longstanding position. In response, the ATO has sought special leave to appeal the decision to the High Court, given the potential widespread impact on private corporate taxpayers.
What Happens Next?
While the ATO awaits a decision from the High Court on whether it will grant special leave to appeal, the ATO have advised taxpayers that they should refer to the published Interim Decision Impact Statement. This document outlines that the ATO will maintain its current views, as expressed in Taxation Determination TD 2022/11, until the legal process is finalised.
While there is no definitive timeline, the High Court is expected to decide on the special leave application within a few months. If granted, a full hearing and judgment could take more time. Should the appeal not proceed, the ATO has committed to providing updated, practical guidance promptly.
Key Implications for Taxpayers
- No Lodgement Deferrals: The ATO does not plan to grant blanket lodgement deferrals for 2024 tax returns while the court process is underway. Taxpayers should proceed with lodgement based on current ATO guidance.
- Consider Your UPE Strategy: The Interim Decision Impact Statement reiterates that taxpayers should consider converting UPEs into Division 7A-compliant loans (under section 109N) to avoid unintended tax consequences. This includes having a written loan agreement in place.
- Other Integrity Provisions Still Apply: The possible application of section 100A and subdivision EA is independent of the Bendel decision. Taxpayers must remain vigilant about how UPEs are treated in their broader tax planning.
- Discretion under Section 109RB: Where a deemed dividend arises due to reliance on the Full Federal Court’s decision, the Commissioner may consider exercising discretion to disregard the dividend or allow franking—but only on a case-by-case basis where an honest mistake or inadvertent omission has occurred.
What Should You Do Now?
The ATO encourages taxpayers who have followed their guidance to continue doing so, as this provides the greatest certainty amid the legal uncertainty. For those considering a different approach, it is vital to seek professional tax advice. If you are impacted by the Bendel decision or have concerns about Division 7A compliance, now is the time to speak with a qualified tax adviser. Staying informed and proactive can help mitigate risk and ensure compliance during this period of legal uncertainty. The information around this is complex and can be confusing. Please speak with your advisor if you have any questions.