Quick summary
- The Full Federal Court ruled that an unpaid present entitlement (UPE) resulting from a trust allocating income to a corporate beneficiary does not constitute a “loan” for Division 7A purposes.
- This decision may impact private business owners who have complied with the ATO’s position over the years.
- The ATO is expected to seek special leave to appeal to the High Court and issue an interim Decision Impact Statement.
On 19 February 2025, the Full Federal Court handed down a significant decision in Commissioner of Taxation v Bendel [2025], ruling that an ‘unpaid present entitlement’ (UPE) from a trust to a corporate beneficiary is not a loan for Division 7A purposes. This ruling challenges the ATO’s longstanding position and offers clarity for private business owners. The decision also highlights the potential for ongoing uncertainty, particularly regarding past arrangements. Business owners should be aware of possible changes and consider reviewing their tax positions to ensure compliance moving forward.
This is a significant decision and a win against the ATO. For the last 15 years, many taxpayers have complied with the ATO’s position on UPEs. Still, this compliance often resulted in ‘top-up’ tax – the difference between the corporate and personal marginal tax rates. However, with this new ruling, the ATO’s stance is now under scrutiny, leaving many business owners uncertain about how to proceed with past arrangements that were created in line with ATO guidelines.
One significant consequence of this ruling is that it reduces the risk of a deemed dividend arising from transactions between trusts and related parties, which could offer financial relief for many business owners who this issue has impacted in the past.
What Are UPEs and Why Do They Matter for Division 7A?
An Unpaid Present Entity (UPE) arises when a trust distributes income to a corporate beneficiary, but the funds remain in the trust rather than being paid to the company.
The ATO has long argued that these unpaid amounts should be treated as “loans” under Division 7A, meaning they could trigger deemed dividends if not repaid or put on compliant loan terms.
With this recent court ruling, there is now uncertainty around whether UPEs should be classified as loans for Division 7A purposes. This decision has significant implications for business owners and investors who use trusts to distribute income to corporate beneficiaries.
To learn more about UPEs, Division 7A, and how the latest ruling affects you, check out our detailed resources:
ATO’s Position & Interim Decision Impact Statement
Despite the Court Ruling, there is still uncertainty about how the ATO will respond. It’s expected that the ATO may seek special leave to appeal the decision to the High Court. In the interim, the ATO will likely continue administering the law based on its previous interpretation, pending the judicial process.
It’s also possible that the government will revisit proposed reforms to Division 7A, which could have implications for how private businesses and family trusts handle trust arrangements moving forward.
The Australian Taxation Office (ATO) previously took the view that UPEs should be classified as loans for Division 7A purposes. However, the Full Federal Court recently “dismissed the ATO’s appeal”, ruling that a “UPE does not constitute a loan” under Division 7A.
This decision challenges the ATO’s stance since 2009 and could mean that certain distributions to companies may no longer trigger deemed dividends under Division 7A rules. However, the ATO has until the end of March 2025 to seek special leave to appeal to the High Court.
The ATO issued an “interim decision impact statement” following the earlier tribunal ruling, which you can read here. We expect further updates soon.
Even if the ATO does not appeal to the High Court or the Government does not change the law, taxpayers must still monitor Division 7A compliance.
What are AAG doing?
Given the complexity and ongoing developments, we are reviewing various clients’ positions, seeing who has been affected by historical ATO engagement or audits, and recommending that they consider taking preventative actions, such as preparing objections to protect their positions.
Should You Hold Off Lodging 2024 Tax Returns?
Given the current uncertainty, we recommend delaying the lodgment of 2024 tax returns for any trusts or companies that may be affected, if possible
Key Considerations
Subdivision EA Rules: These rules may still apply if:
- A trust owes a UPE to a private company; and
- The trust provides financial benefits (such as payments, loans, or forgiven debts) to a shareholder or an associate of the company.
- ATO Guidance on Section 100A: The ATO has also been focusing on the potential application of Section 100A, which addresses tax avoidance through trust distributions.
Next Steps
We will continue monitoring these developments and provide updates as they become available. Please get in touch with our team for tailored guidance if you have any concerns about how these issues may affect your business.
