📢 Tax Update: Bendel Case – Key Issues for Trusts and Division 7A

With financial year-end approaching, it is important for business owners using trust structures to be aware of a major tax case that may affect how unpaid trust entitlements are treated.

The Bendel case deals with whether unpaid present entitlements (UPEs) from a trust to a corporate beneficiary should be treated as loans under Division 7A – a key issue in managing tax obligations and avoiding deemed dividends.

What Is the Case About?

Historically, the Australian Taxation Office (ATO) did not treat UPEs as loans for Division 7A purposes. This changed in December 2009, when the ATO reversed its position and began treating UPEs as loans if certain conditions were met. Since then, most private groups have been required to either repay these amounts or put in place a Division 7A loan agreement.

Mr Bendel challenged the ATO’s view. Both the Administrative Appeals Tribunal and the Full Federal Court ruled in his favour, finding that UPEs are not loans under Division 7A.

The ATO has now sought leave to appeal the decision to the High Court of Australia. As of now, we are waiting to hear whether the High Court will hear the appeal.

📌 What Is the ATO Doing in the Meantime?

The ATO has confirmed that it will continue to apply its existing position, treating UPEs as Division 7A loans, despite the court decisions to date.

The ATO has also clarified the following:

Timing of appeal: A decision from the High Court on whether it will hear the case is expected in the next couple of months.
No blanket deferrals: Affected taxpayers will not be granted blanket deferrals for tax return lodgements.
Discretion on deemed dividends: If a taxpayer relies on the court decision and does not enter into a Division 7A agreement, but the ATO ultimately wins, discretion to disregard a deemed dividend will not be applied automatically and would only be considered case by case, after the event.

🧭 What Are Your Options?

The ATO has outlined two main options while the appeal is unresolved:

Option 1: Follow the ATO’s current position (conservative approach)

Treat UPEs as loans under Division 7A.
Put a complying Division 7A loan agreement in place.
This approach:

Protects against deemed dividend risk if the ATO wins.
Helps reduce exposure to other integrity rules, such as Subdivision EA and section 100A.

Option 2: Rely on the Full Federal Court decision (higher risk approach❗)

Do not treat UPEs as loans.
Do not enter into Division 7A agreements.
This approach:

Reduces current compliance burden.
But creates significant risk if the ATO wins or if other rules (e.g. section 100A) apply.

📅 Timing Example

If a trust appoints income to a corporate beneficiary on 30 June 2024:

The UPE is likely treated as a loan during the 2025 income year.
A complying Division 7A loan agreement must be in place by the lodgement date of the company’s 2025 tax return.
Interest begins accruing from 1 July 2025.
The first minimum annual repayment would be due by 30 June 2026.

🚩 Other Rules to Be Aware Of

Even if the High Court does not hear the appeal, other integrity provisions may still apply:

• Subdivision EA

Applies where the trust provides financial benefits (e.g. loans or payments) to shareholders or associates of the company owed the UPE.

• Section 100A

Targets situations where trust income is appointed to one beneficiary but used by another (often the trustee). The ATO’s green zone guidelines state that placing the UPE under a complying Division 7A loan helps reduce risk under section 100A.

💼 Final Thoughts

The Bendel case is significant, but the outcome is still uncertain. In the meantime, taking a conservative approach by following existing ATO guidance may help reduce overall tax risk, including exposure to other integrity rules.

We are closely monitoring developments and will update you once the High Court confirms whether it will hear the appeal.

If you would like assistance reviewing your trust arrangements or implementing a Division 7A loan agreement, please contact our office.

PRATT Partners – Tax and Advisory

Trusted Partners for Business Owners