As all SME advisers would be aware, on 19 February 2025 the Full Federal Court unanimously decided that an Unpaid Present Entitlement (UPE) due from a Trust to a beneficiary was not a Loan for the purposes of Division 7A. [CoT vs Bendel FCAFC 15]
This decision, following the ATO’s appeal of the 2023 AAT Decision in favour of the Taxpayer, effectively dismisses the ATO’s long held view that by not calling on the UPE, a corporate beneficiary was providing financial accommodation, and therefore a loan, for the purposes of Division 7A.
The publication by the Commissioner on 16 December 2009 of what was to become Tax Ruling TR 2010/3 effectively led to a change in how corporate beneficiaries were utilised by Trusts, and specifically Trusts that carried on a business.
The ATO’s U Turn in 2009 also led to many business owners operating from Trusts seeking to restructure their affairs to transfer their business earning activities into a company. Thousands of hours of planning and implementation, not to mention the professional fees incurred were devoted to restructuring businesses out of Trusts, be they discretionary or fixed unit trusts and into companies.
Whilst the tax laws provided several tax effective options through the CGT Small Business Concessions and certain specific CGT Rollovers, in many cases either some tax was required to be paid or at the very least, funds had to be contributed into a taxpayer’s superannuation fund.
That is not to mention the impost of WA Transfer Duty on the transfer of these business assets, albeit there was effectively no change in the beneficial ownership or control of the business.
So where does Bendel leave us now?
Whilst we should celebrate the clear and concise judgement of the Court, it has created several questions for Trustees and their advisers going forward.
Can we undo Complying Division 7A Loan Agreements from prior years?
NO, the Loan Agreement is a legal document whereby what was a UPE has been converted into a loan for Division 7A purposes. It is our opinion that you must continue to comply with its terms.
What if we identify prior year UPE’s due to corporate beneficiaries that were not placed on complying loan agreements?
We recommend that you quarantine them clearly in the accounts noting the year the UPE arose, that is “2022 UPE”. As a result, as the Bendel decision currently stands, these prior year UPE’s are not subject to Division 7A such that no action needs to be taken in respect to them.
What will the ATO do and can Bendel be overturned?
The ATO has until 20 March 2025 to seek Special Leave to appeal to the High Court. Until that time, we doubt the ATO will make any public comment and yes, if Special Leave is sought and obtained, the High Court could still overturn the Bendel decision.
What should we do with 2023 UPE’s to corporate beneficiaries that were required under the ATO’s ruling to be placed on complying loan agreements by the lodgement date of the 2024 tax return?
We recommend that you advise your clients that because of the recent Bendel decision there is no legal requirement to place these UPE’s on complying loan agreements, however, see the answer to the above question as the matter may not be settled just yet!
What about 2024 UPE’s?
Even under the ATO’s recent position in Tax Determination TD 2022/11, no action needed to be taken in respect to these UPE’s until the lodgement due date of the 2025 tax returns (likely May 2026). As a result, continue to record the UPE as a 2024 UPE in the accounts and wait for the judicial process to end.
Does that now mean I don’t need to be concerned about UPE’s due to corporate beneficiaries from my Trust?
Unfortunately, you still need to be concerned with these UPE’s from at least two fronts. Firstly, if the Trust has loaned funds out to an associated, non-corporate entity (an individual or a trust) then Division 7A can still apply to this loan. Secondly, if the ATO are of the view that the trustee, when resolving to distribute income to the corporate beneficiary, intended for another party to benefit from those funds, then it may seek to tax the trustee on that distribution under section 100A.
Both areas are complex and if you are faced with them, please contact Sean Pearce or Ross Prosper for assistance.