Accountants and lawyers have both been a bit excited lately about a recent court case, Commissioner of Taxation v Bendel [2025] FCAFC 15. The case has been an ongoing ‘David-vs-Goliath battle’ between Steven Bendel, a Victorian accountant, and the Australian Taxation Office [ATO].

So far Bendel has been on the winning side. But the case is not over yet.

The ATO has asked the High Court to make a final determination. Now it’s up to the High Court to first decide whether to hear the case. If it does, we will then need to wait until the matter is heard before we know the final position.

Up until now at least David [AKA Steven Bendel] has prevailed.

 

so, what’s the issue?

The case is about how the tax rules operate when a company lends money to a shareholder or an associate of a shareholder. The tax rules treat these loans as dividends, unless the loans are made on terms which comply with the tax rules. You may have heard your accountant talk about the Division 7A rules; well, this case deals with those rules.

The ATO takes a very broad view of what constitutes a ‘loan’. They argue that a ‘loan’ includes various forms of ‘financial accommodation’. This includes Unpaid Present Entitlements – or what accountants and lawyers call ‘UPEs’.

When a trustee decides to distribute trust income to a beneficiary, but doesn’t immediately pay the distribution, the beneficiary has a UPE. The beneficiary can call on the trustee at any time to pay the UPE.

The ATO argues that UPEs are ‘loans’, therefore need to be put on complying loan terms in accordance with the tax legislation requirements. This would require that interest be paid on the ‘loan’, and the UPE be paid within 7 years of it being made. This is not ideal for many trusts, because it means having to pay interest and pay out the UPE, rather than leaving it as an uncalled entitlement.

If the UPE is not put on complying loan terms, then the ATO treats it as a deemed dividend from the company to the trust, and tax applies to that dividend.

 

what did Bendel decide?

Steve Bendel challenged the ATO view that a UPE was a loan. He argued that a loan was an obligation which arose from the lender advancing money to a borrower, and the borrower then having an obligation to repay that amount. The obligation to repay was central to the existence of a loan. On the other hand, whilst a UPE creates an obligation to pay an amount [the trust was obliged to pay the company the UPE when called on], it was not an obligation to repay an amount, because the company had not advanced an amount to the trust in the first instance.

The Full Federal Court agreed that the lack of an obligation to repay an amount meant the UPE was not a loan. The Court also pointed out that the ATO’s view could lead to double taxation – the company would pay tax on the original distribution, and then further tax would be payable if the UPE was not put on complying loan terms.

 

what does the decision mean?

For anyone who did not follow the ATO view and had tax imposed on a deemed dividend, the upshot of the case is that because no deemed dividend arose, any tax imposed on UPE should be refunded.

For the majority who did put UPEs on complying loan terms, it’s less clear. Whilst it may not be possible to undo the previous arrangements [the payment of interest and principal under the loans] it may open the way for existing loans to be rescinded.

For the moment we suggest it’s best to wait and see the outcome of any appeal that the ATO might bring. We will know more in the few ahead.

In the long term, the government may make legislative changes consistent with the ATO view. With an election coming up, we will have to wait and see where different political parties stand on this issue.

 

It is also important to note that there are other related provisions involving UPEs that are not affected by this decision as the legislation specifically refers to UPEs. For example, if a trust distributes to a company, and the company also lends money to a shareholder or associate, these loans will still be caught.

To be clear, this decision does not impact the general Div7A loans when a shareholder takes money from a company. They are still required to meet the Div7A loan requirements and this case only impacts when a trust distributes to a company.

 

we’re here to help

We will keep you updated with any developments, but in the meantime, if you have any questions, please reach out to your usual contact at businessDEPOT.

 

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