UPEs and the ATO’s position
In a family trust structure, the trustee will often exercise its discretion to distribute income of the trust in a given financial year to an associated private company beneficiary (where the trustee and company are controlled by the same family group).
Where the amount of the distribution is not in fact paid to the beneficiary, but is instead retained in the trust to use for capital or investment purposes, it is referred to as an “unpaid present entitlement” (UPE) owed by the trustee to the private company beneficiary.
For the last 15 years, the ATO has taken the position that an UPE amounts to the provision of “financial accommodation”, which is a loan from the beneficiary to the trustee for the purpose of Division 7A of Part III of the Income Tax Assessment Act 1936 (Cth) (ITAA). This has the result that the value of the UPE is treated as an unfranked dividend, which is assessable income for the trustee for tax purposes (unless the parties enter into a complying loan agreement under Division 7A).
The ATO’s views are captured most recently in Tax Determination TD 2022/11.
The decision in Bendel
However, in a major decision, the Full Federal Court in February 2025 held in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel) that a private company beneficiary’s UPEs were not loans under Division 7A of the ITAA, thereby overturning the ATO’s longstanding view.
Key among the Court’s findings was that a “loan” requires a positive action from the alleged lender – and it will not arise simply when a person has an obligation to pay a sum of money to another party (rather than to repay that amount). An UPE does not meet those requirements.
What does it mean?
This opens the door to significant changes in family business structures, and could permit the accumulation of capital in a trust structure without adverse income tax implications.
However, caution should be exercised, and a careful assessment will need to be made by trusts, both as to whether to declare income which may give rise to an UPE in the first place, and if so whether to treat the amount of the UPE as a loan and create complying Division 7A principal and interest loan terms, or to otherwise simply leave the UPE unpaid.
Taken at face value, the decision in Bendel overrides the ATO’s existing view on UPEs, but the Commissioner of Taxation has noted the ATO will continue to apply its existing position until the appeal process has been concluded. It is anticipated an application for special leave to the High Court to appeal the decision of the Full Court in Bendel is imminent.
In any event, it is possible the Australian Government, following this year’s Federal Election, will legislate to expressly include UPEs within the scope of Division 7A.
For now, trusts and private companies should seek urgent advice before lodging their 2024 and 2025 returns, and should also consider objecting to previous year assessments to preserve their rights.
For a further discussion, please get in touch with Peter Kumnick or Matthew Kumnick.
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