Background

The Division 7A treatment of UPEs to corporate beneficiaries has been a contested issue since 16 December 2009 when the ATO released the ruling that was to become Taxation Ruling 2010/3.

The Full Federal Court’s decision in Bendel was the first appellate court authority to reject the Commissioner’s long-held view that an unpaid corporate beneficiary entitlement can itself amount to a loan under subsection 109D(3). The Court held that subsection 109D(3) requires more than the mere existence of a debt or an obligation to pay. It requires an obligation to repay an identifiable principal sum.

The Commissioner appealed to the High Court, and the appeal was heard across two dates in late 2025. However, the High Court is yet to provide its decision. The result is that, with lodgment day approaching for the 2025 income year, many taxpayers are left making real decisions in the shadow of unresolved litigation and an unchanged ATO administrative position.

We have set out the current lay of the land with respect to Bendel below.

Administrative and Procedural History – The Long Road to The High Court

The ATO has publicly maintained its view on UPEs to corporate beneficiaries for more than 15 years. In the Commissioner’s own words, Bendel is the first time that long-standing view has been considered by the Courts. The ATO’s current published administrative position continues to be reflected in TD 2022/11, and its related materials still treat UPEs and sub-trust arrangements as being capable of being loans for the purposes of Division 7A.

At first instance in the Tribunal, the taxpayers succeeded on the primary issue. The Tribunal held that the balance of an unpaid entitlement of a corporate beneficiary was not a loan to the trustee, whether held on a separate trust or otherwise. It reasoned that construing subsection 109D(3) to capture UPEs would create serious tension with Subdivision EA, which was specifically directed to cases where a company has an unpaid present entitlement and the trustee then makes a payment or loan to a shareholder or associate.

The Commissioner appealed. On 19 February 2025, the Full Federal Court dismissed that appeal. The Full Court accepted that a debtor-creditor relationship may arise in this kind of trust setting, but held that it was still not enough. For subsection 109D(3), a “loan” requires an obligation to repay, not merely an obligation to pay. That was the critical constructional step which defeated the Commissioner’s case.

The Commissioner then sought and obtained special leave to appeal to the High Court on 12 June 2025.  

High Court Hearing Transcripts – A Peek Behind the Curtain

October Hearing

The 14 October 2025 hearing shows the High Court probing the Commissioner’s case on a granular level. Gordon J said she was “not yet convinced” that the assumed debtor-creditor relationship existed in the trust context (this relation was assumed in previous hearings). Her Honour’s concern was that a mere setting aside under a trust deed may not produce the unconditional present obligation to pay that the Commissioner’s argument seemed to require.

That concern mattered as the Commissioner’s primary submission was that the corporate beneficiary had acquiesced in the trust retaining and using the funds, and that this amounted to financial accommodation. But the Court repeatedly pressed counsel on whether that premise was legally stable if the underlying trust relationship had not first crystallised into something more akin to an enforceable debt. That is what led to the adjournment and supplementary submissions on separate trust, debtor-creditor relationship, and related trust-law questions.

December Hearing

By 3 December 2025, the hearing had shifted squarely onto trust deed mechanics and the interaction between section 109D and Subdivision EA.

Counsel for the Commissioner opened by identifying three central issues: whether separate trusts had been created, whether a debtor-creditor relationship existed, and how those matters bore on whether a loan had been made under section 109D(3).

Counsel for the taxpayers answered with an equally direct formulation. He submitted that a “loan” under section 109D(3) still involved both payment and an obligation of repayment, that mere deferral of an existing obligation to pay was not enough, and that section 109D “does not apply to unpaid present entitlements, that being the domain of Subdivision EA”.

What do the hearings suggest?

First, the High Court appears to have been testing the Commissioner’s case at a deeper level than many expected. The issue was not only whether the word “loan” in section 109D is broad enough to include a UPE. The Court was also testing the premise of the Commissioner’s case, including whether the assumed debtor-creditor relationship and the alleged financial accommodation analysis could be sustained in this trust context at all.

Second, the transcripts suggest the Court was alive to the possibility of a narrower and more fact-sensitive outcome. Much of the December hearing was devoted to specific clauses of the deed, separate trust mechanics, certainty of subject matter, and whether the accounting treatment matched the trust law position. That kind of focus may indicate a decision that may turn heavily on the deed and facts rather than laying down a universal rule for all UPEs.

Third, the interaction between section 109D and Subdivision EA remained central. That is unsurprising given the Tribunal had already treated Subdivision EA as the more specific statutory pathway for dealing with unpaid present entitlements in this setting.

Current ATO Position – Interim Decision Impact Statement

For present purposes, the critical point is that the ATO has not revised its administrative position with respect to UPEs and Division 7A.

The ATO’s Interim Decision Impact Statement states that, pending the outcome of the High Court appeal process, the Commissioner continues to administer the law in accordance with TD 2022/11. The updated Interim Decision Impact Statement also records that, unless a decision must be made (such as the taxpayer's period of review will elapse, or a taxpayer gives notice requiring the Commissioner to make an objection decision), the Commissioner did not propose to finalise objection decisions on past-year assessments turning on whether a UPE was a subsection 109D(3) loan.

The ATO has said that it will not grant a blanket lodgement deferral for affected taxpayers while the High Court process runs its course, and will not grant a blanket exercise of the section 109RB discretion if the Commissioner is ultimately successful.

Further, the ATO has also stated that the Bendel appeal does not exhaust the compliance risk. The Commissioner has specifically said that section 100A and Subdivision EA may still apply depending on the facts, and that those provisions do not depend on the outcome of the High Court appeal.

Taxpayer’s Choice – A Rock and a Hard Place

That leaves taxpayers and advisers in a difficult position for the year ended 30 June 2025.

One option is to implement affairs consistently with the Full Federal Court’s reasoning in Bendel and treat an outstanding UPE to a corporate beneficiary as not itself amounting to a section 109D loan. That approach has strong judicial support but carries obvious practical risk while the Commissioner continues to administer the law to the contrary and while the High Court appeal remains unresolved on the materials reviewed.

The other option is to continue following the ATO’s published administrative position, including TD 2022/11 and, where relevant, placing arrangements onto complying Division 7A terms. That may provide administrative certainty, but it can also force taxpayers into transactions and documents they may not ultimately have needed if the Commissioner fails in the High Court.

There is no universal answer. The ATO itself has acknowledged that taxpayers “will need to consider their circumstances and make their own decision pending the finalisation of the appeal process.”

Taxpayers with outstanding UPEs to corporate beneficiaries should review their position before lodgement deadlines.

To discuss UPEs, Division 7A, section 100A, Subdivision EA, or any other matters relating to trust distributions, please contact Velocity Legal’s tax team.