Bendel: The High Court Decision That Could Reshape Division 7A

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You're listening to Explain That by Velocity Legal, the podcast that keeps business owners and professional advisers ahead of the curve in an ever-changing legal landscape.

The tax case of Bendel has shaken up the tax world and dramatically affects how unpaid present entitlements and Division 7A have been administered and are going to be administered into the future.

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In this episode, I'm joined by Special Counsel Archana Manapakkam to revisit what's happened in Bendel and what might happen next.

Welcome back, Archana.

Thanks, Andrew.

Now, we did a previous podcast around the time of the Bendel case being decided.

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We're now recording this as at January 2026. I'm wondering where we are now and what's to come going forward.

So I'll start by asking, where are we right now in the process? Where are we at?

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Well, the last time we spoke, it was just after the Full Federal Court's decision, in which the taxpayer was successful and it was held that UPEs are not loans for Division 7A purposes.

1:13
Since then, the Commissioner applied for special leave to appeal the decision to the High Court. That application was allowed and the hearing has taken place.

So that took place in two parts, the first one in October last year and the second one, I think, in December, start of December last year.

1:34
So now we're waiting for a decision. And the decision is, I think people are expecting it to be handed down this half of the year, so probably by June, but we're still waiting.

So everyone's put their two cents in now.

1:50
The Commissioner has made all his arguments, the taxpayer has made all their final arguments. All we can do now is wait for the justices of the High Court to determine who's right and who's wrong, or maybe something else entirely.

But to determine this question, potentially once and for all, about is an unpaid present entitlement a loan?

2:13
Yes, essentially that's what it is.

But in the meantime, the Full Federal Court's decision is still the law of the land, regardless of whether the Commissioner likes it or not.

And what was the decision, just to recap on where we're at and what the Full Federal Court and Federal Court decided?

2:32
So the Full Federal Court, so the first instance decision was in the Administrative Appeals Tribunal. The Commissioner lost there and then appealed the decision to the Full Federal Court and lost once again. And now they're appealing once again.

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So in that case, there was a company that had an unpaid present entitlement owing from a trust. It was over a number of years that it had different UPEs, unpaid present entitlements, owing to it.

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And the Commissioner said those UPEs are essentially, because they hadn't been repaid, they hadn't been paid in the following income year.

So a UPE arises when you make a trust distribution resolution, make a distribution, but you haven't paid it yet.

3:29
So it's an unpaid present entitlement.

In the year after that present entitlement arose, but it hasn't been paid.

It becomes a loan, and if it's not then paid by the lodgment date of the following year.

3:45
It's then treated, or put on the terms of a Division 7A compliant loan agreement. The Commissioner treats that as a deemed dividend, basically.

And it's important to know that that's just been the Commissioner's view until Bendel.

4:01
Untested for what? The best part of 15 years, right?

Yeah. So that's been the Commissioner's view since 16 December 2009, so for a very long time, 15 years.

So basically there's a provision in Division 7A, and that's a specific provision about what's a loan.

4:28
And it says a loan includes X, Y and Z, and one of them is it includes the provision of financial accommodation.

And the Commissioner's view is it's not a loan in the traditional sense maybe, but it's a loan in the sense that it's financial accommodation and therefore a loan for Division 7A purposes.

4:51
It's a very technical distinction, isn't it?

Because I guess to the ordinary person, you might say, well, okay, trust has got income. Trust has decided that this company is entitled to it and hasn't paid it.

You might think to the ordinary person that, oh, well, that's a loan then.

5:09
But I mean, it's not a loan in the traditional sense, because a loan is I give you some money and you've got to pay it back to me later on.

But the difference here is that there has never been a transfer of money in the first place. It's something created because of a trust deed and the rights under the trust deed.

5:25
Yeah. So, you know, a loan entails the concept of a repayment.

So the company in this instance that has a present entitlement owing to it, it hasn't handed money over to the trust, which has then loaned that money back.

5:46
So I think this distinction was drawn out in the Full Federal Court's decision, that it entails this concept of a repayment.

And that's an interpretational question.

And they also looked at the Division 7A regime more broadly.

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And there is a specific subdivision in Division 7A that deals with unpaid present entitlements. Subdivision EA. There is also a Subdivision EB. We won't talk about EB.

But if there is a provision that deals with unpaid present entitlements, we wouldn't need to have that if a UPE was a loan, right? It would be completely superfluous.

6:32
So the Full Federal Court's reasoning was that it involves a harmonious operation of all the provisions to interpret financial accommodation as not including an unpaid present entitlement.

So AAT said unpaid present entitlements, not a loan.

6:52
Full Federal Court, unpaid present entitlements, not a loan.

Is it fair to say there's really, I mean, there's all sorts of possibilities, but really it's a binary outcome that's going to come from the High Court.

They're either going to agree with the past decisions or they're going to say, nah, the ATO has been right all along.

7:14
Is that fair to say? Those are the two most likely outcomes?

Correct. Yes, that's right.

Yeah. And I guess let's turn to what's going to happen from here.

Let's just say the ATO is correct.

7:30
Let's say the High Court comes along and says, yep, no, the previous judgments got it wrong. ATO has actually been correct the whole time. The UPE is a loan.

What would happen from there?

Well, it's business as usual for the ATO, right?

7:48
I know that some time ago in 2018, there was a Treasury consultation paper in which they talked about codifying the treatment of UPEs as loans, basically.

But that wouldn't really necessarily be required if the High Court says yes, it is.

8:10
Business as usual. We're right the whole time, nothing to see here, move on.

ATO's right on everything else where they go out on a limb.

Maybe not that far, but yeah, you're right. Look, it would be essentially, from the ATO's perspective, business as usual, wouldn't it?

8:25
Yeah. So I think right now, with these different stages of the Bendel decision, they placed a lot of, you know, they placed decisions, say in terms of objections and amended assessments and potentially issuing penalty assessments, they placed all those things on hold pending the outcome of the High Court decision.

8:41
So if the High Court decision, if the Commissioner wins, then all of those decisions you can expect to be issued.

Yeah.

And then let's turn to the other side, which is probably the more interesting side. What if the High Court said no, yeah, actually, you're wrong on this.

9:05
An unpaid present entitlement isn't a loan. What happens? Let's leave aside legislation for a second, but what happens then?

Well, then we've got a situation where, you know, a UPE might not trigger a Division 7A deemed dividend, but it might still.

9:24
So let me explain that further. So it might not be a loan for Division 7A purposes, but it could be caught by Subdivision EA, which is the provision I flagged earlier.

So that's a very complex and little known, little understood provision until recently, until the Bendel decisions have been issued because most people just accepted what the Commissioner was saying, even though there's always a little bit of grumbling in the background.

9:58
You know, that was what the administrator of the law was saying.

So Subdivision EA, basically it provides that if there's a UPE owing to a company from a trust and that value is shifted to a shareholder or associate of that company, say in the form of a payment, loan or forgiveness of a debt to that shareholder or associate of the company, then it's treated as a deemed dividend paid by the company to that shareholder or associate.

10:36
So it's going to come down to whether or not the money's actually left the trust or not.

And if there's been a UPE created and the trust has, you know, lent it out to someone else, you're still going to have a problem. It might be a slightly different problem, but you're still going to have a problem.

10:54
As opposed to the situations where the money sort of stayed within the trust, perhaps in a business, perhaps to buy property or something like that.

Yeah. So if the funds are retained in the trust, then it wouldn't be caught by Subdivision EA.

11:10
It's if the funds then go out. So this is the funds representing the unpaid present entitlement.

So yeah, if they're retained, it's okay for Division 7A purposes. There might be a different issue under section 100A.

11:26
I was going to say, the ATO is still hinting on 100A.

Yeah. So they've flagged that in their interim decision impact statement.

So I'm maybe jumping ahead a little bit here, but the ATO issued a decision impact statement following the AAT decision and then issued an updated one following the Full Federal Court decision in which they acknowledge the decisions.

11:57
But they say that they'll continue to administer the law based on their views pending the outcome of the High Court appeal.

And they'll, in the meantime, put all these decisions on hold pending that appeal.

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And they also flag 100A.

100A is a very, very esoteric provision that garnered some degree of attention. I think probably, is it probably 2022? Somewhere around there.

12:29
So it was sort of just lying there. No one really thought about it until somehow someone at the ATO dusted it off, dusted off the cobwebs, pulled it out and thought, hey, here's something we can ping some taxpayers with.

Yeah, yeah. So basically that's where a present entitlement is created in favour of a particular beneficiary, but that benefit is provided to someone else.

And it's basically pursuant to some arrangement that was pre-existing the creation of that unpaid present entitlement, and it's not an ordinary family or commercial dealing.

13:09
Is that a decent summary?

Yeah, I think the point from all that is that if the taxpayer wins, it's not like there's nothing left.

There's Subdivision EA still, there's maybe section 100A.

13:27
But I mean, even still, I would imagine it's going to involve some very significant adjustments to the revenue, refunds, things like that.

And I mean, it's not going to look good, is it?

I mean, if the highest court in the land says, and all the courts have said, if that's how it turns out, all the courts have said the ATO is wrong and it's been wrong and administering the law for 15 years.

13:51
It doesn't leave a good taste in the mouth, does it?

No, but I mean, I guess it's a reminder that the ATO doesn't make the law. The ATO is a mere participant in the tax system.

They're not always right, and often they're not right, as you and I both know as tax practitioners.

14:10
Yes. It's challenging though because the powers, you know, the scales are so far tilted in their favour through the onus of proof and just resources against the private taxpayer.

You know, it takes a very courageous taxpayer to go against that.

Well, this Bendel decision, certainly the case is a David and Goliath fight, right?

14:29
So, you know, as I mentioned, there has always been a lot of grumbling in the background about this UPE treatment, and finally someone's taken it on.

But, you know, if the outcome of the High Court decision is that the Commissioner loses, then I think there will be a lot of action going on in terms of objections, finalising decisions.

15:00
Taxpayers should be, you know, definitely moving swiftly because there'll be time periods that are running as well.

Hmm.

You reminded me that in a previous podcast, I sort of suggested it was like the moon landing or the fall of the Berlin Wall. I regret making those comments.

15:17
But yeah, look, it's going to be pretty significant, at least in the tax world.

It is, and it'll certainly be an embarrassment to the Commissioner as well.

Hmm. And then I guess legislative change, I know we're sort of just postulating on what's possible from here, but I mean, we can't rule that out, can we, about if the ATO does lose, what comes next in terms of a legislative issue?

15:44
I think in the tax industry, certainly a lot of people are thinking that there will be legislative change if the Commissioner loses in this High Court decision.

So, you know, coming back to that amendment that was proposed in the 2018 consultation paper by Treasury, that amendment, the particular one that seeks to codify UPEs as loans or something along those lines, would probably be passed or something like that.

16:16
I'm not saying that there'll definitely be legislative change, but I think it's looking probably highly likely that there would be.

Yeah, yeah. And then the question is, would it be just a sort of, I guess, a Band-Aid approach or something more broad?

And again, it's impossible.

16:33
It is impossible.

To know which way it's going to go on that. But I mean, my cynical view is that it would just be a Band-Aid to paper over this but not address, you know, Division 6 more broadly. Well, Division 7A more broadly.

It'll cause a lot of problems if the Commissioner's view is upheld, and I guess you'd need to paper over, if you're going to do this Band-Aid approach.

16:56
Question is, is it going to be retrospective? Because the 2018 proposed amendments in the consultation paper were to have retrospective operation, which in the legal world is pretty draconian.

17:15
But you'd also need to deal with the Subdivision EA and Subdivision EB provisions as well.

And you'd also need to make sure that changes that result in UPEs being treated as loans for Division 7A purposes don't result in effective double taxation of the same economic amount.

17:39
Very technical issue, but it was raised in the Federal Court decision at that point, maybe even the AAT one, I don't recall.

Yeah, yeah. So I mean, you're right that any legislative response is going to be well thought through as well.

It can't just be done on a whim, and you need to consider all those issues.

17:59
I want to thank you for being part of this episode, where we recap on the Bendel decision, where we're at at the moment and where we might be going sometime, hopefully in the next couple of months.

In the meantime, we've got another year of tax planning.

18:16
We've got lodgments. The here and now is still happening.

People still need to make decisions, and if they do need any advice regarding Division 7A, trust entitlements, anything like that, I'd strongly encourage them to reach out to Archana.

Thanks once again.