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

Velocity Legal

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Key Insights

Bendel is a major taxpayer win, but it is not a free pass. The High Court confirmed that a corporate beneficiary’s UPE is not, merely because it remains unpaid, a loan for Division 7A purposes. That rejects the ATO’s long-standing approach in an important respect. However, private groups should not assume all historical UPE arrangements are risk-free. The trust deed, resolutions, accounting treatment and any later dealings with the funds still matter.
The ATO may have lost on Division 7A, but other tax issues remain. Bendel narrows the circumstances in which an unpaid entitlement can be treated as a Division 7A loan, but it does not remove every integrity risk. Subdivision EA, section 100A and other tax provisions may still be relevant, particularly where trust income is appointed to a corporate beneficiary but the economic benefit is enjoyed elsewhere in the group.
Private groups should review old and current UPE arrangements. Many taxpayers followed the ATO’s historical approach by converting UPEs into complying Division 7A loans or managing them through sub-trust arrangements. After Bendel, those arrangements should be reviewed carefully before making changes. The decision may affect future trust distribution planning, but historical positions, objections, loan documents and ATO engagement all need to be considered on their own facts.

Contents

What does the High Court’s Bendel decision mean for private groups, trusts and corporate beneficiaries?

For many years, the ATO maintained that certain unpaid present entitlements, or UPEs, owing from trusts to corporate beneficiaries could be treated as loans under Division 7A. That position created significant tax risk for private groups using discretionary trusts and bucket companies.

In this episode of Explain That by Velocity Legal, Andrew Henshaw is joined by Archana Manapakkam to discuss Division 7A, unpaid present entitlements, the Bendel litigation, and why the High Court’s decision matters for trust distribution planning and ATO engagement.

The discussion covers:

what Division 7A is designed to address;
how UPEs commonly arise in private group trust structures;
why the ATO’s long-standing position created deemed dividend risk;
the Full Federal Court’s decision in favour of the taxpayer;
the High Court’s decision in Commissioner of Taxation v Bendel;
why a UPE is not automatically a Division 7A loan;
the practical uncertainty for historical trust arrangements;
why Subdivision EA and section 100A may still need to be considered; and
what taxpayers and advisers should review after Bendel.

A practical discussion for private business owners, family groups, accountants, tax advisers and trustees dealing with Division 7A, trust distributions, corporate beneficiaries, UPEs or ATO reviews.

For advice on Division 7A, unpaid present entitlements, trust distributions, corporate beneficiary arrangements or ATO engagement, contact Velocity Legal’s Tax team.

This podcast in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this podcast.

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