Division 7A and the Bendel Blow

Where the ATO Stands Now

We’ve been keeping an eye on the Division 7A debate for years, and April’s tax update served a firm reminder that this is far from settled. The Full Federal Court has now unanimously ruled against the ATO in Commissioner of Taxation v Bendel, concluding that an unpaid present entitlement (UPE) to a corporate beneficiary is not a Division 7A loan. It's a big deal — but the story isn’t over yet.

So, what happened?

In Bendel, the issue was whether a trust distribution owed (but not paid) to a corporate beneficiary should be treated as a loan under Division 7A, triggering a deemed dividend unless managed under a complying loan agreement.

The ATO said yes, citing their view in TD 2022/11. The courts — both at first instance and on appeal — said no.

The reasoning? A UPE, without actual cash or loan transactions, doesn’t fall within the statutory meaning of a “loan” under s 109D ITAA 1936.

Why this matters for practitioners

We’ve all had clients where trusts distribute income to corporate beneficiaries to cap tax at 25%, but leave the cash in the trust. Under the ATO’s view, that move created a Division 7A issue — unless you documented a loan agreement and stuck to minimum yearly repayments.

The courts have now said that’s wrong in law — which gives some breathing room.

But here’s the catch: the ATO isn’t backing down.

They’ve filed for special leave to appeal to the High Court, and in the meantime, they’re doubling down on their own position. Their Decision Impact Statement confirms:

They won’t finalise assessments or rulings involving this issue until the appeal is resolved (unless forced to act),
If they must act, they’ll continue applying their view in TD 2022/11,
They may still pursue section 100A where Division 7A fails — especially if funds are retained without a commercial explanation.

So we’re in a holding pattern, but one that still carries risk.

Where does that leave us?

From a technical perspective, the courts have spoken — but until the High Court refuses (or hears and dismisses) the appeal, the ATO’s administrative stance holds sway. That puts us in an awkward spot as advisers.

If your clients have UPEs sitting in trusts, and no Division 7A loan agreements in place, you have three choices:

Do nothing and rely on Bendel — risky, because the ATO may still challenge based on TD 2022/11.

Document the UPE as a complying loan, even though the courts say it's not necessary — conservative, but reduces audit exposure.

Convert UPEs into actual payments or commercial loan arrangements, especially where the trust retains funds for working capital.

Final Thoughts

This case highlights the ongoing tension between administrative interpretation and judicial authority.

The Bendel decision gives practitioners solid ground to stand on, but the ATO isn’t conceding just yet.

Until there’s finality — and assuming you don’t want clients caught in the crossfire — it’s worth reviewing UPE positions now, not later.

We'll see how the High Court responds to the leave application, but for now, caution remains the safest policy.