Bendel’s Case and its Implications

In a long awaited decision, the Full Federal Court has unanimously ruled in favour of the taxpayer in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel’s case). The case deals with the Commissioner’s appeal against the AAT decision which held that an unpaid present entitlement (UPE) was not a loan for the purposes of section 109D of the Income Tax Assessment Act 1936.  

The Full Federal Court held that while there was a debtor-creditor relationship between the trust and the company, the creation of the UPE and the retention of that UPE within the trust is not a loan within the meaning of section 109D(3). This is because a loan “… requires a transaction which creates an obligation to repay an amount or which in substance effects an obligation to repay. The creation of an obligation to pay an amount is not sufficient.” 

The case is a great win for the taxpayer. However, it is important to remember that, depending on the fact pattern, Subdivision EA may apply to UPEs (noting that Subdivision EA could not apply in Bendel’s case as the UPE was retained within the trust).  

What happens now?

It is unclear at this stage whether the ATO will apply for special leave to appeal to the High Court (although we expect it to be likely), and if it does, whether the High Court will grant special leave. 

We are also waiting to hear from the ATO on how it will administer this issue in the meantime. At this stage the ATO has advised the interim Decision Impact Statement it issued after the AAT decision is being reviewed in light of the Full Federal Court decision. At the time of writing, no other ATO announcement has been made regarding the decision or possible administrative approaches, particularly for those taxpayers who have complied with the ATO approach in relation to UPEs.

A legislative fix could give the ATO the interpretation it is seeking. But with an election looming, the big question is whether the major political parties (or the cross bench if they have the balance of power) would support legislative amendment of section 109D to specifically include UPEs as loans. 

Next steps

While we wait to find out whether there is an appeal and / or a legislative amendment, taxpayers should do the following:

• Review existing arrangements to determine the impact of the Bendel decision.
• Consider whether Subdivision EA or any other (non-Division 7A) provision might apply to existing arrangements.
• Continue meeting obligations under loan agreements entered into in accordance with TR 2010/3, PS LA 2010/4 and TD 2022/11 until we have an understanding of how the ATO will administer the decision.
• Hold off forgiving any UPEs given the Full Federal Court’s comments that while UPEs are not a loan, they are a debt. The implications of the debt forgiveness provisions within Division 7A need to be considered in detail before any forgiveness is undertaken.
• If the ATO has previously deemed a dividend on a UPE under section 109D, look at lodging an objection as soon as possible.