Full Federal Court Determines Unpaid Present Entitlement not a Deemed Dividend under Division 7A

Commissioner of Taxation v Bendel [2025] FCAFC 15

Background

The Commissioner of Taxation was appealing the decision from the AAT. The issue in dispute relates to the definition of “loan” for the purpose of Div 7A as defined in s109D(3). The trustee passed resolutions resulting in a beneficiary becoming presently entitled to part of the income of the trust, but the trustee had not paid that entitlement to the beneficiary, thus creating an unpaid present entitlement. The tribunal had rejected the ATO’s argument that this was a loan, as s109D(3) requires a loan to create an obligation to repay an amount, or ‘in substance’ creates an obligation to pay.

On 19th of February 2025 the Full Federal Court of Australia delivered the judgement of Commissioner of Taxation v Bendel [2025] FCAFC 15, clarifying whether an unpaid present entitlement (‘UPE’) met the definition of ‘loan’ for the purposes of Division 7A The Court considered whether the existence of a ‘debtor-creditor’ relationship created through an unpaid present entitlement constitutes a ‘loan’. The Full Federal Court unanimously concluded that s109D(3) required more than the existence of a debtor-creditor relationship; it requires an obligation to repay and not merely an obligation to pay.

In these circumstances, the mere existence of a unpaid present entitlement does not itself constitute a loan for the purposes of s109D(3) of the ITAA 1936.

Practical considerations for clients

This judgement goes against the ATO’s current views on how Division 7A applies, which is set out in TD 2022/11. The ATO is yet to clarify its position in relation to this landmark ruling. The ATO may seek leave to appeal to the High Court of Australia.

As a result of this decision, clients should consider reviewing prior year treatment where they have adopted the ATO’s now incorrect interpretation under TD 2022/11. There might an opportunity to amend assessments to obtain cash tax savings where a dividend has been included in their assessable income to take into account the UPE. Clients should also urgently consider their position for FY24 prior to filing by the due date on 31 March 2025.

In addition, the ATO will continue to administer their views around UPEs and Division 7a as set out in in TD 2022/11.

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This ruling introduces new complexities for business owners managing dividend and distribution strategies. At Modoras, we help ensure full compliance and maximise your tax position. Our team of experts offers strategic insights on business planning, forecasting, and financial optimisation tailored for business owners and shareholders. Secure your financial future by scheduling an appointment or calling us on 1300 888 803.