Commissioner of Taxation v Bendel: What Every Trust and Company Needs to Know About Division 7A

Bendel Case Summary

In the complex world of Australia taxation law, the Bendel case has emerged as one of the more important legal decisions when speaking about trusts, companies, and tax advisors in 2025. This Full Federal Court decision (Bendel 2025 FCAFC 15) challenged the published views of the Commissioner of Taxation on whether unpaid present entitlements (UPEs) owed by a trust to a corporate beneficiary should be treated as a loan for the purposes of Division 7A. 

With the ATO’s Interim Decision Impact Statement and their filing for special leave to appeal the Bendel case to the High Court, the tax world has been watching closely. Understanding this ruling, the legal reasoning behind it, and its implications for private company entitlements is important for anyone managing trusts and companies.

This article dives into the Bendel case federal court decision, unpacking what entitlements to trust income mean under Division 7A, explain the appeal process, and explore how the law is being administered while waiting for the current Bendel case appeal to be finalised. We’ll cover all the key terms you need to know, from the purpose of Division 7A, to the obligation to repay and what this could mean for your tax planning. This ruling has significant implications for how trusts and companies manage unpaid entitlements and could affect your tax liabilities.

What is Division 7A and Why Does It Matter?

Division 7A exists to prevent private companies from distributing profits to shareholders or associates via loans or other payments without paying the appropriate tax. The purpose of the Division ensures that if a company was to provide a loan to either a shareholder or related party, and that loan isn’t repaid or formalised under prescribed terms, it is to be treated as a deemed dividend (taxable income in the shareholder’s hands).

The purpose of Division 7A is to maintain the integrity of the tax system by preventing the avoidance of tax through informal loans that have been disguised as repayments or benefits.

What is an Unpaid Present Entitlement (UPE)?

A UPE occurs when a beneficiary, generally a private company beneficiary, is entitled to income from a trust but the actual payment of cash has not yet been made. The trust’s obligation to the company exists, but the actual funds remain with the trust. 

Traditionally, the Commissioner of Taxation has treated the UPEs as loans for the purposes of falling under Division 7A, meaning the unpaid amounts could trigger deemed divided tax liabilities if not properly documented or repaid.

The Bendel Case: Background and Full Federal Court Decision

The Bendel case challenged the ATO’s long-held view that UPEs are loans under Division 7A. The central question being answered was: when is a UPE not a loan for Division 7A purposes?

In Commissioner of Taxation v Bendel [2025] FFAFC 15, the Full Federal Court held that a UPE is not a loan under Division 7A. With the court reasoning that a loan requires an obligation to repay money, whereas a UPE only creates an obligation to pay an entitlement. 

This distinction is pivotal: the trust’s decision to pay income to the company creates a debtor-creditor relationship, but it is not the same as a loan that requires repayment under Division 7A rules.

The Court’s decision significantly narrows the scope of the application of Division 7A loans by excluding UPEs from being automatically treated as loans.

What is the ATO’s Interim Decision Impact Statement?

Following the Full Federal Court decision, the ATO released an Interim Decision Impact Statement discussing how it will administer the law while the Bendel case is under appeal as they seek a High Court ruling to overturn the Full Federal Court’s interpretation.

In the interim, the ATO will continue to treat UPEs as loans for Division 7A and will not process amendments or rulings that rely on the Full Federal Court Decision until the Bendel case appeal process is finalised. This means taxpayers must still comply with the existing approach, keeping in mind the legal uncertainty surrounding the case.

Stay Ahead of the Bendel Case: Protect Your Business from Tax Surprises

The Special Leave to Appeal and What It Means

As discussed above, the ATO has applied for a special leave to appeal the Bendel decision to the High Court of Australia in a bid to overturn the ruling. If the High Court accepts the appeal it could result in a definitive ruling that either confirms or overturns the Full Federal Court’s decision.

Until then, taxpayers face a challenging legal environment, with the Bendel case signalling a potential shift, however at the moment the Federal Court’s decision is not yet the final word.

What Are the Practical Implications for Trusts and Companies?

While the appeal from the ATO is pending, trustees and companies should still carefully evaluate their exposure under Division 7A. For those with unpaid present entitlements owed to private companies, there are risks that these amounts may be treated as loans and in-turn, trigger deemed dividends if the High Court overturns Bendel and where they are not properly documented or repaid. 

In these uncertain times it remains essential to maintain clear documentation, formal loan agreements, and check that any loans or entitlements meet the Division 7A compliance requirements. Both Businesses and Advisers should monitor the Bendel case updates closely and balance potential savings with the risks of non-compliance.

Comparing UPEs to Loans Under Division 7A: Why the Distinction Matters

The purpose of Division 7A is to address arrangements where shareholders obtain loans without proper tax consequences. A loan implies a legally enforceable obligation to repay with interest.

A UPE however, arises from the trust law concept of entitlement to income, which does not automatically create a repayment obligation akin to a loan. This legal nuance was the focal point of the Full Federal Court’s decision. The reason being that if you treated every UPE as a loan it would have imposed substantial administrative burdens and unexpected tax liabilities on many taxpayers.

The Bendel case marks a pivotal moment in Australian tax law as it could redefine how private company entitlements from trusts are treated for Division 7A purposes. While the Full Federal Court has come to a decision, the ATO’s special leave to appeal means this issue remains unsettled. 

Therefore, taxpayers must navigate this evolving landscape carefully, balancing potential benefits against risks. Clear documentation, professional advice, and vigilance are key. 

Stay informed and prepared, because the outcome of the Bendel case will impact trust and company tax planning for years to come.

Frequently Asked Questions

• Is the Bendel case ruling currently law?

  No. The ATO has appealed, and until the High Court decides, the original Division 7A treatment stands.

• What makes a UPE different from a loan?

  A UPE is an entitlement to income without a loan repayment obligation. A loan requires repayment.

• Should I change my trust or company arrangements?

  Firstly before any major decisions we would suggest seeking professional advice. In the meantime you should ensure you have all the proper documentation and formal loan agreements to reduce any potential risk. If you are seeking professional advice, contact Cordner for all your business advisory needs.

• What if the appeal overturns Bendel?

  The ATO’s previous Division 7A approach would return, possibly resulting in tax and penalties where not applied appropriately.