Commissioner of Taxation v Bendel: what we know so far

Commissioner of Taxation v Bendel [2025] FCAFC 15, which recently found in favour of Mr Bendel is a landmark case for tax practitioners, taxpayers and the tax system. Though the extent of the implications of this decision are yet to be seen, we’re keeping you up to date with information as it’s available.

Case details

Full Federal Court of Australia 

Logan, Hespe and Neskovcin JJ 

Date of decision: 19 February 2025 

Date of hearing: 22–23 August 2024 

Registry: Victoria 

Decision: In favour of the Taxpayer 

On 19 February 2025, the Full Federal Court (the Court) released its decision on Commissioner of Taxation v Bendel [2025] FCAFC 15, which found in favour of Mr Bendel (the Respondent) and dismissed the Commissioner’s (the Applicant’s) appeal. 

Synopsis of decision 

In its decision, the Court was satisfied that the then Administrative Appeals Tribunal, did not complete its statutory task because it did not engage with the text of subsection 109D(3) of the Income Tax Assessment Act 1936 (ITAA 1936). However, the Court still did not accept the Commissioner’s construction. 

The Court stated at [88] the perceived mischief that lies at the heart of the Commissioner’s submission is the creation of a present entitlement that is not paid to a corporate beneficiary and remains in the trust but which benefits from taxation at the corporate beneficiary’s corporate tax rate. The Court found that Division 7A does not operate to negate that present entitlement. 

A consequence of the Commissioner’s construction of Div 7A is that a share of net income to which a corporate beneficiary has been made presently entitled and on which the corporate beneficiary has been taxed in one year is again included net income of that same trust in the following year. This has the potential result of an overall tax impost that is higher than if the corporate beneficiary was never made presently entitled at all. 

Importantly, the Court found that: 

• Division 7A itself draws a distinction between a ‘debt’ and a ‘loan’. The two should not be equated and the concept of a ‘loan’ is narrower than that of a ‘debt’ (at [77] and [78]); 

• the creation of an obligation to pay an amount to a private company that does not result from a transfer of an amount from or at the direction of the private company is not a loan within the meaning of subsection 109D(3) (at [79]); 

• the term ‘makes a loan’ in paragraph 109D(1)(a) connotes something more than the mere existence of a debt owed to a private company (at [79]); 

• although a debtor-creditor relationship was created by the trustee resolution and the entry in the trust accounts, subsection 109D(3) requires more than the existence of a debtor-creditor relationship — it requires an obligation to repay and not merely an obligation to pay (at [93] and [94]); and 

• the creation of the UPE, and the corporate beneficiary’s non-exercise of its right to call for payment of its present entitlement (by refraining from calling for payment) did not constitute the making of a loan or create an obligation to repay an amount as opposed to an obligation to pay. Accordingly, section 109D was not satisfied (at [93] and [94]). 

Analysis: Division 7A and UPEs – only mostly dead 

Neil Brydges, CTA, Principal, and Kaitilin Lowdon, ATI, Principal Lawyer, at Sladen Legal, provide their comments on the Full Federal Court’s decision in FCT v Bendel [2025] FCAFC 15 (Bendel) which was handed down on 19 February 2025. This follows the hearing held on 22–23 August 2024. 

The Full Federal Court (Court), in a unanimous judgment, held, contrary to the view of the Commissioner since 16 December 2009, that an unpaid present entitlement (UPE) owing to a corporate beneficiary is not a loan under subsection 109D(3) of Division 7A in Part III of the Income Tax Assessment Act 1936 (ITAA 1936). 

However, just as Miracle Max (of The Princess Bride fame) explains ‘mostly dead is still slightly alive,’ the idea that UPEs as loans under section 109D are completely gone may be premature. The ATO may apply for special leave to appeal the Court’s decision to the High Court of Australia. Separately, legislative changes to Division 7A were proposed by the former Coalition Government (see below). Absent either of those, taxpayers will be faced with ‘unravelling’ arrangements, or tax, penalty or interest paid (which may now be out of time to amend), in accordance with the Commissioner’s post-16 December 2009 view. 

Background 

Since 16 December 2009, in various administrative guidance documents, the Commissioner has sought to apply the provisions of Division 7A to UPEs owing to corporate beneficiaries, with his views and administrative practice set out in: 

• Taxation Determination TD 2022/11 (a summary of TD 2022/11 can be found in TaxVine Edition 25, dated 13 July 2022); and 

• now withdrawn (but still relevant for UPEs that arose before 1 July 2022) Taxation Ruling TR 2010/3 and Practice Statement PS LA 2010/4. 

On 1 October 2023, the then Administrative Appeals Tribunal (Tribunal) handed down its decision in Bendel v FCT [2023] AATA 3074 (Tribunal Decision) where the taxpayer challenged the ATO’s view that a UPE can be a loan under subsection 109D(3). 

An article written by The Tax Institute on 10 October 2023 on the Tribunal Decision can be found here. 

The Tribunal held for the applicant saying a UPE with a corporate beneficiary is not a loan under subsection 109D(3), concluding at [101]: 

… the necessary conclusion is that a loan within the meaning of s 109D(3) does not reach so far as to embrace the rights in equity created when entitlements to trust income (or capital) are created but not satisfied and remain unpaid. The balance of an outstanding or unpaid entitlement of a corporate beneficiary of a trust, whether held on a separate trust or otherwise, is not a loan to the trustee of that trust. 

The Commissioner appealed the Tribunal’s decision to the Full Federal Court. In the ATO’s Interim Decision Impact Statement on the Tribunal Decision, the Commissioner stated: 

Pending the outcome of the appeal process, the ATO is administering the law in accordance with the published views relating to private company entitlements and trust income in TD 2022/11. 

Until the appeal process is finalised, the Commissioner does not propose to finalise objection decisions in relation to objections to past year assessments (for which no settlement was reached) where the decision turns on whether or not a UPE was a subsection 109D(3) loan. However, if a decision is required to be made (for example, because a taxpayer gives notice requiring the Commissioner to make an objection decision), any objection decisions made will be based on the existing ATO view of the law. 

The Full Federal Court’s decision  

The decision provides a lesson on the principles of statutory construction, ascertaining the meaning of the ‘text, context and purpose’ of: 

• paragraph 109D(3)(b) — ‘a provision of credit or any other form of financial accommodation’; and 

• paragraph 109D(3)(d) — ‘a transaction (whatever its terms or form) which in substance effects a loan of money’.   

The Court’s decision is as follows: 

• Definition of ‘loan’ — The Court held that subsection 109D(3) contains an obligation to repay. Paragraph 109D(3)(d) refers to a transaction which in substance effects a loan of money and it should not be accorded a meaning that renders all other subparagraphs otiose (i.e. ineffective). 

Each of s 109D(3)(a), (c) and (d) encapsulate a concept of repayment. As the Court of Appeal observed in Prime Wheat at 512 (Gleeson CJ), an advance of money involves the making of a loan, where the concept of a loan involves the provision of a principal sum attendant with an obligation to repay. Thus, embedded in s 109D(3)(a) is an obligation to repay. By its terms, s 109D(3)(c) is engaged only if there is an express or implied obligation to repay. 

• Context of Division 7A — The Court held that, in its context, the phrase ‘provision of credit or any other form of financial accommodation’ in paragraph 109D(3)(b) could not be interpreted as broadly as that attributed to that phrase as used in the Corporations Act 2001. The Court also highlighted that Division 7A draws distinctions between a ‘debt’ and a ‘loan’. 

• Purpose of Division 7A — The Court held that its interpretation of section 109D ensured a harmonious operation of the Division in its entirety, and the importance of giving operative effect to each of the provisions in Division 7A, including Subdivision EA, and without producing ‘absurd or irrational outcomes or leave unaddressed an obvious drafting error’.  

• Debtor-creditor relationship versus loan — The taxpayer accepted that a debtor-creditor relationship existed by the trustee resolution and the entry in the trust accounts, and that the amounts were not subject to a contingency or condition.  

However, the Court held that the creation of such a relationship in law did not result in a loan or creation of an obligation to repay necessary to satisfy section 109D. The consensual arrangement to refrain from calling for payment did not involve the payment of a sum by or at the direction of the corporate beneficiary that would require repayment. 

Accordingly, although a debtor-creditor relationship was created, there was no ‘loan’ as defined in subsection 109D(3) because there was no obligation to repay an amount; merely an obligation to pay an amount. 

Fully dead or partly alive? 

Before taxpayers and advisers start to pop the champagne, it would be premature to suggest the issue is fully dead.  

The ATO may, and has 28 days to, apply for special leave to appeal the decision to the High Court (by 19 March 2025). While most commentators expect the ATO to apply for special leave, a unanimous decision makes the prospect of success more difficult. Special leave will generally be granted only where there is a significant legal issue of public importance, a need to resolve conflicting decisions of lower courts, or case law raises a new point of law that requires the High Court’s interpretation.  

The possibility of a special leave application, at a minimum, raises challenges for taxpayers and advisers, particularly in respect of how to manage UPEs that arose in the 2022–23 income year with the lodgment day for the 2023–24 income year fast approaching.  

Absent that, the (then) Coalition Government announced as part of the Federal Budget 2018–19 that it would ‘ensure that [UPEs] come within the scope of Division 7A’. That announcement has not since progressed by either government, and the Court’s comments about the possibility of double taxation if section 109D did apply to UPEs may mean considerable amendments to other provisions across Division 7A. With a Federal election looming, announcing changes to Division 7A may be politically unattractive.  

Other observations 

Bendel concerned whether a UPE with a corporate beneficiary was a section 109D loan. The Court said the UPE was not a loan, because there was not an obligation to repay. But that is not the end of the issues that advisers need to consider with respect to UPEs. 

Some other considerations include: 

• Bendel highlighted that the oft-forgotten Subdivisions EA and EB in Division 7A can apply when a trust has UPEs with a corporate beneficiary — particularly where the money leaves the trust in favour of a shareholder or associate of a shareholder of that corporate beneficiary. While it is not always the case, the facts of Bendel did not give rise to the application of Subdivisions EA and EB.  

• Although based on the concessions made by the taxpayer, a debtor-creditor relationship existed in Bendel. Could this raise the spectre that if the UPE is forgiven or assigned, the private company could be taken to pay a dividend to the trust under section 109F that deals with debt forgiveness? The Court noted at [77–78] that: 

• ‘Division 7A itself draws a distinction between a “debt” and a “loan”’; and 

• ‘It is apparent from the terms of s 109G that the concept of a “debt” is not to be equated with a loan and that the concept of a loan is narrower than that of a debt.’ 

• What if documentation, such as an Option 1 or Option 2 agreement under (former) PS LA  2010/4, included a form of obligation to repay as part of that agreement? Could that obligation cause the UPE to be a loan under subsection 109D(3)? 

• The Tribunal found, and both parties accepted on appeal, that the trustee did not hold the amount of the UPE on sub-trust, there being no separation of assets in its accounts or anywhere else. That acceptance will leave many to ponder the effectiveness of clauses enabling the trustee to set aside amounts for beneficiaries (see also the comments at [75 to 80] of the Tribunal Decision on sub-trusts).  

Closing comments 

Finally, the ATO has indicated that in certain circumstances other provisions may apply to arrangements involving UPEs. Accordingly, regard needs to be had to other specific and general anti-avoidance provisions. 

Bendel may be headed six feet under, it may need a few more layers of dirt with an unsuccessful special leave application or be resurrected in a High Court appeal. Until then, taxpayers and advisers are in purgatory. Or will it be Elysium? Whatever happens, the aftermath of the Bendel decision is likely to occupy the minds of the ATO, taxpayers, and their advisers for some time. 

Note from The Tax Institute  

We are currently considering the implications of this decision for practitioners, taxpayers and the tax system, in both the short and long term. In order to give you the best and most reliable information and interpretations, our experts are hard at work unpacking the issues.

We will make further analysis and insight available in the coming weeks. We will also be discussing this landmark decision as our upcoming CPD events.