If you’re involved in a trust with a corporate beneficiary, you may have been worried about unpaid present entitlements (UPEs). For years, the ATO treated UPEs as loans under Division 7A. That meant trusts and corporate beneficiaries faced the risk of deemed dividends and unexpected tax bills.
But a recent court decision has changed the game. The Federal Court ruled that UPEs are not loans for Division 7A purposes. This is a major win for trusts and companies. It removes a long-standing tax risk and brings much-needed clarity.
Does this mean you’re in the clear? Not entirely. The ATO could still challenge UPEs under other rules.
Why Does This Matter?
If you are running a business through a trust and have a corporate beneficiary, you have probably been following the Australian Taxation Office’s (ATO) long-standing view that UPEs are treated as loans under Division 7A. This meant that if a trust owed money to a company but did not pay it out, the ATO could deem it a loan and slap you with extra tax.
Now, thanks to the recent Federal Court decision in Commissioner of Taxation v Bendel [2025] FCAFC 15, the courts have ruled against this interpretation. This decision could save businesses from unnecessary tax complications, but before you breathe a sigh of relief, let’s look at the fine print.
The Case That Changed Everything – Commissioner of Taxation v Bendel
On 19 February 2025, the Full Federal Court ruled in Commissioner of Taxation v Bendel that a UPE is not a loan under Division 7A. This directly contradicts the ATO’s long-held view.
What Did the Court Say?
The ATO argued that when a corporate beneficiary leaves its UPE in a trust, it’s giving “financial accommodation.” The Court rejected this argument. They ruled that a loan requires an obligation to repay, not just an obligation to pay.
A UPE simply means the trust owes money to the corporate beneficiary. But there’s no requirement for repayment as there would be in a loan. That’s a critical difference.
This decision confirms that UPEs do not automatically trigger Division 7A. It removes a major tax risk that corporate beneficiaries and trusts have faced for years.
How Does This Affect You?
1. No Automatic Division 7A Trouble for UPEs
Before this ruling, corporate beneficiaries with UPEs risked having them treated as loans. That could result in deemed dividends and additional tax liabilities. Now, this risk is significantly reduced.
2. But Don’t Relax Just Yet
While the ATO lost this case, they still have other tools to challenge UPE arrangements. One of the biggest risks now is section 100A.
Section 100A is an anti-avoidance rule that applies when trust income is distributed to one entity but benefits another. If the ATO believes this has happened, they can reassess the trust’s tax position.
3. How the ATO Might Respond
- The ATO could issue new guidance on how UPEs should be treated after this ruling.
- The government could change the law to bring UPEs into Division 7A.
- The ATO may focus on section 100A as a way to challenge UPE arrangements.
What Should You Do Now?
If you have been worried about Division 7A and UPEs, this ruling is a breath of fresh air—but it does not mean you should let your guard down. Here are some key steps to take:
Review Your Trust Structures: If you have UPEs sitting in your trust, this ruling might give you some breathing room. However, review your setup with a tax advisor to ensure compliance with all relevant tax laws.
Monitor ATO Announcements: The ATO is unlikely to take this ruling lying down. Stay informed about any guidance updates or legislative changes that could impact your position.
Be Careful with Related-Party Transactions: Just because UPEs are not loans under Division 7A does not mean they can be used freely. Ensure that payments, loans, or other transactions between trusts and shareholders do not trigger other tax complications.
Final Thoughts
This ruling is a big win for businesses using trusts with corporate beneficiaries, but it is not a free pass to ignore Division 7A. The ATO may shift its focus to other areas like Section 100A or push for legislative amendments, so staying proactive is key.
For now, this decision provides clarity and some relief, but tax law is always evolving. If you are dealing with UPEs, now is the time to reassess your structures, seek professional advice, and ensure you are on solid ground.
The last thing you want is an unexpected tax bill because you assumed the rules wouldn’t change—because if history has taught us anything, they always do.
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