Urgent clarification needed on unpaid present entitlements

The article is relevant to members in Australia and was current at the time of publication.

In a landmark legal decision, the High Court has ruled that unpaid present entitlements (UPEs) from trusts — where a private corporate beneficiary does not call for payment — are not regarded as loans under Division 7A of the Income Tax Assessment Act 1936.

In its June ruling of Commissioner of Taxation v Bendel [2026] HCA 18, the court found that a trustee’s retention of funds for working capital does not constitute financial accommodation or create a loan, and that a UPE held on a separate trust does not give rise to a debtor-creditor relationship.

The court also confirmed that the Australian Taxation Office’s (ATO) long standing administrative position, which required trusts to convert UPEs into seven  or 10 year complying Division 7A loans, was legally incorrect.

In response to the Bendel judgment, the ATO released a Decision Impact Statement (DIS) in June to clarify its views on the court’s decision.

It stated that the court’s reasoning made it clear that section 109D under Division 7A does not apply to corporate UPEs where a company does not take action in respect of its entitlement.
However, the ATO also noted there could be potential implications for beneficiaries under other taxation laws. These include Subdivision EA, where trust funds are used for shareholders or associates, and under section 100A, where there is a reimbursement agreement.

CPA calls for clearer pathways

In a submission to the ATO, CPA Australia has called on the ATO to provide clearer, fairer and more workable administrative guidance for taxpayers, advisers and private groups that relied on the ATO’s former, incorrect administrative position for over 15 years.

“Without clearer administrative pathways, historically compliant taxpayers remain unfairly exposed to unnecessary compliance costs, uncertainty and adverse tax outcomes,” CPA Australia notes.

“Furthermore, guidance is required on the operation of Subdivision EA, section 100A, section 109RB, statutory amendment time limits, and the extent to which trust deed wording, trustee resolutions and accounting records may affect the characterisation of historical UPE arrangements.”

CPA Australia argues that taxpayers entered complying loan agreements because the ATO required them to do so, and Bendel shows this was an honest mistake of law.

Another area of concern is the suggestion, in the DIS, that Bendel may only apply where trust deeds contain similar “set aside” wording to the deed in the case. 

CPA Australia warns that this approach could force practitioners to review decades of trust deeds and resolutions, create uncertainty where deeds use terms such as “paid”, “applied” or “credited”, and lead the ATO to argue that certain wording still creates financial accommodation.

In its submission, CPA Australia contends that Bendel should apply broadly to all passive UPEs, regardless of drafting nuances, and that the ATO should not confine the decision to specific deed mechanics.

It has recommended a clear safe harbour or administrative pathway for unwinding legacy complying loan arrangements where taxpayers acted in good faith in accordance with prior ATO guidance.

Issues for practitioners

For practitioners, the Bendel decision simplifies the treatment of future UPEs but complicates the past.

“Taxpayers who followed the ATO’s position and entered into complying Division 7A loan agreements are told they cannot simply unwind those agreements because they are contractual arrangements,” says CPA Australia Tax Adviser, Bill Leung.

“Those taxpayers may still have to make repayments and return interest as assessable income. Taxpayers who did not follow the ATO’s position may be able to amend assessments if they are within time, or lodge objections if they are outside the amendment period, but objections can be costly and uncertain.

“The rules should operate prospectively only and should provide a pathway for taxpayers who entered Division 7A loan agreements in good faith under the ATO’s former position to unwind or transition those arrangements fairly.”

Meanwhile, in a separate submission on the federal government’s proposed minimum 30 per cent tax rate on discretionary trusts, CPA Australia has encouraged Treasury “to test each element of the final design against the established principles of good tax policy”.

As part of this, CPA Australia has urged the federal government to reconsider the role of the UPE framework following the Bendel decision, particularly considering the proposed minimum tax on discretionary trust distributions and any legislation treating UPEs as giving rise to Division 7A loans.

Leung says the proposed tax on discretionary trusts raises a serious concern for taxpayers with existing UPEs.

“If distributions to corporate beneficiaries are already subject to a 30 per cent minimum tax, and if a UPE is also legislatively treated as a Division 7A loan, the same economic amounts are effectively being taxed twice,” he says.

“That would be excessive, risk double taxation and unfairly target the very structures the policy seeks to address.”

 

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