High Court finally settles Division 7A treatment of UPEs

In our earlier article, we examined the Full Federal Court’s decision in Commissioner of Taxation v Bendel [2025] FCAFC 15, which rejected the ATO’s long-standing position that unpaid present entitlements (UPEs) owed to corporate beneficiaries could constitute “loans” for the purposes of Division 7A.

The High Court has now handed down its decision in Commissioner of Taxation v Bendel [2026] HCA 18, dismissing the Commissioner’s appeal. This judgment brings long-awaited certainty to an issue that has shaped trust distribution practices for the past 16 years.

From administrative practice to judicial rejection

Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) is designed to prevent private companies from distributing profits to shareholders or their associates in non-dividend form, by deeming certain loans, payments and debt forgiveness to be dividends.

For many years, the ATO took the view that where a trust resolved to distribute income to a corporate beneficiary but retained the funds, the resulting UPE could amount to a “loan” for Division 7A purposes. This was said to arise because the corporate beneficiary, by not calling for payment, effectively provided “financial accommodation” to the trust. That approach was rejected at first instance by the Administrative Appeals Tribunal and again by the Full Federal Court, which held that a UPE does not involve the essential feature of a loan (namely an obligation to repay an amount advanced).

The Commissioner’s appeal to the High Court sought to reinstate the ATO’s broader interpretation of section 109D(3).

Key facts

The case arose from the activities of Gleewin Pty Ltd, the trustee of the Steven Bendel 2005 Discretionary Trust ("the 2005 Trust"). During the income years 2014 to 2017, Gleewin Pty Ltd resolved to "set aside" amounts of net income for beneficiaries, including Gleewin Investments Pty Ltd and Mr Steven Bendel.

The Commissioner of Taxation issued amended assessments to Gleewin Investments Pty Ltd, asserting that the UPEs constituted loans under section 109D(3) of the ITAA 1936 and were therefore deemed dividends under section 109D(1)

Legal issues

The High Court was tasked with resolving several key legal issues, including:

1. Whether the resolutions to set aside income amounts created separate trusts in respect of such amounts.
   
   In respect of this issue, the Court held that the resolutions to set aside income created separate trusts for Gleewin Investments Pty Ltd (as required by the 2005 Trust Deed). The amounts ceased to form part of the general trust fund and were held on separate trusts pending payment.

2. Whether Gleewin Investments’ decision not to call for payment of its entitlements constituted a loan under section 109D(3) of the ITAA 1936.

The High Court’s decision

The High Court rejected the Commissioner’s position. In doing so, it confirmed that a UPE owing from a trust to a corporate beneficiary is not a “loan” within the meaning of section 109D(3) of Division 7A.

Central to the High Court’s reasoning was the distinction between an obligation to pay and an obligation to repay. The majority of the High Court held that mere inactivity or acquiescence does not satisfy the definition of “loan,” which requires a bilateral transaction or provision of value. The Court also rejected the argument that the UPEs could fall within the concept of “financial accommodation”.

While Division 7A extends the meaning of “loan” beyond its ordinary sense, the High Court emphasised that section 109D requires that the company is actively doing something to move value from it to someone else. This extension does not dispense with the need for a transaction that, in substance, bears the character of a loan. The passive retention of funds by a trustee, even with the beneficiary’s knowledge, does not amount to the provision of credit or accommodation in that sense.

The role of Subdivision EA

Importantly, the High Court considered the broader statutory framework, including the existence of specific provisions such as Subdivision EA. The Court expressly recognised that Subdivision EA operates as a targeted integrity regime addressing circumstances in which unpaid present entitlements from trusts are used to channel private company profits to shareholders (or their associates).

The Court acknowledged that Subdivision EA was introduced specifically to address the perceived gap where a corporate beneficiary’s unpaid entitlement was effectively used to lend money to a shareholder or associate. The majority of the High Court found that where trust entitlements are, in substance, lent or paid to a shareholder (or an associate of a shareholder) of the private company, Parliament intended for that shareholder (or their associate) to be taxed.

What this means in practice

For many taxpayers, Bendel raises the prospect that historical Division 7A exposures may have been overstated where UPEs were treated as loans in reliance on ATO guidance. Depending on the circumstances, there may be scope to revisit these prior year assessments.

We anticipate that the ATO will issue a Decision Impact Statement which addresses UPEs moving forward and existing arrangements put in place based on the ATO’s Taxation Determination TD 2022/11 and the now withdrawn Taxation Ruling TR 2010/3.

At the same time, the decision does not unwind the practical steps that many private groups have taken over the years to manage perceived Division 7A risk. It has been common for UPEs to be placed on sub-trust arrangements or converted into complying Division 7A loan arrangements based on the ATO’s rulings and determinations. While such arrangements may no longer be required to address section 109D risk in respect of a UPE, they remain legally operative and may carry their own tax and commercial consequences if altered or terminated.

More broadly, the High Court’s decision should not be understood as removing all Division 7A risk in respect of trust structures. Other integrity provisions remain highly relevant. Subdivision EA continues to apply where a corporate beneficiary’s unpaid entitlement is effectively used to lend money to a shareholder or associate. Similarly, section 100A and the general anti-avoidance rules in Part IVA may apply where arrangements are entered into for the purpose of obtaining a tax benefit.

Trust distributions moving forward

Whilst the High Court has provided an answer as to whether a UPE owing from a trust to a corporate beneficiary is a “loan” within the meaning of section 109D(3) of Division 7A, the practical effect for taxpayers is more nuanced. While UPEs are now confirmed not to be loans, the broader integrity framework remains very much in play.

Importantly, looking forward, the practical attractiveness of using corporate beneficiaries may also diminish irrespective of Bendel. Recent Federal Budget proposals targeting the taxation of trusts include a minimum 30% tax on discretionary trust’s income, with corporate beneficiaries not receiving credits for tax paid by the trust. If implemented, these measures make distributions to corporate beneficiaries from 1 July 2028 unattractive. Accordingly, even with the Division 7A position clarified, those reforms may reduce the overall effectiveness of corporate beneficiary structures as a tax deferral strategy.

For private groups and their advisers, the task now is not simply to rely on Bendel, but to reassess structures holistically. The combined impact of judicial clarification and proposed legislative change means that trust and distribution strategies will need to be reassessed moving forward.

Author: Stephanie Flegg

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.