In another win for the taxpayer, the Full Court of the Federal Court of Australia (the Full Court) in Commissioner of Taxation v Bendel [2025] FCAFC 15 dismissed the Commissioner’s appeal against a Tribunal decision in Bendel and Commissioner of Taxation [2023] AATA 3074 that an unpaid present entitlement (UPE) to a corporate beneficiary wasn’t a loan for the purposes of Division 7A.
Notably, a full bench of three judges of the Full Court heard the appeal (as opposed to a single judge), highlighting the importance of this case for all involved stakeholders – including for accountants and other professional tax advisers advising family trust clients.
Read our article here on the background to the Tribunal proceedings and the reasoning behind the Tribunal’s decision in favour of the taxpayer.
The central issue in the Commissioner’s appeal to the Full Court was whether or not the UPE between a discretionary trust and its corporate beneficiary was a “loan” under section 109D(3) of the Income Tax Assessment Act 1936 (ITAA 1936).
Ultimately, the Full Court didn’t accept the Commissioner’s submissions as to the construction of s 109D(3).
Section 109D(3) of the ITAA 1936 provides that:
(3) In this Division, loan includes:
(a) an advance of money; and
(b) a provision of credit or any other form of financial accommodation; and
(c) a payment of an amount for, on account of, on behalf of or at the request of, an entity, if there is an express or implied obligation to repay the amount; and
(d) a transaction (whatever its terms or form) which in substance effects a loan of money.
The Full Court, having applied established principles of statutory interpretation and analysed relevant case law around the meaning and interpretation of “advance of money,” “financial accommodation” and “loan”, found that there was a distinction in interpreting section 109D(3) between an obligation to repay and a mere obligation to pay. The former is a loan, the latter is not.
The Full Court at paragraph [79] said:
“Having regard to its context, s 109D(3)(b) is to be construed as referring to a provision of credit or any other form of financial accommodation which involves an obligation to repay an identifiable principal sum, rather than simply an obligation to pay. 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 s 109D(3). This is consistent with the use of the phrase “makes a loan” in s 109D(1)(a) which connotes something more than the mere existence of a debt owed to a private company.” (Our emphasis added).
The Full Court further stated that this interpretation of s 109D(3) of the meaning of a loan does not fail to give effect to the purpose of Division 7A (which is about treating specific kinds of amounts as dividends) (at [81]). Further, this interpretation “does not give rise to absurd or irrational outcomes” (at [87]).
Rather, it seems that the Commissioner’s preferred view of how s 109D(3) is to be constructed would have this absurd or irrational outcome, which the Full Court outlines at [88]:
The perceived mischief which lies at the heart of the Commissioner’s submission is the creation of a present entitlement which 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. 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.
Finally, whilst the taxpayers admitted that there was a debtor-creditor relationship between the trust and the corporate beneficiary and a debt owing to the corporate beneficiary on account of the amounts of net income distributed, that was insufficient to give rise to a “loan.” The Full Court concluded at [94] that:
“[a]lthough – based on the concessions made by the taxpayer – a debtor creditor relationship was created by the trustee resolution and the entry in the trust accounts, there was no loan or creation of an obligation to repay an amount as opposed to an obligation to pay”.
If this Full Court decision stands, it has the potential to give greater flexibility for discretionary trusts and their families to consider making allocations of income and capital to corporate beneficiaries as UPEs without the risk of Division 7A deemed dividend issues.
We speculate that the Full Court decision (and the Tribunal decision, for that matter) may have been decided differently if the facts were slightly different. For example, after the creation of the UPE, the trust made an actual payment to the corporate beneficiary (to satisfy the UPE) and then there was a payment of the same amount back to the trust as a loan. That is likely to attract the operation of Division 7A.
As the Federal Court decision handed down by the Full Court (and not a single judge), the Commissioner must seek special leave if it wishes to appeal to the High Court[1]. Watch this space!
For more information on this decision and its impact, please contact Coleman Greig’s Taxation team.
[1] Federal Court of Australia Act 1976, section 33(3).
