Federal Court Confirms UPEs Are Not Division 7A Loans
Table of Contents
What is a UPE?
What is Division 7A and Why Does It Matter?
Background: How Did We Get Here?
What Does This Mean for Accountants & Business Owners?
Will the ATO Accept the Court’s Decision This Time?
Conclusion
Introduction
In a major ruling, the Full Court of the Federal Court of Australia has upheld that unpaid present entitlements (UPEs) are not loans under Division 7A of the Income Tax Assessment Act 1936 (Cth). This decision, in Commissioner of Taxation v Bendel [2025] FCAFC 15, contradicts the Australian Taxation Office (ATO)'s long-standing position that a UPE amounts to “financial accommodation” and should be treated as a Division 7A loan.
What is a UPE?
If you have a trust with a company as a beneficiary, this applies to you. Here’s what a UPE (unpaid present entitlement) means in simple terms:
Let’s say your trust made a profit of $100,000 this year. Instead of paying it to your company straight away, you decide to leave it sitting in the trust. That ‘promise to pay’ is called an unpaid present entitlement (UPE).
Normally, this is just an internal accounting entry—it doesn’t mean money has moved. But the ATO has argued that even though no cash changed hands, this arrangement is still a loan under Division 7A and should be taxed accordingly.
What is Division 7A and Why Does It Matter?
Division 7A is a tax rule designed to stop private companies from making tax-free payments to business owners and their trusts.
Normally, if your company lends money to you or your trust, you need to either pay it back or set up a formal loan agreement to avoid extra tax. The ATO wanted to treat UPEs the same way, even though no actual loan existed.
What Was the ATO Trying to Do?
The ATO has long argued that a UPE is really just a disguised loan. This meant that business owners could be hit with:
Extra tax under Division 7A
The requirement to put formal loan agreements in place
Potential penalties for non-compliance
Background: How Did We Get Here?
For years, the ATO has treated UPEs owed to corporate beneficiaries as loans for Division 7A purposes, arguing that the unpaid amount represents financial accommodation—one of the legal definitions of a loan under the Act. This has had major tax compliance implications for trusts, requiring trustees to either put Division 7A loan agreements in place or pay out UPEs to avoid deemed dividends.
However, taxpayers have pushed back against this interpretation, leading to the test case of Bendel, where the Administrative Appeals Tribunal (AAT) ruled that a UPE is not a loan. The ATO appealed, but the Full Federal Court dismissed the appeal, reinforcing the original decision.
What Does This Mean for Accountants & Business Owners?
UPEs may no longer be automatically subject to Division 7A – If this decision stands, trusts with corporate beneficiaries could face less tax compliance burden related to UPEs.
ATO’s response is unclear – The ATO has a history of resisting court rulings on Division 7A. After losing the Colonial First State case in 2011, it issued Tax Determination TD 2011/16, effectively reasserting its position despite the court ruling. More recently, the ATO has issued Tax Determination TD 2022/11, reinforcing its stance that UPEs constitute financial accommodation under Division 7A. Will it do the same here?
Taxpayers must remain cautious – While this decision is a win for trusts and tax planning, the ATO could appeal further, issue new guidance, or push for legislative changes. Until there is clear direction, trustees and advisors should tread carefully.
Will the ATO Accept the Court’s Decision This Time?
This is the big unknown. The ATO has previously gone against court rulings by issuing tax determinations (TDs) to maintain its stance. It may do so again or attempt to lobby for legislative amendments that bring UPEs back under Division 7A. Additionally, Section 100A of the Income Tax Assessment Act 1936 remains another tool the ATO could use to scrutinise trust distributions, particularly in cases where distributions are viewed as reimbursement agreements.
What Should Business Owners Do Now?
If you have a trust with a company beneficiary, check whether you have UPEs.
Talk to your accountant before assuming this case means no more Division 7A worries.
Keep an eye on the ATO’s response—things might change.
Conclusion: A Win for Taxpayers, But the Fight Might Not Be Over
The Bendel ruling confirms that a UPE is not a loan under Division 7A, but history shows the ATO may not accept defeat quietly. Accountants, tax agents, and trustees should remain vigilant and wait for further clarity before assuming UPEs are safe from Division 7A forever.
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