The Full Federal Court has ruled against the ATO’s long-held view that unpaid present entitlements (UPEs) to private company beneficiaries are treated as loans under Division 7A.

1. The ATO’s long-standing position has been rejected

Since 2009, the ATO has considered UPEs—where a trust distributes income to a private company without paying it—as a form of “financial accommodation.” This meant they were treated as loans under Division 7A, potentially triggering adverse tax consequences such as deemed dividends.

In Bendel v Commissioner of Taxation [2023] AATA 3074, the Administrative Appeals Tribunal (AAT) ruled that UPEs do not meet the legal definition of a loan. The ATO appealed, but on 19 February 2025, the Full Federal Court upheld the AAT’s decision in Commissioner of Taxation v Bendel [2025] FCAFC 15.

2. What does the decision mean for trusts and private companies?

The Court ruled that for something to be a “loan” under Division 7A, there must be an obligation to repay an amount, not just an obligation to pay it. This means UPEs to private company beneficiaries are not automatically caught under Division 7A.

If this decision stands:

• Trusts may have more flexibility in managing UPEs.
• The pre-2009 approach—where Division 7A only applies if a UPE results in an actual loan to a shareholder or their associate—could return.
• Taxpayers who have structured their affairs based on the ATO’s view may need to reconsider their position.

3. What happens next?

The ATO may seek to appeal the decision to the High Court or push for legislative changes to reinstate its previous stance.

We are closely monitoring the situation and will provide updates as soon as the ATO clarifies its position however, our recommendation is to hold taking any action until we have a clearer view of what the ATO’s position may be going forward.

In the meantime, if you have any questions please contact your Holman Hodge advisor.