The impact of the ATO Vs Bendel Case

High Court clarifies treatment of UPEs under s 109D

The High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18 is a landmark ruling on how unpaid present entitlements (UPEs) are treated under Division 7A, specifically s 109D of the Income Tax Assessment Act 1936. At its core, the case resolves a long-running controversy, does a corporate beneficiary’s failure to call for payment of a UPE amount to a “loan” (and therefore a deemed dividend) under s 109D?

The High Court’s answer is no, at least not without something more than mere inaction. While this brings clarity to this issue there remains a range of complex questions for groups structured with corporate beneficiaries.

Key takeaway

The High Court held that, UPEs are not “loans”, nor the provision of financial accommodation for the purposes of s 109D, merely because a corporate beneficiary does not demand payment. This directly narrows the scope of s 109D and rejects the idea that passive retention of funds by a trustee automatically triggers a deemed dividend.

The High Court also concluded that Subdiv EA of Division 7A is important to consider as it expressly addresses the situation of UPEs made to corporate beneficiaries while having the trust making payments, loans or forgiving debts of shareholders of the corporate beneficiary.

What actually happened in Bendel?

A discretionary trust resolved to “set aside” income for a corporate beneficiary. The amounts became UPEs, they were not paid, and the beneficiary did not demand payment.

The Commissioner argued this amounted to:

• a “provision of credit” or
• “financial accommodation” under s 109D(3)
• Therefore, a deemed dividend should arise under Division 7A.

The Commissioner assessed the taxpayer and corporate beneficiary in relation to distributed income, attempting to apply s 109D to the UPEs.

The High Court’s reasoning

UPEs held on separate trust (not a debt)

The Court found that the trustee’s resolutions:

• “set aside” income (not distribute it)
• resulted in the creation of separate trusts for the beneficiary
• did not create a debtor–creditor relationship

This is critical, without a debt or equivalent obligation to repay, the foundation for a “loan” is missing. This confirmed that UPEs are distinct, viewed as entitlements that Parliament is aware of and are intentionally dealt with under other legislation.

No “loan” without an active provision of financial accommodation

The Court rejected the Commissioner’s argument that mere failure to call for payment equals financial accommodation.

Instead, it held:

• a “loan” under s 109D requires some act that transfers value or provides assistance
• doing nothing (i.e. not calling for payment) is not enough
• there must be bilateral activity or an identifiable transaction

UPEs simply sitting in the trust do not involve:

• provision of credit
• financial accommodation
• or a transaction “in substance” equivalent to a loan

This further reinforces the concept that UPEs are distinct entitlements separate from other common financial concepts.

Role of Subdivision EA

The Court highlighted that Division 7A already contains specific rules for UPEs, Subdivision EA deals with situations where:

• UPEs exist, and
• value is shifted (e.g. loans to shareholders)

Parliament’s choice was:

• Tax the shareholder receiving the benefit, not the trustee or corporate beneficiary simply holding a UPE using the new Subdiv EA.
• The option to tax the trustee was not legislatively enacted despite being suggested in a review.

The High Court essentially agreed with the Tribunal’s remittal back to the Commissioner on the basis that the wrong taxpayer was being assessed using the wrong sections of legislation.

Practical implications for UPEs

What the decision confirms:

• a UPE by itself is not automatically converted into a Division 7A loan
• a corporate beneficiary’s failure to demand payment is not financial accommodation
• UPE arrangements do not automatically trigger deemed dividends

For a long time, many have been following the ATO’s administrative approach converting UPEs into Division 7A loan agreements. This High Court ruling will not retrospectively change these but may impact the decision on whether taxpayers continue to choose to convert UPEs for income years going forward.

What still matters

This decision does not eliminate Division 7A risk entirely, Division 7A may still apply where:

• there is an actual payment or loan between entities where UPE funds are also involved
• value is shifted to a shareholder or associate (Subdivision EA)
• there is a true debtor–creditor relationship
• there is some active dealing amounting to financial accommodation

Risks also remain under other sections such as section 100A targeting situations where trust income is set aside for one beneficiary but enjoyed by another. Part IVA can also be applied in certain circumstances when distributing to a corporate beneficiary is sole or dominantly for the purpose of obtaining tax benefits.

Final thoughts

The High Court’s decision is a major reset for Division 7A and UPEs. It:

• limits the reach of s 109D
• undermines the ATO’s administrative position on the treatment of UPEs
• confirms the unique nature of a UPE and recognising how they are treated is different to other financial arrangements.

A UPE is not a loan unless there is a real transaction, obligation, or transfer of value, not simply because the money is left in the trust.

This does not mean that UPEs can be held indefinitely with no risk. Every taxpayer’s situation will vary and subtle differences in facts can trigger different areas of tax law. A key example of that is the possibility of Subdivision EA applying to Bendel instead of s 109D, the result of which is similar, but different entities end up with the tax liability.

If your business structure contains corporate beneficiaries with potential UPEs, you can reach out to your trusted advisor to discuss with them how this High Court decision may impact your arrangements.

FAQs regarding trust distributions to corporate beneficiaries.

What is an unpaid present entitlement?

An unpaid present entitlement, often called a UPE, can arise when a trust distributes income to a beneficiary but the amount is not actually paid at that time. This commonly occurs in family group structures where a corporate beneficiary is entitled to income from a trust, but the funds remain within the trust for use in the business.

What does the Bendel decision mean for trust distributions?

The Bendel decision confirmed that an unpaid entitlement to a corporate beneficiary is not automatically treated as a loan under Division 7A simply because the company has not demanded payment. This is important for businesses and family groups using trusts and corporate beneficiaries as part of their structure.

Do businesses still need to review unpaid trust distributions?

Yes. The Bendel decision does not remove all tax risk. Trust distributions, unpaid entitlements, corporate beneficiaries and related party transactions still need to be reviewed carefully, particularly where funds have been used by shareholders, associates or other entities within the group.