High Court decides against Commissioner on extended loan definition in Division 7A

The High Court has dismissed the Commissioner's appeal in the Bendel litigation (Commissioner of Taxation v Bendel [2026] HCA 18). In a 5-2 decision, the majority held that the present entitlement of a corporate beneficiary of a discretionary trust which remained unpaid did not constitute the making of a loan by the company to the trust for the purposes of Division 7A of the Income Tax Assessment Act 1936 (ITAA36). In reaching its decision, the Court also addressed sub-issues arising from the trustee's resolutions, the provisions of the trust deed and the accounts of the trust in determining whether there was a borrower-lender relationship and whether the present entitlements were held on a separate trust.

The Commissioner had argued, in accordance with his longstanding views, that the expanded definition of a loan in Division 7A caught the unpaid present entitlements in the case (UPE). This, in his view, resulted in a deemed dividend from the corporate beneficiary to the trustee in the amount of the UPE, which then flowed through to presently entitled beneficiaries of the trust. The tax to be paid on the deemed dividend was in addition to the tax paid by the corporate beneficiary as a result of its UPE.

The important aspects of the majority's decision are:

• The majority closely examined the terms of the trust deed, trust resolutions and the conduct of the corporate beneficiary in deciding that (a) a relationship of debtor and creditor did not exist between the trustee and the corporate beneficiary; and (b) that the corporate beneficiary's entitlement was held on a separate trust and no longer formed part of the trust fund. The Court also examined the accounts of the trust to determine whether the trustee had admitted that an unconditional relationship of debtor and creditor existed and decided that it had not. This was a question of fact to be decided in each case.

• The majority rejected the two bases on which the Commissioner argued that the UPE constituted a loan under the expanded definition. First, it was held that the provision of financial accommodation requires some initial or anterior transfer of value or the supply or grant of some sort of pecuniary assistance, involving some bilateral activity. There was, for example, no anterior payment by the corporate beneficiary to the trust which was required to be repaid. Secondly, doing nothing, or acquiescing to the retention of funds, is not a transaction which in substance effects a loan, particularly where there is no relationship of debtor and creditor.

• The majority considered that the Commissioner's case was greatly undermined by Division 7A including a specific subdivision directed at UPEs of corporate beneficiaries. The legislative history of Division 7A showed that Parliament had considered the issue of the UPEs of corporate beneficiaries and had essentially rejected a proposal to provide for the outcome now sought by the Commissioner. The Commissioner did not rely upon the specific subdivision, even though the facts broadly fell within the ambit of those provisions. Nor did the Commissioner suggest that he could not also assess Mr Bendel under that subdivision – an approach that would have led to both the Trust receiving a deemed dividend and Mr Bendel being separately taxed.

The Commissioner will be expected to reflect the effect of the decision in his public guidance, which is currently contained in public ruling (TD 2022/11). It is worth noting that in the Interim Decision Impact Statement issued following the Commissioner's loss in the Full Federal Court, the Commissioner indicated that he would hold off finalising assessments, private rulings and objection decisions which turn on these issues. As a result of today's decision we can expect the Commissioner to reflect the outcome of this decision in the matters that have been paused.

In responding to Full Court Federal Court's decision, the Commissioner also raised the possible application of section 100A of the ITAA36 to these types of arrangement. Where the trustee retained for working capital funds comprising a corporate beneficiary's UPE, the Commissioner expected a loan on commercial terms to be put in place between the corporate beneficiary and the trustee. If not, the Commissioner foreshadowed reviewing the arrangements through the lens of section 100A. The Commissioner considers section 100A to be an anti-avoidance provision. When it applies, the trustee of the trust may be assessed to tax at a rate equal to the highest marginal tax rate.

Today's win for taxpayers comes in the wake of the wide reaching changes in the Budget to the taxation of trusts, including the role of corporate beneficiaries. As the Commissioner resumes his activities, taxpayers are faced with navigating both those changes and the additional uncertainty as to how the Commissioner will react to the final rejection of his long entrenched views on Division 7A. Close attention should be given to trust arrangements and resolutions for the immediate future and should you wish to discuss the best approach for your affairs a member of our team would be pleased to assist you.

The relevant facts are set out in the majority judgment but a brief summary is included below.

Mr Bendel's busy suburban accounting and tax practice and commercial property ventures were conducted through trusts. One of the trusts in the group that received income from these endeavours was the Steven Bendel 2005 Discretionary Trust. The trustee of the Trust was Gleewin Pty Ltd. A discretionary beneficiary of the Trust was Gleewin Investments Pty Ltd. Mr Bendel was the sole director and shareholder of these companies. He was also a discretionary beneficiary.

In the relevant tax years, the trustee of the Trust resolved to "set aside" income of the trust for Mr Bendel and Gleewin Investments Pty Ltd, in varying proportions, making them presently entitled to the income and taxed under section 97 of the ITAA36. Gleewin Investments entitlements were not satisfied, except to the extent necessary to pay its tax liability and its other expenses from time to time. Gleewin Investments did not require payment of the balances.

In the relevant years, the trustee of the Trust also made payments to Mr Bendel. These were recorded in the Trust's accounts as an amount Mr Bendel owed to the Trust.

The ATO's longstanding view was that when a corporate beneficiary had a UPE, this could amount to a loan from the company to the Trust for the purposes of Division 7A, ITAA36. The ATO relied on the extended definition of a loan, which includes the provision of financial accommodation and a transaction which in substance effects a loan of money.

Applying these views to the case of Mr Bendel, to the extent Gleewin Investment's UPEs (and therefore loans) remained outstanding, the Trust was deemed to have received a dividend under Division 7A. This deemed dividend added to the income of the Trust which flowed through to the presently entitled beneficiaries, being Gleewin Investments and Mr Bendel. The ATO issued amended assessments to Gleewin Investments and Mr Bendel.

Mr Bendel's objection against the amended assessments was unsuccessful. But he was successful in challenging them in the Administrative Appeals Tribunal, on appeal to a Full Court of the Federal Court of Australia and now in the High Court.