Division 7A & Unpaid Present Entitlements (UPEs)

If you run a business that operates through a trust and has a corporate beneficiary, you may have heard about the complexities of Division 7A and Unpaid Present Entitlements (UPEs). A recent court case—FCT v Bendel [2025] FCAFC 15—has shaken up the ATO’s long-held stance on how UPEs are treated for tax purposes.

So, what does this mean for business owners like you? Let’s break it down in simple terms.

Understanding UPEs & Division 7A

Example: The “Owed Money” Scenario

Imagine you have a family trust that makes a profit of $100,000 in a year. To reduce tax, your accountant distributes this profit to a company you own (a corporate beneficiary) instead of paying it all to you personally. The idea is that the company gets taxed at a lower rate.

However, instead of transferring the $100,000 straight to the company’s bank account, the trust holds onto the money. This means the company is entitled to the money but hasn’t actually received it. That’s what we call an Unpaid Present Entitlement (UPE)—money owed but not yet paid.

Now, here’s where Division 7A comes in. The ATO had previously said that if a trust holds onto money that belongs to a company, it should be treated as a loan, which means it must follow loan repayment rules and might even trigger extra taxes (like deemed dividends).

What the Court Decided in the Bendel Case

In the case FCT v Bendel [2025] FCAFC 15, the Full Federal Court ruled against the ATO’s view. The court said:

• A UPE is not the same as a loan because there is no obligation for the trust to pay it back like a loan.
• Since it’s not a loan, it does not automatically fall under Division 7A’s strict rules.

Why This is a Big Deal for Business Owners

For years, many business owners and accountants had to treat UPEs like loans and follow strict repayment rules or risk tax penalties. This ruling means that:

✅ If your trust owes money to a corporate beneficiary, it may not trigger Division 7A rules anymore.
✅ This could reduce compliance headaches and possibly lower tax risks.

However, before popping the champagne, there are a few things to consider.

What Happens Next? Is It Really Over?

Just like in The Princess Bride (where “mostly dead” is still “slightly alive”), this issue isn’t fully resolved. The ATO still has until 19 March 2025 to appeal to the High Court. If they do, there’s a chance this decision could be overturned.

On top of that, the government previously announced plans to change Division 7A rules to include UPEs. While they haven’t acted on it yet, this ruling might push them to bring in new legislation.

What Should Business Owners Do?

• Don’t assume all UPEs are safe yet. If you have a trust owing money to a corporate beneficiary, still consider your tax position carefully.
  
• Keep an eye on ATO updates. If they appeal or if new laws are introduced, the tax treatment could change again.
• 
  Talk to your accountant. If you have old UPEs that were treated as loans, review whether you can adjust your tax position moving forward.

Final Thoughts

The Bendel case is an important win for business owners who use trusts and corporate beneficiaries, but the fight isn’t over. Until things are completely settled, it’s best to stay informed and ensure your tax strategy is still in line with ATO expectations.

Need help navigating Division 7A & UPE situation? Our team at Investax Group is here to guide you through the changes and ensure your tax position remains strong. Contact us today!

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