A harmonious construction of Division 7A – Commissioner’s appeal in Bendel dismissed

The highly anticipated judgment of Logan, Hespe and Neskovcin JJ of the Federal Court of Australia (FCA) in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel) was finally issued on 19 February 2025. 

Despite concluding that the erstwhile Administrative Appeals Tribunal (AAT) ‘did not complete its statutory task’ in the antecedent first instance decision of late 2023^[1], Logan, Hespe and Neskovcin JJ nonetheless unanimously rejected the Commissioner of Taxation’s (Commissioner) appeal, affirming that an unpaid present entitlement (UPE) cannot constitute a ‘loan’ for the purposes of Division 7A of the Income Tax Assessment Act 1936. 

Although the spectre of a potential High Court appeal or legislative amendment may deter taxpayers from ‘popping the cork’ just yet, the decision in Bendel remains significant in that it (at least for the time being) invalidates long-standing administrative positions of and guidance issued by the Commissioner^[2].

Background

In broad and simple terms, Bendel concerned a company with UPEs owing to it from a discretionary trust over a number of years being issued amendment assessments by the Commissioner on the basis that the company’s forbearance in respect of those UPEs constituted ‘financial accommodation’ and therefore ‘loans’, and in turn deemed dividends for Division 7A purposes. An unspecified quantum of penalties was imposed in connection with those amendment assessments. 

Further detail regarding the Commissioner’s views on the status of UPEs in the context of Division 7A and the evolution thereof, as well as the first instance AAT decision in Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074 (Original Decision) – the latter briefly considered below -  can be found in RSM Australia’s Tax Insight on the Original Decision^[3]. 

Original Decision

The Original Decision concerned, inter alia, whether the UPEs indeed constituted ‘loans’  for Division 7A purposes.

Senior Member K James held that the UPEs did not constitute ‘loans’ for Division 7A purposes largely on the basis that Subdivision EA of Division 7A specifically and solely deals with UPEs in a Division 7A context^[4]. 

Bendel

Unlike the Original Decision, Bendel focussed on whether a UPE could constitute a ‘loan’ for Division 7A purposes, having regard to the text of the entirety of the relevant provision (viz. section 109D) considered in the particular statutory context within which it appears and having regard to apposite case law such as Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300, Prime Wheat Association Ltd v Chief Commissioner of Stamp Duties [1997] NSSC 546 and the leading case of Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55.

Summarily, it was held that the notion of a loan under section 109D, including the subsidiary notion of financial accommodation, must be regarded as encapsulating a concept of repayment, without which no loan (and in turn no deemed dividend) could exist^[5]. In the relevant circumstances, all that existed was an obligation of payment (cf. repayment). Logan, Hespe and Neskovcin JJ regarded this construction as enabling the various paragraphs and subsections constituting section 109D read together harmoniously, whilst at the same time according a harmonious operation to the language of Division 7A in its entirety. 

What Does Bendel mean practically?

Notwithstanding the immediately obvious and tantalising implication of Bendel in the precipitation of potential refund and structuring opportunities for private groups, there are various practical considerations with which taxpayers and tax advisors must contend. Foremost amongst these is the matter of determining how to respond to the decision.

Whereas a unanimous FCA decision grounded in accepted canons of statutory construction may present difficulty for the Commissioner in seeking leave to appeal to the High Court, the granting of special leave to appeal a unanimous decision of the Federal Court is not unheard of, particularly where the relevant decision has potentially broad implications^[6]. Further, the Australian Taxation Office’s (ATO) administrative position per its Interim Decision Impact Statement on the Original Decision is stated to be subject to the outcome of the entire appeal process rather than the FCA decision itself.  Hence, there can be no immediate practical certainty.

Additionally, there is the spectre of potential legislative amendment to effectuate the Commissioner’s views, which may render any respite for taxpayers short-lived. Compounding this is the looming Federal election, which renders improbable any such legislative amendment in the near-term. Taxpayers may, however, take some comfort from the fact that although taxation laws are frequently amended with retroactive application, such retroactivity is typically (and arguably necessarily) pegged to the date of an announcement by government of the proposed amendment.  

In this context, it is almost impossible to decide or advise on what course of action should be taken, although the possibility of out-of-time objections should not be discounted, particularly when considered against, for example, paragraph 4 of PS LA 2003/7. It would also arguably not be unreasonable at least from the perspective of the potential imposition of penalties to adopt a position consistent with the law as it has now stood for more than 15 months. The latter would, however, need to be carefully considered against the inherent risk in going against a publicly stated position of the Commissioner and the potential general interest charge costs given the punitive nature of the charge, compounded by the non-deductibility of any such costs incurred from 1 July 2025.  

FOR MORE INFORMATION

If you would like to discuss the practical implications of or how to respond to the decision in Bendel, please contact your local RSM adviser.

[1] Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074.

[2] TR 2010/3 & TD 2011/11. 

[3] Unravelling the Implications of the Bendel Decision | RSM Australia

[4] Relevantly, Subdivision EA provides that Division 7A will only apply with respect to a UPE where the relevant trustee pays or loans an amount to, or forgives an amount owed, by a shareholder or an associate of a shareholder of the relevant private company. 

[5] Bendel and Commissioner of Taxation (Taxation) [2023] AATA 3074.

[6] See, for example, PepsiCo Inc & Anor v FC of T [2024] FCAFC 86.