Background
Present entitlements are rights that a beneficiary of a trust has to share in the trust’s income. The two defining features of a present entitlement over trust income are that the beneficiary:
• has an indefeasible and vested interest in the relevant trust income; and
• has an equitable right to demand payment of the relevant trust income.

Ultimately, a beneficiary who has a present entitlement to trust income will be assessed on their proportionate share of that trust’s net income.

An unpaid present entitlement (“UPE”) arises where a beneficiary is made presently entitled to trust income, but the trustee does not subsequently pay that amount to the beneficiary—for example, because the amount is retained by the trust for investment or other purposes.

Prior Position
The longstanding view of the ATO under Taxation Determination TD 2022/11 (“TD 2022/11”) was that a UPE between a trust and a private company constitutes a loan for the purposes of the deemed dividend rules under Division 7A.

Subject to some exceptions, the existing rules apply to treat loans and payments made under certain circumstances by private companies to their shareholders as taxable dividends.

The ATO’s view was recently challenged and overturned on 19 February 2025, when the Full Federal Court dismissed the Commissioner of Taxation’s appeal in the case of Commissioner of Taxation v Bendel [2025] FCAFC 15 (“Bendel”). In Bendel, the Court held that UPEs arising from a trust’s distribution to a private company were not loans for the purposes of Division 7A.

Bendel Decision
In Bendel, a discretionary trust resolved to distribute a portion of its trust income—equivalent to $1.66 million—to a corporate beneficiary for the 2013 to 2016 income years. The amount remained unpaid.

Following an audit of the taxpayer’s affairs, the ATO issued amended assessments and imposed penalties on the basis that the corporate beneficiary’s UPEs were deemed to be dividends under Division 7A.

The taxpayer objected to the amended assessments, but the objections were unsuccessful. The dispute was initially heard by the Administrative Appeals Tribunal (“Tribunal”), which was required to consider whether the UPEs were loans for the purposes of section 109D(3) of the Income Tax Assessment Act 1936 (Cth) (“ITAA 36”). The Tribunal ultimately ruled in favour of the taxpayer, determining that the UPEs were not loans—contrary to the ATO’s long-standing position as set out in TD 2022/11.

The ATO appealed the decision, but the Full Federal Court unanimously dismissed the appeal in favour of the taxpayer.

Moving Forward
As the Bendel case remains subject to a potential appeal to the High Court, there is considerable uncertainty regarding the treatment of UPEs for private companies.

In our view, pending the outcome of any appeal to the High Court, the prudent approach for private companies is to continue complying with TD 2022/11.

Veroshan Sripragasan
Lawyer