A full Federal Court decision handed down earlier this year has cast doubt over the treatment of unpaid present entitlements (UPE) from unit trusts as to whether they qualify as loans under Division 7A of the Income Tax Assessment Act (ITAA) and in turn the Superannuation Industry (Supervision) (SIS) Act.
The Commissioner of Taxation v Bendel [2025] FCAFC 15 case challenged an ATO ruling that relied on the concept of a financial accommodation included in ITAA Division 7A and subsequently decided a UPE was a loan from the recipient to the unit trust.
“So the ATO said financial accommodation could include a UPE because it’s a debtor/creditor relationship. [However], the full Federal Court said financial accommodation can be read that way, but you’ve got to read these definitions in the context of the legislation,” Sladen Legal business law principal Phil Broderick told Institute of Financial Professionals Australia 2025 Conference and Expo delegates in Melbourne last Friday.
“[The court added] the context of the legislation in Div 7A is it’s designed to catch loan and loan-like arrangements. What’s a loan? A loan is an advancement of principal with an obligation to repay. So loans would definitely be caught by that, but then financial accommodation in the context of the expanded definition in Div 7A, it would have to look like that. A UPE is a debtor-to-creditor relationship – nothing has been advanced with an obligation to pay.
“So the full Federal Court narrowed [the meaning of] financial accommodation to exclude UPEs.”
Broderick noted the decision has implications for SMSFs due to commonalities between the ITAA and the SIS Act.
“The expanded definition of loan in the SIS Act is almost identical [to that in the ITAA] and the concept is almost identical. So the expanded definition is designed in the SIS Act to capture loan and loan-like arrangements,” he said.
“[As such], if you take the Bendel decision, it’s not going to capture debtor-to-creditor-type relationships and it’s not going to capture UPEs or anything else that is not an advancement of principal with an obligation to repay.”
He pointed out the ATO is not acting on this decision yet and is awaiting the result of the High Court special leave process currently in play relating to this matter.
The treatment of UPEs as loans from beneficiaries to unit trusts may no longer stand due to a recent full Federal Court decision.
