The Bendel Case shapes up to be the ATO’s Waterloo – a crushing defeat to the position the ATO took in TR 2010/3.
The Bendel Case Part 1
The Full Federal Court published its long-awaited decision on the Bendel Case on 19 February 2025.
If you are unfamiliar with The Bendel Case, please listen to episode 406, where we discuss the case after the AAT decision in 2023.
The Bendel Full Federal Court verdict went the taxpayer’s way. Not just Mr Bendel’s way but the way for Australia’s over 1 million discretionary trusts.
In this mini-series, Andrew Henshaw of Velocity Legal in Melbourne discusses what this all means for you in this mini-series about s109 Subdiv EA and TR 2010/3, often dubbed The Bendel Case. Here is what we learned, but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
The Bendel Case Part 1
The Bendel case is really just about one question: Is a UPE to a private company a loan? That is the question.
When a trust makes a private company presently entitled but doesn’t pay the entitlement out, in other words, the income goes one way, and the cash goes another, is that a loan?
If it is a loan, it is financial accommodation from a private company to a related party. And that, of course, makes it a Div 7A loan.
s109 Subdiv EA versus TR 2010/3
EA and the TR look at this from two different angles
s109 Subdivision EA says, “Where did the cash go? Assume that cash came from the company and test it against Div 7A.” That is what s109 Subdiv EA is saying, in very simple words.
However, the ATO says something completely different in TR 2010/3. The ATO says any UPE to a private company is a loan. It doesn’t matter where the cash actually went and why it went there.
Different Angle
In the eyes of the ATO, there is no contradiction. Because s109EA and 2010/3 come from a completely different angle.
EA: Start with the Trust
s109EA starts with the trust and walks past the private company. Let’s call this presently entitled company the ‘UPE company’. So s109EA has no interest in this UPE company, completely ignores it, and goes right up to the trust and says,
“Hey, trust, where did that money go that you made some company presently entitled and didn’t pay to the company?”.
Trust still got the Cash
And if the trust then says, “It’s still here. I kept it. I still got it.”
Then s109EA won’t have an issue. It doesn’t matter for what purpose the trust kept the money. It could be for working capital, passive investments, no purpose at all or something else; all that matters to EA is that the money is still in the trust.
Trust no longer got the Cash
But if the trust says, ‘Ehhhh, ooops. I paid it out.” Then, s109EA will start looking for the money.
If the money went to a third party or another company, then s109EA has no issue because there is no Div 7A issue when a private company lends money to a third party or another company – even if it is a related company.
However, if the trust paid the money to the shareholder of the UPE company or their associate, s109EA will have an issue. And that is when the UPE company becomes the principal character in the story and is no longer a bystander.
EA will assume an unfranked deemed dividend from the company to the shareholder.
So that’s s109EA.
TR 2010/3: Focus on the UPE
TR 2010/3 comes from a completely different direction. It only cares about whether the UPE company got the money. Nothing else matters.
It walks past the trust, runs up to the UPE company and says, “Did you get the money?”
And if the UPE company says it doesn’t have it, that’s all TR 2010/3 wants to know. It doesn’t care who else got the money. All it sees is financial accommodation from the private company to a related party, and, hence, a Div 7A loan.
If the UPE company has a s109N loan agreement, all is well.
But if the UPE company doesn’t have a loan agreement, then there is a deemed dividend from the private company to the trust. Even if the money went to a third party, another company, or the shareholder of the UPE company, in each of these scenarios, the trust receives the deemed dividend under TR 2010/3.
Mr Steve Bendel
But now comes Mr Steve Bendel, an accountant and tax agent. He was busy with his clients’ trusts and Div 7A agreements and completely forgot to his own trust. So his trust had UPEs to a company, got audited, and was slapped with massive fines. So Mr Bendel went to court and argued just one point: A UPE is not a loan.
And in 2022, the AAT said that Mr Bendel was right. A UPE is not a loan. So, the ATO went to the Full Federal Court and lost.
The Full Federal Court declared on the 19th of February 2025 that a UPE is not a loan.
s100A
How do s109EA and s100A interact with each other?
s109EA is only about UPEs to private companies where the money went from the trust to the shareholder of the UPE company or their associate. s100A is much wider and looks at any distribution where the cash didn’t follow the present entitlement.
However, we will cover this in more detail in ep 437.
Now, this is only the tip of the iceberg. We go into a lot more detail in this episode. So please listen in.
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Item 17 Ministerial Determination
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