The ATO’s failed appeal in the Bendel case has the profession all excited. We explain why.

Plus, the ATO's updated guidance on sales of land and small scale subdivision projects.

Also of interest this month is the ATO guidance on sales of land including small scale subdivisions.

Bendel: UPEs not loans under Division 7A

Reference: Commissioner of Taxation v Bendel [2025] FCAFC 15 (19 February 2025)

The Full Federal Court has dismissed the Commissioner’s appeal in Commissioner of Taxation v Bendel [2025] FCAFC 15, holding that unpaid present entitlements (UPEs) owed to corporate beneficiaries are not loans for Division 7A purposes.

Since December 2009, the ATO has taken the controversial view that when a trustee appoints income to a corporate beneficiary and some or all of this amount is left unpaid, then this amount can be treated as a loan for Division 7A purposes (see TD 2022/11 for the ATO’s most recent guidance on this point). The ATO’s view has been that leaving a UPE outstanding can trigger a deemed unfranked dividend for the trust if appropriate action isn't taken to prevent this, even if no funds are provided by the trust to shareholders of the company or their associates.

This issue has now been tested before the AAT and the Federal Court. In the Bendel case, the key issue was whether UPE balances owed to a company that arose during the 2014 to 2017 income years should be treated as loans for Division 7A purposes under section 109D(3) of the ITAA 1936.

At first instance, in September 2023, the AAT concluded that the ATO's approach in this area wasn't correct, finding that an unpaid trust distribution was not a loan for Division 7A purposes.

The ATO appealed the decision and indicated that it would continue to administer the law in accordance with existing ATO guidance until the appeal process was finalised (see the interim decision impact statement at the link here).

The Full Federal Court has dismissed the Commissioner’s appeal, and upheld that a UPE balance should not be treated as a loan for the purpose of Division 7A.

The Full Federal Court primarily considered the construction of section 109D(3) in the judgement. While appointing income to a beneficiary might create a debtor-creditor relationship between the parties, the Court held that this isn't enough for the amount owing to the company to be treated as a loan under section 109D(3). The crucial issue for the Court was that the trustee's resolution created an obligation to pay an amount to the company, but this needs to be distinguished from an obligation to repay an amount.

It now remains to be seen whether the ATO will seek to appeal the decision to the High Court and if so, how the ATO will administer Division 7A while awaiting the outcome. There is also the possibility that the Government will step in and make a legislative amendment to bring the rules back in line with the ATO's approach since 2009.

Updated guidance on land and subdivision projects

Reference: Examples of tax consequences on sales of land including small-scale land subdivision

The ATO has updated its document ‘Examples of tax consequences of sales of land including small-scale land subdivision’ to include additional examples.

The document now includes seven examples that cover the income tax and GST consequences of common property transactions such as property flipping, subdivision, and property development.

In Example 3, the ATO covers a scenario where the taxpayer repeatedly buys, renovates, and sells properties, engaging in market research, seeking professional advice, taking out business loans, and then carrying out renovations in a business-like manner. The ATO takes the view that this is running a business, since the taxpayer’s primary intention is to make a profit from the renovations and reselling of the property. The profits are treated as ordinary income and taxed on revenue account. The CGT provisions don’t apply here since the property is held as trading stock. However, GST doesn’t apply on this particular situation because the taxpayer is supplying existing residential premises which have not undergone substantial renovations.

In contrast, in Example 4, the taxpayer buys a property planning to live in it as their main residence, and renovates it with the assistance of tradespeople when required. However, the taxpayer ends up selling the property due to personal reasons such as losing their job and family illness. Even though there happen to be favourable market conditions when the taxpayer decides to sell, the ATO takes the view that the sale is taxed on capital account because there’s no commercial intent. The sale is not considered part of a business activity or an isolated profit-making transaction. The taxpayer can access the 50% CGT discount, although the main residence exemption wouldn’t apply because the taxpayer never actually lived in the property.

Similarly, the ATO covers two contrasting examples on subdivision.

In Example 5, the taxpayer subdivides the vacant land from their main residence because of ill health and growing debt levels. Since they didn’t initially intend to profit from the subdivision and sale of the vacant land, the sale is viewed as the mere realisation of a capital asset rather than a business venture. The activities related to the subdivision are limited to necessary actions for council approval, reflecting a low level of complexity and small scale.

In contrast, Example 6 covers someone who purchases an investment property with the explicit intention of subdividing the land and selling the lots for profit. The taxpayer engages professionals and enters into a development agreement to oversee the subdivision, actively managing the project. The ATO considers this is clearly a profit-driven, business-like activity, so the profits are treated as business income and taxed on revenue account.

The updated guide builds on other guidance and examples provided by the ATO in this area, particularly MT 2006/1. This provides practitioners with a range of practical resources to refer to when clients are contemplating subdivision or other property projects.