What does Bendel mean for SMSFs?

In this article, we consider the implications for SMSFs of the recent Federal Court of Australia (Full Court) decision in Commissioner of Taxation v Bendel [2025] FCAFC 15 (Bendel).

In particular, we consider Bendel’s impact for SMSFs with investments in pre-1999 unit trusts.

This article contains many generalisations and simplifications. For the full text of Bendel, see https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCAFC/2025/15.html

Why would Bendel be relevant for SMSFs? Bendel isn’t an SMSF case

On its face, Bendel is not relevant for SMSFs. Bendel does not involve an SMSF.

However, on a slightly closer inspection, the connection is clear.

In respect of the meaning of ‘loan’, Bendel considered the expression ‘provision of credit or any other form of financial accommodation’ in s 109D(3) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).

Section 10(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) uses almost identical language when defining a loan.

Consider the following table comparing the two definitions.

This typically becomes relevant where:

• an SMSF has invested in a unit trust;
• the unit trust has declared a distribution to which the SMSF is now presently entitled; and
• the unit trust has not promptly paid the distribution (ie, an unpaid present entitlement (UPE) exists).

The ATO has expressed the view in Self Managed Superannuation Fund Ruling SMSFR 2009/3, at paragraphs 7–8):

… when an overall consideration of the factors surrounding the non-payment of the trust distribution is seen as an arrangement for the provision of credit or financial accommodation, it will satisfy the extended definition of ‘loan’ in subsection 10(1).

Consequently, the unpaid amount will be included in the in-house assets of the SMSF, where:

• • the trust in question is a related party of the SMSF; and
  • the circumstances indicate that a loan agreement has been entered into, or that a consensual agreement for the provision of credit or other form of financial accommodation has been reached between the parties.

Later, in that same ruling, the ATO state (SMSFR 2009/3 [101]):

Factors which might lead to the conclusion that a consensual arrangement for the provision of credit or financial accommodation does exist include:

• • the trustees are the same or under substantially the same control;
  • the amount of the unpaid trust distribution is substantial;
  • the amount has remained unpaid for a substantial period of time;
  • distributions for multiple years remain unpaid; and
  • any documents executed by the parties evidencing an intention to defer payment of the trust distribution.

Consequently, the ATO provide the following example (SMSFR 2009/3 [52]–[55]):

Example 3 – unpaid trust distributions which are loans

Dominic and Mary are the sole members and trustees of the DM SMSF, which holds units in the DM Unit Trust. The trustee of the DM Unit Trust is DM Pty Ltd, of which Dominic and Mary are the sole directors and shareholders. The units in the unit trust were held prior to 11 August 1999 and were not in-house assets under the rules at that time.

As at 30 June 2009 a total of $300,000 in trust distributions have been resolved since 11 August 1999, excluding the distribution made on 30 June 2009, the amount of which is unknown. All of the resolved distributions remain unpaid and no amounts have been reinvested in new units. There is no clause in the unit trust deed regarding the character of the unpaid trust distributions and no other documents describing or creating any contractual agreement in respect of the unpaid amounts. Interest is accumulating on the outstanding distributions and currently totals $100,000.

After discussion with the Tax Office, Dominic and Mary state that they do not intend that the DM SMSF will seek payment by a specific date but they do intended that payment will occur at a later time. In addition, Dominic and Mary state that no amount has been put aside in the DM Unit Trust for payment of the distributions to the DM SMSF and consequently the DM Unit Trust is not in a position to pay the distributions to the DM SMSF.

Although there is no specific loan arrangement or definite date for payment, the facts enable the Commissioner to conclude that there is provision of financial accommodation by the DM SMSF to the DM Unit Trust. This is because

• • the two trusts are controlled by Dominic and Mary;
  • the amounts of the distributions deferred are substantial; and
  • the time frame of the deferral is also large and a pattern of deferring payment of the distributions is well established over many years.

Consequently, as at 30 June 2009 the $300,000 in unpaid trust distributions are considered to be loans under the extended definition in subsection 10(1) by the trustee of the DM SMSF to the trustee of the DM Unit Trust. This is because there has been the provision of a financial accommodation.

Pre-1999 unit trusts

Some SMSFs invested in unit trusts before 12 August 1999. Today, those investments are typically excepted from constituting in-house assets. Also, typically certain reinvestments of pre-1999 unit trust distributions made before July 2009 are also excepted from constituting in-house assets. However, any further investments in or loans to those unit trusts constitute in-house assets. Part 8 of the SISA broadly prohibits SMSFs from owning in-house assets.

This begs the question: can an SMSF effectively inject further SMSF money into such a unit trust by not calling upon an UPE from existing units? Based on SMSFR 2009/3, the answer is typically no because such UPEs, if not promptly paid, will constitute loans that thus in-house assets. However, after Bendel, some are posing the question: is the ATO correct?

Is the ATO correct in SMSFR 2009/3?

Certainly, in Bendel, as it currently stands, the ATO was incorrect. More specifically, the Full Court of the Federal Court of Australia unanimously held that (paragraphs 93–96):

… s 109D(3) requires more than the existence of a debtor-creditor relationship. It requires an obligation to repay and not merely an obligation to pay. The Commissioner contended before the Tribunal that the non-exercise by [the owner of the UPE] of its right to call for payment of its present entitlement amounted to the provision of financial accommodation … However, the consensual arrangement relied upon by the Commissioner did not involve the payment of a sum by or at the direction of [the owner of the UPE] that was required to be repaid. [Emphasis added]

In those circumstances, applying the correct construction of s 109D results in only one conclusion being open. Section 109D is not satisfied. Although – based on the concessions made by the taxpayer – a debtor creditor relationship was created by the trustee resolution and the entry in the trust accounts, there was no loan or creation of an obligation to repay an amount as opposed to an obligation to pay.

…

The [ATO’s] appeal should be dismissed.

However, does that also mean the ATO was also wrong in SMSFR 2009/3?

Potentially, yes. However, it is difficult to say with complete certainty at this stage. Note the following.

Firstly, the ATO could still appeal — or at least apply to appeal — Bendel to the High Court. If the High Court agrees to hear such an appeal, then the High Court could rule that the ATO is correct in respect of Bendel.

Also, Bendel considered a different provision in a different Act to what is relevant for SMSFs. It is tempting to simply ‘copy’ the interpretation of one phrase from one Act and ‘paste’ that interpretation to a similar phrase from another Act. However, that is not how one should approach the task of statutory interpretation. Similar wording from another Act might be somewhat instructive. However, as the Full Court of the Federal Court remind us in Bendel:

The construction of s 109D(3) we have adopted is derived from the language of the statute construed in its context and results in each of the provisions in Div 7A being given operative effect.

In other words, the correct construction of a provision depends on the language of the specific statute in which that provision appears. Therefore, it is conceivable that the same words in the definition of ‘loan’ in the ITAA 1936, could have a different meaning to the same words in the SISA.

Also note that SMSFR 2009/3 refers to other possible contraventions of the SISA arising for an SMSF with UPEs owed from a related trust. Namely s 109 (requirement to deal at arm’s length) and s 62 (sole purpose test). However, should the UPEs not amount to a ‘loan’, the application of these sections is also less clear.

What about Montgomery Wools?

Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund v Commissioner of Taxation [2012] AATA 61 is a 2012 decision of the Administrative Appeals Tribunal. The full text is available at https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2012/61.html

The facts in Montgomery Wools involved an SMSF that invested in a unit trust but did not call on the distributions. In Montgomery Wools, the ATO argued that:

[the SMSF] “provided financial accommodation” [ie, a loan within the meaning of SISA s 10(1)] to [the unit trust] by not requiring a distribution and payment of income but instead enabling payment to be deferred …

The AAT essentially accepted this argument (see paragraph 94 of Montgomery Wools).

However, Montgomery Wools is only a tribunal decision. Thus, it is not even judicial authority. A decision of the Full Court of the Federal Court can definitely ‘overturn’ a tribunal decision.

Also, if the Bendel reasoning applies to the facts of Montgomery Wools, then this aspect of Montgomery Wools may well be incorrect. I stress the word ‘if’. Again, among other things, Montgomery Wools considered the SISA and the SISA’s context. For example, Montgomery Wools the explanatory memorandum to the 1999 that introduced that current in-house asset rules.

Practically, what should SMSFs do right now?

In my experience, few if any SMSFs wish to be test cases. Accordingly, at least for the time being, practically speaking, SMSFs should ignore Bendel. In other words, SMSFR 2009/3 is still the safest guidance on which to proceed.

However, I acknowledge that some SMSFs, for various reasons, might wish to test the boundaries of the ‘new’ law as they currently stand today post-Bendel. Such SMSFs have a greater chance of success today than they did before Bendel of not calling on UPEs and this not constituting a loan. However, until the ATO provide guidance on this matter, such SMSFs should strongly consider first obtaining tailored legal advice on their circumstances.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Bryce Figot ([email protected]) Special Counsel, and Shaun Backhaus ([email protected]) Director, DBA Lawyers

DBA LAWYERS

5 February 2024