On 10 June 2026, the High Court of Australia handed down its highly anticipated decision in Commissioner of Taxation v Bendel [2026] HCA 18, dismissing the Commissioner’s appeal in a 5-2 majority. This landmark decision confirms, at the highest level of the Australian judicial system, that an unpaid present entitlement (‘UPE’) owed by a trust to a corporate beneficiary does not, of itself, constitute a ‘loan’ for the purposes of Division 7A of the Income Tax Assessment Act 1936.
For any taxpayer distributing income from a discretionary trust to a private company, which is a commonly used structure in Australia’s mid-market, this decision has the potential to fundamentally change the way that distributions and tax effective retention of funds within groups is achieved. Where a trust’s arrangements are structured consistently with those considered in Bendel, UPEs left unpaid may no longer need to be placed on complying Division 7A loan terms with interest and principal repayments, nor paid out within prescribed timeframes. This could mean that funds representing profits made within trusts may be able to be retained within the trust but distributed to a company and taxed at the company tax rate (rather than being subject to the individual marginal rates).
The timing of this decision is particularly significant. With 30 June 2026 only weeks away, trustees and their advisers are finalising trust distribution resolutions for the current financial year. For groups whose trust deeds and distribution arrangements are consistent with the Bendel fact pattern, this decision opens the door to a distribution and structuring approach which has been especially problematic since the Commissioner adopted his view on unpaid distributions to companies 16 years ago. However, the extent to which the decision applies to any particular group will depend on the specific terms of the trust deed, the nature of the distribution resolutions, and the way in which the UPE is characterised at law. For those who have already prepared their year-end distribution planning on the assumption that Division 7A applies to UPEs, there may still be opportunities to achieve outcomes consistent with Bendel.
Background
Division 7A is an integrity provision designed to prevent private companies from distributing profits to shareholders or their associates in a tax-free manner (such as through loans, payments or the forgiveness of debts) by treating those amounts as deemed dividends unless they are repaid or placed on complying loan terms.
Since the 2010 financial year, the Commissioner of Taxation took the view that where a trust distributed income to a corporate beneficiary but did not pay the amount, the resulting UPE was a ‘loan’ for Division 7A purposes. The rationale was that the corporate beneficiary, by not calling for payment, effectively provided ‘financial accommodation’ to the trust. The consequence was that, to avoid a deemed dividend arising, the UPE needed to be either paid in full within particular timeframes, or placed on complying Division 7A loan terms, requiring principal and interest repayments over a set period.
This view was first challenged at the Administrative Appeals Tribunal in Bendel and Commissioner of Taxation [2023] AATA 3074 and subsequently at the Full Federal Court in Commissioner of Taxation v Bendel [2025] FCAFC 15, both of which found in favour of the taxpayer. The Commissioner then obtained special leave to appeal to the High Court.
What the High Court decided
The majority (Gageler CJ, Gordon, Edelman, Steward and Gleeson JJ) held that the UPEs in question were not ‘loans’ within the meaning of section 109D(3).
Three key findings underpin the decision:
- No debtor/creditor relationship arose. The trust deed in Bendel required amounts set aside for beneficiaries to be held on separate trusts. The majority found that the trustee’s resolutions did not create a debtor/creditor relationship between the trust and the corporate beneficiary. Rather, the amounts were held on separate trusts for the beneficiary, pending payment. This finding was specific to the wording and operation of the trust deed in question, meaning the position for other trusts may depend on whether their deeds operate in a similar manner.
- Inaction is not financial accommodation. The majority held that the corporate beneficiary’s decision not to call for payment did not amount to a ‘provision of credit or any other form of financial accommodation’, nor did it ‘in substance effect a loan of money’. Division 7A requires that the company is actively doing something to move value from it to someone, analogous with the payment of a dividend. Mere acquiescence to the retention of funds by the trustee does not satisfy this requirement.
- Legislative context supports a narrower reading. The majority drew on the legislative history of Division 7A, noting the existence of Subdivision EA (and its predecessor, section 109UB) as a targeted integrity regime specifically dealing with UPEs. The fact that the Board of Taxation had previously proposed treating UPEs as loans, a proposal not adopted by Parliament, was seen as further evidence that the law was not intended to operate as the Commissioner had contended.
Justices Jagot and Beech-Jones dissented, favouring a broader view of section 109D(3) that would treat the retention and use of funds by the trust, in conjunction with the beneficiary’s failure to insist on payment, as capable of constituting financial accommodation.
Subdivision EA and section 100A could still be an issue
While the Bendel decision is a significant win for taxpayers in the context of Division 7A, it does not eliminate all integrity risks associated with UPEs and trust distributions. Two provisions in particular remain relevant and should be considered on their merits in each client’s circumstances:
- Subdivision EA (sections 109XA and 109XB) applies where a UPE owed to a corporate beneficiary is used, directly or indirectly, to provide a loan or other financial benefit to a shareholder or associate of a shareholder of that company. In those circumstances, the amount may still be treated as a deemed dividend of the company. Subdivision EA was specifically designed to address the gap where trust funds attributable to a corporate beneficiary’s entitlement are effectively channelled to individuals connected to that company, and its operation is entirely independent of the Bendel outcome.
- Section 100A is a separate anti-avoidance provision that can apply where a beneficiary is made presently entitled to trust income as part of a ‘reimbursement agreement’. Broadly, this is an arrangement under which someone other than the beneficiary benefits from the distribution. Where section 100A applies, the trustee rather than the beneficiary is assessed on that income at the top marginal rate. The ATO has previously flagged this provision as relevant to trust distribution arrangements regardless of the Bendel outcome, and it may have application depending on the specific facts of the arrangement.
Neither provision should be assumed to apply in all cases, but equally neither should be overlooked. The applicability of each will turn on the particular facts, the terms of the trust deed, and the way in which the trust’s funds are ultimately dealt with.
Practical considerations and actions for 30 June 2026
The decision raises a number of practical matters that should be carefully considered in the lead-up to 30 June 2026:
- Assess whether your trust arrangements align with Bendel. The High Court’s reasoning turned on the specific terms of the Bendel trust deed, including the creation of separate trusts upon distribution. Not all trust deeds will operate in the same way. Before concluding that Division 7A does not apply to a particular UPE, it is essential to review the relevant trust deed and distribution resolutions to determine whether the legal characterisation of the UPE is consistent with the position in Bendel.
- Review existing Division 7A loan agreements over UPEs. Many private groups have converted UPEs into complying Division 7A loans over the past 16 years in reliance on the Commissioner’s now overturned position. While some of these arrangements may not have been necessary, they remain legally operative. Careful consideration should be given before seeking to unwind or vary any such agreements, as doing so may have unintended tax consequences (for example, triggering Division 7A on the forgiveness of a debt).
- Review accounting treatment. UPEs are often recorded against a ‘beneficiary loan account’ in the balance sheet as a matter of accounting convenience. Following Bendel, it may be appropriate to consider whether this presentation is consistent with the legal characterisation under the relevant trust deed. Aligning the accounting records with the legal position may help avoid creating unnecessary evidentiary risk.
- Consider objection rights for prior year assessments. Taxpayers who were assessed for deemed dividends solely on the basis of the Commissioner’s former UPE position may wish to consider whether they have grounds to lodge objections or seek amendments, subject to the relevant time limits.
- Consider Subdivision EA and section 100A in every instance. As outlined above, these provisions operate independently of the Division 7A loan question settled in Bendel. In each instance where an UPE is to remain unpaid, consideration should be given to whether the funds attributable to that entitlement are being used in a way that could enliven either provision.
ATO response
We await the ATO’s Decision Impact Statement in response to the High Court’s decision. This will be important in understanding the Commissioner’s revised administrative approach, including the status of Taxation Determination TD 2022/11 (which currently contains his latest views on how UPEs to companies operate) and how the ATO intends to deal with existing arrangements put in place in reliance on its former position.
Federal Budget: proposed trust tax changes from 1 July 2028
As part of the 2026–27 Federal Budget, the Government announced the proposed introduction of a 30% minimum tax on discretionary trust income from 1 July 2028. The tax will be paid at the trustee level, with non-corporate beneficiaries receiving a non-refundable credit. Notably, corporate beneficiaries will not receive a credit for the tax paid by the trustee, a design feature that will effectively result in double taxation of income distributed to them and is likely to significantly diminish the role of corporate beneficiaries in trust distribution planning.
While Bendel provides welcome clarity for the current environment, the landscape for trust distributions will change fundamentally from 1 July 2028 if these proposed Budget changes are enacted. Furthermore, the Government could choose to enact legislation consistent with the Commissioner’s view of Division 7A prior to Bendel, which may lead to the Bendel decision being of limited practical relevance in future years.
As part of their proposed changes to the taxation of discretion trusts announced in the Budget, the Government has also announced a proposed three-year rollover relief window commencing 1 July 2027 to facilitate the transfer of assets out of discretionary trusts to other entity types. Groups with significant assets held in discretionary trust structures should begin considering their options well ahead of these proposed changes taking effect.
What should you do?
The Bendel decision brings long-awaited clarity to a question that has created significant uncertainty and compliance cost for private groups since 2010. However, the extent to which the decision changes the position for any particular group will depend on the specific terms of their trust arrangements, the nature of their distribution resolutions, and whether other integrity provisions such as Subdivision EA or section 100A may have application.
With 30 June fast approaching and the proposed trust reforms on the horizon, now is an opportune time to review your current trust structures and distribution strategy. If you’d like practical advice on how this decision affects your arrangements, what actions you should take before 30 June 2026, or how to begin planning for the proposed trust changes, contact your local William Buck Advisor.
