Trust structures have long been an effective tool for medical professionals in managing investment income distribution, providing asset protection, and achieving tax efficiency. Despite the recent ATO focus surrounding unpaid present entitlements (UPEs)—particularly after the Bendel v Commissioner of Taxation decision—trusts remain a legitimate and powerful part of medical practice structures when used correctly.
Why medical professionals use trusts
- Trusts provide medical professionals with flexibility and control over income distribution, particularly when:
- Running a service entity to support their medical practice
- Structuring income tax efficiently across family members or corporate beneficiaries
- Protecting assets from potential litigation or creditors
- Managing intergenerational wealth and succession planning
These benefits remain unchanged. However, how income entitlements—especially UPEs—are managed within these trusts is where recent developments have sharpened focus. For more details on the benefits of trusts, read our article: How medical practitioners can benefit from discretionary family trusts.
Understanding UPEs and the ATO’s concerns
A UPE arises when a beneficiary becomes entitled to income from a trust, but that entitlement remains unpaid. This is common in medical service structures where income may be allocated to a corporate beneficiary (colloquially called a ‘bucket company’ or ‘dump company’) for tax efficiency, but the cash is retained in the trust.
The ATO is particularly concerned when UPEs owed to corporate beneficiaries effectively allow trusts to retain access to those funds, potentially blurring the line between entitlement and financial accommodation. The ATO positions that all UPEs must be treated as Division 7A loans, which do not fall under the specified rules, resulting in deemed dividends that are unfranked and additional tax consequences.
What the Bendel case clarified
In Bendel v Commissioner of Taxation [2023] AATA 3074, the Tribunal determined that a UPE owed to a corporate beneficiary did not automatically constitute a loan under Division 7A simply by being unpaid. The key point was the absence of a positive act by the corporate beneficiary to provide financial accommodation or access to funds.
This was a taxpayer-friendly decision that pushed back on the ATO’s broader interpretation. However, the ATO has indicated it disagrees with the outcome and may not apply it more broadly, particularly where trust funds are reinvested or accessed in ways resembling a loan. Read more about our analysis of this ruling: Landmark ruling on Division 7A and unpaid trust distributions.
ATO’s ongoing administrative position
Despite the ruling in the Bendel case, the ATO has stated they intend to continue treating UPEs to private companies as loans under Division 7A unless managed properly, such as via sub-trusts or complying loan agreements. They have released an interim decision impact statement confirming this treatment.
The ATO have sought special leave to appeal the Tribunal decision which means potentially the High Court will further determine the outcome.
What this means for medical professionals
While the regulatory environment has shifted, this does not diminish the utility of trusts—it simply requires a more disciplined and transparent approach. Here’s what medical clients should do:
- Continue using trusts strategically
Trusts still offer medical professionals tax efficiency, asset protection and flexibility that are unmatched by other structures. The key is ensuring they’re set up and managed in line with ATO expectations. - Review existing UPEs to corporate beneficiaries
If a corporate beneficiary is owed money from prior years, trustees should ensure either:
– A compliant Division 7A loan agreement is in place or
– The funds are held in a sub-trust structure with proper documentation and investment management. - Avoid leaving UPEs unresolved
The ATO is particularly concerned where UPEs are left unpaid with no plan or structure. This could expose the trust to the risk of reassessment and penalty. - Align with a strong advisory team
Medical clients should work closely with accountants and legal advisers to ensure:
– Annual trust resolutions are clear and aligned with actual cash movements
– Sub-trusts and Division 7A strategies are executed and documented correctly
– Ongoing compliance is built into the practice’s financial processes
With sound advice, clear documentation, and proactive planning, medical professionals can continue to enjoy the benefits of trusts without falling foul of the ATO’s evolving expectations.
For further advice on the implications of trusts and the Bendel case, please contact your local Health team advisor.
