If your family group includes a discretionary trust that distributes income to a private company, the High Court’s decision in Commissioner of Taxation v Bendel is likely to be highly relevant.

For more than 15 years, many trustees, business owners and advisers have operated on the Australian Taxation Office’s view that an unpaid present entitlement, commonly referred to as a UPE, could amount to a loan for Division 7A purposes. That position resulted in thousands of family groups entering formal Division 7A loan agreements, paying interest and making minimum yearly repayments where trust income distributed to a corporate beneficiary remained within the trust.

On 10 June 2026, the High Court of Australia handed down its decision in Commissioner of Taxation v Bendel [2026] HCA 18. The Court confirmed that an unpaid present entitlement is not, by itself, a loan for the purposes of section 109D of Division 7A.

The decision represents a significant development for private groups using discretionary trusts and corporate beneficiaries. However, it does not mean that every UPE is outside Division 7A, that existing complying loan agreements can be ignored, or that trust income can be retained and used without considering the broader tax consequences.

The practical outcome will depend on the terms of the trust deed, the wording of the trustee’s resolutions, the accounting treatment adopted and what the trust and company actually do with the entitlement.

A quick refresher: what is an unpaid present entitlement?

Many family groups use a discretionary trust, often described as a family trust, to operate a business, hold investments or manage family wealth.

At the end of each financial year, the trustee generally determines how the trust’s income will be distributed among eligible beneficiaries. Depending on the trust deed and the circumstances of the family group, those beneficiaries may include individuals, other trusts or private companies.

A common strategy has been to distribute some of the trust’s income to a private company, sometimes called a “bucket company”. A company may pay tax at a flat rate of 25% or 30%, depending on its circumstances, which can be lower than the tax rate applying to an individual beneficiary.

The company is assessed on its share of the trust’s net income even if the underlying funds are not immediately transferred to it. A beneficiary is generally presently entitled where it has a present or immediate right to demand payment from the trustee, with the precise position depending on the trust deed and the trustee’s resolutions.

In many arrangements, the cash represented by the distribution does not physically leave the trust. The trust may continue using the money to fund working capital, acquire investments, repay external debt or meet other business expenses.

The amount the company is entitled to receive, but which remains unpaid, is known as an unpaid present entitlement, or UPE.

Economically, the funds remain available to the trust. Legally and for tax purposes, however, the nature of the company’s rights and the trustee’s obligations must be determined by examining the relevant documents and conduct.

Why did UPEs create a Division 7A concern?

Division 7A of Part III of the Income Tax Assessment Act 1936 is an integrity regime applying to private companies.

Broadly, Division 7A can treat certain payments, loans and forgiven debts involving a private company and its shareholders or their associates as unfranked deemed dividends. The purpose of the regime is to prevent private company profits from being extracted or used for private purposes without the appropriate dividend taxation consequences.

Since 2009, the ATO’s position was that where a private company left a trust distribution unpaid, the company could be providing financial accommodation to the trust. On that interpretation, the UPE could fall within the extended definition of a “loan” in subsection 109D(3).

If Division 7A applied, the amount generally needed to be paid to the company or placed on a complying Division 7A loan agreement by the relevant lodgment date. A complying loan agreement ordinarily required interest to be charged and minimum yearly repayments to be made.

Failure to satisfy those requirements could result in an unfranked deemed dividend, limited by the private company’s distributable surplus.

This treatment became an established feature of annual tax planning for many family groups. Advisers prepared loan agreements, calculated benchmark interest, monitored minimum yearly repayments and considered whether seven-year or, where applicable, secured 25-year loan terms could be used.

The ATO’s position was reflected in guidance dealing with private company entitlements and financial accommodation, including Taxation Determination TD 2022/11. The Bendel litigation directly challenged the legal basis of that position.

What happened in the Bendel case?

Mr Steven Bendel’s family group used a discretionary trust with a private company beneficiary.

The trustee made resolutions setting aside parts of the trust’s net income for the company. Those amounts were not fully paid to the company and therefore remained as unpaid present entitlements.

The Commissioner treated the outstanding entitlements as loans made by the company to the trustee for the purposes of section 109D. The resulting assessments were based on the proposition that the company had provided financial accommodation to the trust.

The taxpayers challenged that treatment.

The matter was initially considered by the Administrative Appeals Tribunal, which found that the UPEs were not loans for the purposes of section 109D. The Commissioner appealed to the Full Federal Court, which dismissed the appeal. The Commissioner then appealed to the High Court.

The High Court also found in favour of the taxpayers, confirming that the UPEs in the circumstances of the case were not Division 7A loans.

What did the High Court decide?

The High Court confirmed that an unpaid present entitlement does not automatically constitute a loan within the meaning of subsection 109D(3).

In broad terms, a loan requires an obligation to repay an amount. An obligation to pay an entitlement that has never previously been advanced is not necessarily an obligation to repay.

That distinction was fundamental.

The trust owed an amount to the corporate beneficiary because of the trustee’s distribution resolutions. However, the company had not first provided that money to the trust in a transaction carrying an obligation for the trust to return or repay it.

The Court’s decision can be understood through three central principles.

1. An obligation to pay is not necessarily an obligation to repay

A conventional loan generally involves one party advancing money to another party, with the recipient becoming obliged to repay the same amount.

A UPE arises differently. The company becomes entitled to trust income through the operation of the trust deed and the trustee’s resolution. The amount is payable to the company, but that does not necessarily mean the company advanced the amount to the trust.

The Full Federal Court had similarly concluded that a loan for the purposes of subsection 109D(3) requires a transaction creating an obligation to repay, or a transaction that in substance produces such an obligation. Merely creating an obligation to pay is insufficient.

2. Mere inaction is not necessarily the provision of financial accommodation

The Commissioner argued that the company’s failure to demand payment allowed the trust to continue using the funds and therefore amounted to the provision of financial accommodation.

The Court did not accept that the company’s mere failure to call for payment was enough in the circumstances.

The extended definition of “loan” refers to an advance of money, the provision of credit or another form of financial accommodation, a payment made on account of another person, or a transaction that in substance effects a loan.

Those concepts ordinarily require an identifiable act, transaction or arrangement. A company simply refraining from demanding payment does not necessarily mean it has made a loan.

This does not mean inaction can never form part of a wider arrangement. It means that the legal character of the arrangement cannot be determined solely from the fact that the entitlement remains unpaid.

3. The trust deed and resolutions were critical

The Bendel trust deed authorised the trustee to “pay, apply or set aside” income for a beneficiary. It also provided that an amount set aside for a beneficiary would be held on a separate trust for that beneficiary pending payment.

The trustee’s resolutions adopted that language and set aside amounts for the corporate beneficiary.

The legal effect was that the relevant amounts were held under a separate trust for the company. The company’s rights were therefore analysed as the rights of a beneficiary under that separate trust, rather than simply the rights of a lender owed a debt.

The High Court’s published catchwords specifically identify the importance of the trust deed, the resolutions, the separate trusts, the absence of an obligation to repay and the distinction between a debtor-creditor relationship and a trust relationship.

Does Bendel mean that a UPE can never become a loan?

No.

The decision does not establish that every UPE is permanently outside Division 7A. It confirms that a UPE is not, merely because it remains unpaid, automatically a loan under subsection 109D(3).

A UPE may subsequently become a loan because of later conduct or documentation.

For example, the position could change if:

• the company demands payment and then agrees to give the trustee time to pay;
• the trustee and company expressly convert the entitlement into a loan;
• the parties enter repayment terms;
• interest is charged or accrued;
• the entitlement is transferred to a loan account;
• the company and trustee acknowledge a debtor-creditor relationship; or
• the arrangement otherwise involves the provision of financial accommodation.

It remains necessary to examine what occurred when the entitlement arose and what happened afterwards.

Following the decision, the ATO released a Decision Impact Statement in late June 2026 accepting the High Court’s ruling and placing related guidance under review.

Why the trust deed and distribution resolutions matter

The High Court’s decision turned on the specific terms of the Bendel trust deed and the legal effect of the trustee’s resolutions.

Not every trust deed contains an equivalent power to “set aside” income or provides that an amount set aside will be held on a separate trust for the beneficiary. Other deeds may use materially different language or may produce a debtor-creditor relationship once a beneficiary is made presently entitled.

The annual distribution resolution must also be consistent with the deed.

A resolution stating that an amount is “set aside” and held on a separate trust may have a different effect from a resolution saying that an amount is:

• credited to a beneficiary loan account;
• acknowledged as a debt due to the company;
• loaned back to the trustee;
• repayable on particular terms; or
• subject to interest.

Trustees should not assume that adopting a sentence from the Bendel decision will produce the same result. The resolution must be authorised by the particular trust deed and must accurately reflect what the trustee intends to do.

Distribution resolutions should also be prepared and executed within the time required by the deed and tax law. The ATO generally expects trustees of discretionary trusts to make resolutions by 30 June where beneficiaries are to be made presently entitled to the trust’s income.

Accounting treatment and conduct remain important

The financial statements and accounting records do not necessarily determine the legal character of an arrangement, but they can provide important evidence.

Risk may increase where the accounts:

• describe the UPE as a loan;
• include it in a loan schedule;
• record interest;
• recognise repayment terms;
• combine the entitlement with other advances;
• show transactions between the company and trust as movements in a single loan account; or
• otherwise demonstrate that the parties regarded the amount as repayable debt.

The conduct of the parties should also align with the trust deed and resolutions. An arrangement described as a separate trust in the legal documents may be difficult to defend if it is administered in practice as an ordinary loan.

Before relying on Bendel, the trust deed, trustee resolutions, general ledger, financial statements, tax returns and subsequent transactions should be reviewed together.

Existing Division 7A loans do not disappear

Many taxpayers previously converted UPEs into formal complying Division 7A loans in accordance with the ATO’s published position.

Those loan agreements remain legally effective.

The High Court’s decision does not automatically cancel the loans, remove outstanding repayment obligations or reverse transactions already undertaken. Where the parties formally agreed that an entitlement became a loan, the arrangement must continue to be managed in accordance with its terms and the Division 7A requirements.

Minimum yearly repayments should therefore continue to be made unless and until the arrangement has been reviewed and specific advice indicates that another course is available.

Similarly, sub-trust investment arrangements established under previous ATO guidance remain legally on foot. Bendel does not automatically unwind those arrangements or authorise trustees to disregard their existing terms.

Subdivision EA still applies

Subdivision EA of Division 7A specifically addresses certain arrangements involving trusts with unpaid present entitlements owing to private companies.

Broadly, Subdivision EA may apply where a private company has an unpaid present entitlement and the trust provides a payment, loan or debt forgiveness benefit to a shareholder of the company or an associate of a shareholder.

For example, risk may arise where the trust retains funds represented by a corporate beneficiary’s UPE and then uses those funds to:

• make a loan to an individual shareholder;
• pay personal expenses for a shareholder or family member;
• forgive an amount owed by an associate; or
• provide another relevant financial benefit.

The High Court noted that Division 7A contains specific provisions dealing with the trust-UPE-company context. The existence of Subdivision EA was relevant to the statutory interpretation adopted by the Court.

Bendel should therefore not be understood as permission for shareholders or associates to use trust funds without further tax consequences.

Section 100A remains a separate risk

Section 100A is another important integrity provision.

It may apply where a beneficiary is made presently entitled to trust income as part of a reimbursement agreement and another person receives a benefit, subject to the statutory requirements and exceptions.

Where section 100A applies, the beneficiary’s present entitlement may be disregarded and the trustee can be assessed at the top marginal rate, currently 47%.

The ATO’s Taxation Ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2 outline its approach to reimbursement agreements and trust distribution arrangements.

A distribution to a corporate beneficiary should therefore have a genuine commercial and legal basis. The tax outcome cannot be assessed by looking only at Division 7A.

Proposed trust tax reforms from 1 July 2028

The 2026–27 Federal Budget proposed a minimum 30% tax rate for discretionary trusts from 1 July 2028, subject to exceptions and the passage and final form of legislation. Under the proposal, corporate beneficiaries would not receive credit for tax already paid by the trust.

The Government has also announced transitional rollover relief and commenced consultation on implementation issues, including the interaction between UPEs, corporate beneficiaries and the Bendel decision.

The implementation details are still important. Family groups should not assume that the final rules will operate in a particular way until legislation is enacted.

Nevertheless, the proposal may materially affect the longer-term value of distributing trust income to a bucket company. Structuring decisions should therefore consider both the current law following Bendel and the direction of the proposed reforms.

What should trustees and business owners do now?

1. Do not rush to unwind existing arrangements

Continue complying with existing Division 7A loan agreements, sub-trust arrangements and repayment obligations until they have been properly reviewed.

Unilateral changes may create tax, accounting, legal or trust law consequences.

2. Review the trust deed

Confirm whether the deed permits income to be “set aside”, whether a separate trust is created and what rights arise when a beneficiary is made presently entitled.

The precise wording matters.

3. Review annual distribution resolutions

Examine how distributions to corporate beneficiaries have been documented, including whether the resolutions refer to a separate trust, debt, loan account, crediting or repayment.

Particular attention should be given to the 2025–26 resolutions and the financial statements currently being prepared.

4. Review the accounting records

Ensure the general ledger and financial statements accurately reflect the intended legal arrangement.

Descriptions such as “beneficiary entitlement”, “UPE”, “loan” and “amount owing” should not be used interchangeably without considering their legal effect.

5. Trace how the retained funds were used

Review whether the trust used the funds for business or investment purposes, or provided payments, loans or benefits to shareholders and their associates.

This is essential when considering Subdivision EA and section 100A.

6. Consider prior income years

Some taxpayers may have paid tax because a UPE was treated as a Division 7A loan or deemed dividend under the ATO’s former view.

Depending on the facts, amendment periods and procedural requirements, there may be scope to seek amendments, lodge objections or preserve rights while the ATO updates its administrative position.

7. Monitor the ATO and legislative response

The ATO’s guidance, Decision Impact Statements and administrative approach should be monitored as they are updated following the High Court decision.

The proposed minimum 30% tax on discretionary trusts and any legislative response dealing specifically with UPEs should also be factored into future planning.

Final thoughts

Commissioner of Taxation v Bendel is one of the most significant Division 7A and trust taxation decisions in many years.

It establishes that an unpaid present entitlement is not automatically a loan merely because the corporate beneficiary does not demand immediate payment. However, the decision is highly dependent on legal characterisation, documentation and conduct.

For family groups, the key message is not that UPEs can now be ignored. It is that each arrangement must be analysed according to the trust deed, the trustee’s resolutions, the financial statements, the subsequent conduct of the parties and the use of the underlying funds.

If your trust has distributed income to a private company, now is an appropriate time to review your trust deed, distribution resolutions, UPE balances, Division 7A loans and accounting treatment.

Please contact Hall Browns to arrange a review of your trust and corporate beneficiary arrangements.

This article contains general information only and does not take into account your objectives, financial situation or personal circumstances. Tax and trust law outcomes depend on the facts and governing documents of each arrangement. Please obtain professional advice before acting on any matter discussed.