High Court Decision is here.
The High Court has dismissed the Commissioner of Taxation’s (Commissioner) appeal in Commissioner of Taxation v Bendel [2026] HCA 18. The practical consequence is that, on the terms of the trust deed and resolutions before the Court, the unpaid present entitlements (UPE) of the corporate beneficiary were not “loans” for the purposes of s 109D(3) of the Income Tax Assessment Act 1936 (Cth)(ITAA 1936), so the Commissioner’s s 109D assessments failed.
This is a significant taxpayer win, but it is not a general proposition that every UPE to a corporate beneficiary falls outside Division 7A.
What is the Tax Deferral?
With the corporate tax rate at 25 – 30% and the personal tax rate at up to 47%, there has always been a driver to access profits taxed only at the corporate rate for personal use and enjoyment.
One of the simplest ways to achieve this was for a company to make uncommercial (non-interest) loans to the shareholders of the company. These arrangements aim to create a tax deferral by giving individuals access to profits for personal use that have only been taxed at the corporate tax rate.
Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) has been in existence since 1999 seeking to stop this tax deferral. Where Division 7A applies, the individuals who benefit from the profits are deemed to have received a dividend of an amount related to the profits received. Taxpayers can choose to put a commercial loan in place to remove the adverse taxation consequences of receiving a deemed dividend.
Can Division 7A apply to trusts?
While Division 7A is principally aimed at companies, the provisions can also apply to trusts. A way to achieve a tax deferral on profits made by a family discretionary trust was to make a company presently entitled to the income of the trust so that it was taxed at the company rate of tax but to not pay the income to the company but rather pay it to or for the benefit of the shareholders of the company. These arrangements create UPEs in favour of companies and delay the payment of the entitlement (potentially for years) to the company.
Division 7A was amended in 2002 by the introduction of Subdivision EA to extend its application to trusts for circumstances like the one set out above. Then from 16 December 2009, the Commissioner went a step further and took the position that he did not need to solely rely on Subdivision EA but the general loan provisions in section 109D of Division 7A can apply to treat the UPE as a deemed dividend.
The Commissioner in Bendel sought to rely on section 109D as the provisions in Subdivision EA were limited and did not prevent all tax deferral arrangements. Where section 109D applied then a much larger group of tax deferral arrangements were stopped.
High Court’s Key Findings
The Full Court in 2025 rejected that broad approach that section 109D applied and the High Court has now affirmed the taxpayers’ ultimate success.
The High Court held that the deed and resolutions must be read according to their own terms, and that the trustee here exercised a power to “set aside” trust income rather than to “pay” or “apply” it. Under cl 3(5) of the deed, the amounts set aside ceased to form part of the general trust fund and were thereafter held on separate trusts for the beneficiary “pending payment”, with power in the trustee to invest or otherwise deal with those amounts in the meantime.
That mattered because the Court held that the resolutions did not create an unconditional duty to pay the corporate beneficiary immediately. Instead, the beneficiary acquired rights under the separate trusts and unless the trustee admitted indebtedness or the beneficiary made a call for payment in circumstances where it was entitled to do so, there was no debtor-creditor relationship of the kind on which the Commissioner’s s 109D case depended.
The majority further held that the separate trusts were sufficiently certain in subject matter. The property was ascertainable by reference to the “net income” of the trust as defined in the deed and by reference to s 95 of the ITAA 1936 even though the trustee had not physically segregated particular assets in its accounts.
Having reached those conclusions, the High Court rejected the Commissioner’s contention that a beneficiary makes a loan merely by not insisting on payment of its unpaid present entitlement. In the circumstances before the High Court, there was no advance of money, no debtor-creditor relationship, and no transaction that could be characterised as a provision of credit, financial accommodation or a transaction which in substance effected a loan of money within s 109D(3).
Now that the Taxpayer Has Won
Now that the High Court has found for the taxpayer then there will be tax opportunities for clients but also still a number of tax provisions that the Commissioner will seek to apply to remove the tax deferral.
The decision should not be read as abolishing Division 7A risk for all UPEs. The Court’s reasoning is tied closely to the terms of this deed, the language of the resolutions, the existence of separate trusts and the lack of an admitted debt. The wording of trust deeds to provide a power to set aside amounts of income, wording of trust resolutions and the presentation of the financial accounts of the Trust will be fundamental to achieving the benefits of Bendel.
In particular, the judgment recognises that a debtor-creditor relationship may arise where a trustee makes or admits an unconditional obligation to pay a beneficiary or where a beneficiary calls for payment such that nothing remains for the trustee to do except pay over money.
The case also does not displace Subdivision EA. To the contrary, the High Court recognised that where trust funds effectively representing a corporate beneficiary’s entitlement are lent to or otherwise applied for the benefit of a shareholder or associate, Subdivision EA remains a live integrity provision capable of taxing the shareholder or associate rather than the company beneficiary.
Subdivision EA
Subdivision EA of Division 7A deems certain payments, loans or forgiven debts by a trustee of a trust to a shareholder (or associate) of a private company to be included in the shareholder’s (or associate’s) assessable income as if they were a dividend where the trust has an outstanding UPE to the private company.
An example of a transaction captured by Subdivision EA is set out below.
ABC Pty Ltd is a beneficiary of a discretionary trust, the XYZ Trust.
ABC Pty Ltd has an unpaid present entitlement with the XYZ Trust of $25,000 at the time the trust’s tax return is lodged.
The XYZ Trust lends $25,000 to Bob and $25,000 to Beck, who are shareholders in XYZ Pty Ltd.
Neither loan is subject to a written agreement, nor have they been repaid before the lodgement day. As such, Subdivision EA applies to include $25,000 in the assessable income of both Bob and Beck i.e. a total of $50,000 is included in assessable income (assuming that XYZ Pty Ltd has sufficient distributable surplus) even though only $25,000 has been sheltered from tax at the applicable corporate tax rate by virtue of the unpaid present entitlement to XYZ Pty Ltd.
Where a UPE exists the trust is effectively treated the same way as a private company for the purposes of Division 7A. Any personal use of the profits of the trust by individuals will continue to be caught by Subdivision EA. Bendel provides no benefit to taxpayers in this situation.
Reinvestment of Trust Profits
One major tax benefit that may arise from the Commissioner losing Bendel is where the trust reinvests profits or never received the profits in cash.
Provided that the trust deed allows for the setting aside of amounts, the wording of trust resolutions and the presentation of the financial accounts of the Trust align with Bendel then both section 109D and Subdivision EA would not apply and there would be no deemed dividend. This would result in the reinvestment of trust profits to be taxed at only the corporate tax rate providing 70 cents in the dollar to be available for reinvestment rather than only 53 cents in the dollar. This would put a trust in the same position as a company on the reinvestment of profits and would be a major win for taxpayers.
Going forward and subject to the new Federal Budget changes to taxation of trusts, taxpayers could consider making UPEs to bucket companies where the trust profits are reinvested. There would be no need to put the UPE into a complying loan or sub-trust arrangement and the deferral between the corporate tax rate and personal tax rate would be available.
The Commissioner may still attack the arrangements through other provisions (see below).
Other Provisions
The Commissioner is warning taxpayers that the Commissioner will seek to apply other provisions (especially section 100A of the ITAA 1936).
Section 100A empowers the Commissioner to tax a person who has benefited from a trust distribution made in favour of another person.
In Practical Compliance Guideline PCG 2022/2 Section 100A reimbursement agreements, the Commissioner said that where a corporate beneficiary was entitled to income from a trust and the trustee retains those funds by way of a loan on ‘commercial terms’ for working capital, it would not typically seek to apply compliance resources to consider the application of section 100A.
For those purposes, the ATO accepted that loans on Division 7A complying terms were sufficiently commercial. If instead, a trustee retains funds that a corporate beneficiary has been made entitled to without converting that entitlement to a loan at least as commercial as the terms set out in Division 7A, the arrangement would fall outside the green zone in PCG 2022/2.
Prior Years
Unfortunately, the Commissioner losing Bendel is likely to be of little benefit to most taxpayers in prior years. The decision does not mean existing sub-trust or Division 7A complying loan arrangements should be unwound without analysis. Many clients implemented those arrangements in response to the Commissioner’s administrative practice and unwinding them will likely produce tax, trust or accounting consequences depending on how the arrangements were documented and operated.
Taxpayers who have not complied with Division 7A will possibly benefit but where a taxpayer has sought to comply with the Commissioner’s rulings on Division 7A then Bendel will not be of any assistance. This is because the act of complying with the Commissioner’s measures to comply with Division 7A, there has been an acknowledgement of a loan, which brings back the general operation of section 109D and not the limited provisions in Subdivision EA.
Any loan payments that have been made or dividends that have been paid will not be able to be reversed.
Where a taxpayer has been assessed on the basis that a UPE is a loan because of failure to comply with Division 7A then such taxpayers should consider:
a) amending prior year returns if they included a deemed dividend in their assessable income referable to a UPE (by applying the Commissioner’s views in TR 2022/11 and PSLA 2009/4);
b) objecting to their prior year assessments if they have been assessed on the basis of existing UPEs; and
c) not receiving a loan, payment or forgiven debt referable to the UPE (without a written loan agreement by lodgement day).
Year ended 30 June 2026
Trustee resolutions can now be prepared with more certainty given the outcome of Bendel is now known. The threat of section 100A is still present and it can be expected that the Commissioner will focus more on that provision to prevent these tax deferral arrangements.
For 30 June 2026 and later years, the decision materially reduces the pressure to force every corporate UPE into a complying loan or sub-trust arrangement merely because of the Commissioner’s former s 109D position. But that is only true where the deed and the trustee’s conduct support a true “set aside on separate trust pending payment” analysis rather than an immediate debt due and payable.
In practice, trustees should continue to approach year-end resolutions conservatively. The questions now become:
a) what does the deed actually permit;
b) does the wording create a separate trust or an immediate debt;
c) how are the beneficiary entitlements recorded in the accounts; and
d) will any use of the retained funds expose the arrangement to Subdivision EA, section 100A or other integrity provisions?
Concluding observations
Bendel is an important High Court authority limiting the Commissioner’s ability to treat every corporate unpaid present entitlement as a Division 7A loan. But it is best understood as a trust law and deed construction case with tax consequences, rather than a universal tax safe harbour for UPEs.
The practical lesson is that the tax outcome now turns even more sharply on legal architecture and implementation. Clients with bucket company arrangements should have their deeds, resolutions and accounts reviewed before assuming that their UPEs are either safe or exposed.
And the taxpayer win may be short lived with the new Federal Budget rules that are going to be introduced for trusts.
Greg Vale
