The High Court of Australia’s decision in Commissioner of Taxation v Bendel [2026] HCA 18 ended a long-running dispute over whether an unpaid present entitlement owed by a trust to a corporate beneficiary can be treated as a Division 7A loan. The ruling is important for Australian discretionary trusts that distribute income to corporate beneficiaries while leaving the cash inside the trust.
The issue: unpaid entitlements and Division 7A
The dispute involved a common Australian private group structure:
- A discretionary trust earns income.
- The trustee resolves to distribute income to a corporate beneficiary, often called a bucket company.
- The company is presently entitled to the income and pays tax at the corporate rate.
- The cash is not physically paid to the company.
- The amount remains recorded as an unpaid present entitlement, or UPE, while the funds continue to be used inside the trust.
Since 2009, the Australian Taxation Office had taken the position that this kind of unpaid entitlement could fall within Division 7A of the Income Tax Assessment Act 1936.
Division 7A is an integrity regime designed to stop private company profits from being extracted tax-free. The ATO’s view was that if a corporate beneficiary did not demand payment of its entitlement, it was effectively providing financial accommodation to the trustee. Under that theory, the unpaid entitlement could be treated as a loan. If not repaid or put on complying terms, it could become a deemed dividend.
The ATO applied this position to undistributed amounts set aside for Steven Bendel’s company, Gleewin Investments.
The taxpayer’s argument was that a UPE is not a loan. A beneficiary that does not demand payment has not advanced funds, and an entitlement to be paid is not the same as an obligation to repay borrowed money.
The court decisions
The ATO lost at each stage of the dispute.
The Administrative Appeals Tribunal found for the taxpayer. The Full Federal Court unanimously rejected the Commissioner’s appeal in February 2025. It held that a loan for Division 7A purposes requires an advance and an obligation of repayment, neither of which is created merely by a UPE.
The Commissioner sought special leave to appeal. On 10 June 2026, the High Court dismissed the final appeal by majority.
The result: a corporate beneficiary’s unpaid present entitlement does not, by itself, constitute a loan for Division 7A purposes. Declining to demand payment is not, on its own, the provision of financial accommodation.
Why the decision matters
The immediate effect is that the mere existence of a UPE owed to a corporate beneficiary no longer triggers Division 7A.
This means trustees are not required to convert every such entitlement into a complying Division 7A loan agreement simply because the cash remains in the trust. Structures built around the ATO’s long-standing view, including sub-trust arrangements and loan documentation, may need to be reviewed.
The decision also challenges more than 15 years of ATO administrative practice. The Commissioner has said he is considering the implications and will issue practical guidance for affected taxpayers.
What the decision does not do
The ruling is limited. It does not make all trust distributions to corporate beneficiaries risk-free.
Several issues remain relevant.
Section 100A still matters
Section 100A, which deals with reimbursement agreements, remains a major risk area for trusts. Arrangements where income entitlements remain unpaid while benefits flow elsewhere may still attract scrutiny.
A taxpayer may win the Division 7A argument but still face problems under section 100A.
Subdivision EA may still apply
Subdivision EA can still produce deemed dividends where company funds connected to a UPE are ultimately made available to shareholders through the trust.
The Bendel decision does not remove this risk.
Past arrangements may need review
Taxpayers who entered complying loan agreements or sub-trust arrangements because of the ATO’s previous view may want advice on whether those arrangements should be revisited.
Taxpayers who received assessments based on the ATO’s rejected position may have grounds for objection, depending on the facts and applicable time limits.
Parliament could change the law
The decision interprets the law as it currently stands. The legislature may still amend Division 7A to bring UPEs expressly within the regime on a prospective basis.
Any current planning should account for the possibility of legislative change.
Practical implications
For Australian private groups using discretionary trusts and corporate beneficiaries, the decision changes the compliance position around unpaid present entitlements.
Key points include:
- A UPE owed to a corporate beneficiary is not automatically a Division 7A loan.
- Trustees may not need Division 7A loan agreements solely because a corporate beneficiary’s entitlement remains unpaid.
- Existing sub-trust and loan arrangements should be reviewed before being changed.
- Section 100A, Subdivision EA, and other integrity rules remain relevant.
- Past assessments or arrangements may require case-by-case advice.
- Future legislation could alter the position.
For internationally mobile families with Australian trust interests, the decision removes one deemed-dividend exposure that had affected routine trust distributions for more than a decade. However, the trust landscape remains unsettled while ATO guidance is pending and a legislative response remains possible.
Source article: knightsbridge.ae
