The High Court has recently delivered an important decision for private business groups using discretionary trusts and corporate beneficiaries.
In Commissioner of Taxation v Bendel [2026] HCA 18, decided on 10 June 2026, the High Court rejected the ATO’s longstanding position that an unpaid present entitlement (UPE) owed by a trust to a corporate beneficiary will automatically be treated as a loan for Division 7A purposes.
Division 7A is designed to prevent private companies from providing benefits to shareholders or their associates through payments, loans or debt forgiveness without appropriate tax consequences. Where Division 7A applies, the benefit may be treated as an unfranked dividend.
What does the Bendel decision mean for UPEs?
Discretionary trusts are commonly used in private business and investment structures. A trust may distribute income to a corporate beneficiary so the income is taxed at the applicable company tax rate, while the cash remains in the trust to fund working capital, investments or business growth.
Historically, the ATO considered that where the corporate beneficiary’s entitlement remained unpaid, the UPE could constitute a Division 7A loan. Businesses therefore often needed to enter into complying Division 7A loan arrangements, charge the benchmark interest rate and make minimum yearly repayments to avoid a deemed unfranked dividend.
The High Court has now confirmed that an unpaid trust distribution does not, by itself, constitute a loan merely because the corporate beneficiary has not demanded payment.
This is significant for private groups that have retained trust distributions within the trust rather than transferring the cash to the corporate beneficiary. The decision may reduce the need for some groups to treat UPEs as Division 7A loans, providing greater certainty and potentially reducing administration and compliance costs.
However, the outcome will still depend on the specific facts and arrangements of each trust.
What about existing Division 7A loans?
Following the decision, the ATO released a Decision Impact Statement on 26 June 2026, confirming that it will generally administer the law consistently with the High Court’s decision.
Importantly, businesses should not assume that existing Division 7A loan arrangements can simply be cancelled.
Where a UPE has already been dealt with in a way that created a formal Division 7A loan, the loan remains a loan according to its legal character. Any applicable interest and minimum yearly repayment requirements will generally continue until the loan is repaid or the relevant loan term ends.
Therefore, businesses with existing Division 7A loan agreements should review their arrangements carefully before making any changes.
Does Bendel remove other tax risks?
No. The Bendel decision provides important clarity on UPEs, but it does not remove all Division 7A or tax integrity concerns.
For example, where a trust distributes income to a corporate beneficiary but the trust funds are subsequently used to provide a payment, loan or other benefit to a shareholder of the company or an associate, other Division 7A provisions may still apply.
Section 100A also remains relevant. These rules can potentially apply where income is appointed to one beneficiary but, under a reimbursement agreement, the economic benefit of that income is enjoyed by another party.
The application of these provisions depends heavily on the facts. The Bendel decision should therefore not be treated as a blanket exemption from Division 7A, section 100A or other tax integrity rules.
What should private groups do now?
The Bendel decision provides a good opportunity for private groups to review their trust structures and how UPEs have been managed.
Businesses with corporate beneficiaries should consider whether:
- trust distribution resolutions have been properly prepared and documented;
- UPEs have been correctly recorded in the accounting records;
- any UPEs have subsequently been converted into loans;
- trust funds have been used for the benefit of shareholders or their associates; and
- section 100A or other Division 7A provisions may apply.
This review is particularly important for arrangements established under the ATO’s previous approach to UPEs.
Proposed 30% minimum tax on discretionary trusts
The Bendel decision also needs to be considered alongside the Government’s proposed changes to the taxation of discretionary trusts.
The Government has proposed a 30% minimum tax rate on the taxable income of discretionary trusts from 1 July 2028, subject to certain exclusions. Under the proposed framework, tax paid at the trust level would generally not provide a refundable or non-refundable tax credit to corporate beneficiaries in the same way it may for other beneficiaries.
Treasury’s recent consultation on the proposed trust tax reforms has also considered whether Division 7A should apply to unpaid distributions. These proposals are not yet law, but they could significantly change the way private groups approach trust distributions and UPEs in the future.
Looking ahead
The Bendel decision provides welcome clarity under the current Division 7A rules, particularly for private groups using discretionary trusts and corporate beneficiaries.
At the same time, the proposed trust tax reforms mean businesses should not make long-term decisions based on Bendel alone. Reviewing existing trust distributions, UPEs and Division 7A arrangements now can help identify issues and prepare for potential changes before 1 July 2028.
Please let us know if you would like to discuss how the Bendel decision, Division 7A or the proposed 30% minimum tax on discretionary trusts may affect your group.
Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
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By Yvonne Shao @ Pitt Martin Tax
