High Court decision and ATO statement on Bendel’s Case

The High Court recently handed down its decision in Bendel’s Case, confirming that an unpaid present entitlement (or UPE) between a discretionary trust and a beneficiary company does not fall within the extended definition of a “loan” for Division 7A purposes.

The Australian Taxation Office released a Decision Impact Statement in response to the High Court findings, concluding the High Court's reasoning makes it clear that where a beneficiary company is entitled to a share of trust income that remains unpaid (a UPE) and the company takes no positive actions to call for payment of the entitlement, this will not fall within the expanded definition of a "loan" for Division 7A purposes.

This is in contradiction to the ATO’s historical position that treated UPEs as "loans".

High Court majority decision

The High Court recently handed down its decision in Bendel’s Case, considering the issue of whether an unpaid present entitlement (UPE) between a discretionary trust and a beneficiary company (or bucket company) is caught within Division 7A where the funds are retained in the trust.

In a majority decision, the High Court ruled that the UPEs in question did not fall within the expanded definition of a "loan", in section 109D of the Income Tax Assessment Act 1936 (ITAA 1936) and therefore Division 7A did not apply.

It is important to note that this High Court decision was made considering a specific set of facts applicable to the Bendel Case and is not a ‘blanket’ decision applying to all UPEs going forward for every discretionary trust.

ATO releases Decision Impact Statement

Following this decision, the Australian Taxation Office (ATO) released a Decision Impact Statement (DIS), a document explain the ATO’s response to the High Court findings.

The ATO concluded that the High Court's reasoning makes it clear that section 109D does not apply where a beneficiary company is entitled to a share of trust income that remains unpaid (ie. the UPE) and the company takes no positive actions to call for payment of the entitlement. This is in contradiction to the ATO’s historical position that UPEs are ‘financial accommodations’ and therefore fall within the expanded definition of a "loan" for Division 7A purposes.

Does this mean a UPE will never subject to potential adverse tax implications?

No.

While the DIS concluded that a UPE does not fall within the extended definition of a “loan” for Division 7A purposes, the ATO also stated in the DIS that a private company beneficiary's inaction in calling for payment of the UPE may be insufficient to spare potential implications under other taxation laws, including Subdivision EA and section 100A of the ITAA 1936.

Subdivision EA

Subdivision EA may apply in situations where a beneficiary company has a UPE and the discretionary trust pays, makes a loan to, forgives a debt of a shareholder or associate of a shareholder of that company. In these circumstances, the shareholder (or associate of the shareholder) of the company are deemed to have received an assessable dividend if they receive a financial benefit from a trust where that same company has a UPE.

The ATO confirmed in the DIS the judgment suggests that Subdivision EA may apply where the funds to which the beneficiary company has been made presently entitled have been set aside on a separate sub-trust and other relevant requirements are met.

Section 100A

Section 100A is an anti-avoidance rule that can apply in circumstances where a beneficiary’s trust entitlement arose under an arrangement where a beneficiary is made presently entitled to trust income, someone other than that beneficiary receives a benefit in connection with the arrangement, and at least one of the parties enters into the agreement for a purpose of reducing tax. This is otherwise known as a ‘reimbursement amount’.

The ATO confirmed in the DIS the judgment suggests that Section 100A may apply in situations where the UPE arises out of, or in connection with, an arrangement intended to reduce someone’s tax liability, where someone else benefits, and that is entered into outside the course of ordinary family or commercial dealings. In such circumstances, Section 100A may apply which would make the trustee of the trust liable to tax on the reimbursement amount at the top marginal rate (ie. 47%).

Will this decision be applied in the same way to UPEs of all trusts going forward?

No.

As noted above, this High Court decision was made considering a specific set of facts applicable to Bendel’s Case. It is not a ‘blanket’ decision applying to all UPEs going forward for every discretionary trust.

Based on the specific facts in Bendel’s Case, the High Court concluded that:

• the trust resolutions effected a setting aside of the UPEs, but not a distribution of those amounts;
• the UPEs were thereafter held on separate trusts (or sub-trusts) created by the trust resolutions for the beneficiary company, allowing the trustee the power ‘pending payment’ to invest or deal with the fund in line with the trust deed; and
• no debtor/creditor relationship arose between the trust and the beneficiary company (as the beneficiary was ‘passive’ and did not demand payment of the UPE), nor did the accounting entries establish an admission of indebtedness.

The concept of ‘pending payment’ noted above created a situation where something must happen, a positive action must be taken before payment of the UPE could be effected.

In other words, unless the corporate beneficiary took positive actions to call for payment of the entitlement, the UPE would not fall within the expanded definition of a "loan" in section 109D and Division 7A would not apply. Simply, where the beneficiary remains ‘passive’ in not demanding payment of their entitlement, the UPE was not a “loan”.

What can trusts do with existing UPEs after following the ATO’s historical position?

While this decision is a favourable outcome for most taxpayers, as it removes the ATO’s historical position that treated UPEs as loans, it would be unwise to treat the decision as a basis to disregard every historical UPE or ‘unwind’ arrangements put in place under former ATO guidance.

Existing UPEs and complying loan agreements

Albeit existing loan agreements were put in place to comply with the ATO’s historical position (ie. we were only doing what we were told to do), the mutual agreement between the trust and the beneficiary company to enter into a complying loan agreements was a positive action accepting that the UPE is in fact a loan (at that time).

For existing UPEs which have been put under complying loan agreements for Division 7A purposes, it is not recommended to simply cancel or ‘unwind’ those loan agreements. The High Court decision does not reinstate previous arrangements back to a mere UPE. Cancelling loans would likely have adverse tax consequences.

Unless further guidance emerges, we consider existing complying loans agreements should remain in place and annual repayments should continue to be met.

Amendments or Objections to existing arrangements

The ATO has stated in the DIS that taxpayers who have been assessed on the basis that UPEs were loans for the purposes of Division 7A may seek an amendment (if they remain within their allowed amendment periods, usually 4 years), or they may lodge an objection (where they are outside of their amendment periods).

Decisions in respect of amendment requests or objections will involve careful consideration of relevant facts and circumstances, including the terms of the trust deed, resolutions of the trustee, accounting records, and any subsequent dealings with the entitlement, to confirm whether the circumstances are within the scope of the High Court’s reasoning. This would require the taxpayer’s facts to be exactly the same of those considered in the Bendel’s case.

Do not expect retrospective changes

We do not expect sweeping retrospective changes to be announced by the ATO to ‘unwind’ historical Division 7A compliance arrangements. The ATO noted in the DIS that existing guidance involving Division 7A generally, and Section 100A, are under review pending further amendments or withdrawals. At this time, we do not have any understanding of the changes the ATO will make.

The ATO has stated that “[if] a statement turns out to be incorrect and taxpayers underpay their tax as a result, they will not have to pay a penalty, nor will they have to pay interest on the underpayment provided they reasonably relied on [the Bendel’s] Decision Impact Statement in good faith”.

2026 Budget announcement taxing trusts at 30%

We also have the 2026 Budget announcement to consider in relation to the taxing of trust income at a 30% flat rate, with a further double tax impost on any trust distributions to beneficiary companies.

After 1 July 2028, this could potentially give rise to an effective total tax rate exceeding 60%, which going forward would effectively make the use of bucket companies irrelevant. At this time, we are waiting to see draft legislation to understand the precise impact of this Budget announcement.

Subdivision EA and Section 100A still apply

Leaving UPEs outstanding could potentially lead to implications under other tax rules, such as Subdivision EA or the reimbursement rules in section 100A, as explained above.

Existing UPEs are still subject to potential exposure for the purposes of both Subdivision EA and Section 100A.