The High Court has recently handed down an important decision that may affect many 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 dismissed the Commissioner of Taxation’s appeal and confirmed that an unpaid present entitlement (UPE) of a corporate beneficiary does not, by itself, constitute a loan for the purposes of Division 7A.
The decision provides greater clarity for private groups that have historically used trust distributions as part of their business and tax structures. However, it does not mean that Division 7A or other tax integrity rules can be disregarded.
What is Division 7A?
Division 7A is designed to prevent private companies from providing benefits to shareholders or their associates in the form of payments, loans or forgiven debts without those benefits being appropriately taxed.
Where Division 7A applies, the relevant amount can generally be treated as an unfranked dividend for tax purposes.
This can become relevant where a discretionary trust distributes income to a corporate beneficiary but the amount remains unpaid.
Why does the Bendel decision matter?
It is common for private business groups to use discretionary trusts as part of their overall structure.
A trust may distribute income to a corporate beneficiary, with the amount remaining within the trust rather than being paid immediately to the company. The funds may then continue to be used within the business or trust structure for purposes such as working capital, investment or growth.
Before the Bendel decision, the ATO’s longstanding position was that certain unpaid trust distributions could constitute loans for Division 7A purposes.
This could require businesses to put complying Division 7A loan arrangements in place, including paying interest at the applicable benchmark rate and making minimum yearly repayments.
For businesses affected by this approach, this created additional administration and compliance requirements and could reduce flexibility around how funds were used.
The High Court has now confirmed that an unpaid present entitlement does not, on its own, amount to a Division 7A loan.
Importantly, the Court’s decision was based on the requirements of the Division 7A definition of “loan”. An obligation to pay an amount is not necessarily the same as an obligation to repay an amount.
The particular circumstances of each arrangement still need to be considered.
What happens with existing Division 7A loan arrangements?
Following the High Court’s decision, the ATO released a Decision Impact Statement on 26 June 2026.
The ATO has confirmed that it will generally administer the law consistently with the High Court’s decision and has acknowledged that its previous position on UPEs is no longer applicable.
However, existing arrangements should not simply be unwound.
Where an unpaid entitlement has already been dealt with under a formal complying Division 7A loan arrangement, that arrangement does not automatically cease to exist because of the Bendel decision.
Businesses should therefore continue to meet the requirements of any existing complying loan arrangement unless they have obtained appropriate advice about changing that arrangement.
Other tax integrity rules still matter
While Bendel is an important decision, it does not remove all tax risks associated with trust distributions.
The ATO has specifically highlighted that other provisions may still apply depending on how the trust’s funds and distributions are dealt with.
For example, Subdivision EA may be relevant where trust funds associated with a corporate beneficiary’s entitlement are subsequently provided for the benefit of a shareholder of the company or an associate.
Section 100A may also need to be considered in certain arrangements where one beneficiary is made presently entitled to trust income, but another person ultimately receives the benefit.
These rules are highly dependent on the facts and circumstances.
As a result, the Bendel decision should not be viewed as a blanket exemption from Division 7A or other integrity provisions.
What should private groups do now?
The decision provides a useful opportunity for private business groups to review how their trust structures and distributions are currently being managed.
This may include reviewing:
- trust deeds and distribution resolutions;
- unpaid present entitlements;
- existing Division 7A loan arrangements;
- accounting records and beneficiary accounts;
- how trust funds have been used following distributions;
- transactions involving shareholders and their associates; and
- whether other integrity provisions, including Subdivision EA and section 100A, may apply.
The purpose of this review is not simply to determine whether Bendel applies. It is also an opportunity to understand whether the group’s broader arrangements remain appropriate.
Looking ahead: proposed trust tax reforms
There is another significant development that private groups using discretionary trusts should keep in mind.
As part of the 2026–27 Federal Budget, the Government announced a 30% minimum tax on discretionary trusts from 1 July 2028, subject to the proposed legislation and applicable exclusions.
Under the proposal, the tax would be paid by the trustee. Beneficiaries would continue to declare their trust income, with beneficiaries other than corporate beneficiaries generally receiving a non-refundable credit for the tax paid by the trustee.
This means the proposed changes could significantly affect the tax outcomes of private groups that currently use discretionary trusts and corporate beneficiaries.
Treasury has also released a consultation paper seeking feedback on the design of the proposed minimum tax. As part of this broader reform discussion, changes affecting the treatment of unpaid trust distributions and Division 7A are also being considered.
These changes are not yet law, so the final position may change as the legislation is developed and passed.
What does this mean for your business?
The Bendel decision provides welcome clarity around unpaid present entitlements, but it should not be considered in isolation.
With further changes to the taxation of discretionary trusts also being proposed, now may be a good time for private groups to review their existing structures, distribution arrangements and tax planning strategies.
Understanding how these changes may affect your particular circumstances can help you make informed decisions before the proposed reforms take effect.
If you have questions, please do not hesitate to contact our office to speak to one of our team.
