Family trusts have been a historically popular way for families to manage wealth and investments due to the flexibility trusts allow.
They are also a vehicle that the Australian Tax Office (ATO) has been keeping a close eye on, and in particular where a trust makes a corporate beneficiary entitled to trust income but the payment is not made (‘unpaid entitlement’ or ‘UPE’).
In the ATO’s view, such unpaid entitlements should be considered a loan for taxation purposes and put on complying Division 7A loan terms subject to the ATO’s benchmark interest rate.
However, a recent decision by the Full Federal Court has thrown this into doubt.
The court case, known as “Commissioner of Taxation vs Bendel”, found that such unpaid entitlements should not be treated as loans and therefore are not required to be put on complying loan terms.
Anyone with a family trust will need to consider how the Bendel case will impact them both retrospectively and in the future. The ATO has applied for Special Leave to appeal to the High Court and has released an updated Interim Decision Impact Statement (DIS) outlining its view on the decision and impact on taxpayers.
In the DIS the Commissioner has emphasised that the unpaid entitlements may be subject to another tax provision, section 100A. The Commissioner also stated that the ATO will continue to administer the law in line with its view until the appeal process is over.
The Bendel case is a landmark tax case that will have significant impact on future trust income distribution decisions. Depending on whether the Federal Government decides to change the law and the ATO’s response to Bendel case, trust vehicles are potentially more attractive if unpaid entitlements to a corporate beneficiary can be retained in the trust as working capital or reinvestment. We will be watching further developments closely.
This article was first published in the Autumn 2025 issue of Financial Times.
Co-authored by Amy Martin, Senior at HLB Mann Judd Sydney.