For more than 15 years, taxpayers, advisers and the Australian Taxation Office (ATO) have disagreed about whether an unpaid present entitlement owed by a trust to a corporate beneficiary should be treated as a loan under Division 7A.
On 10 June 2026, the High Court resolved that question. In Commissioner of Taxation v Bendel [2026] HCA 18, a majority of 5-2 dismissed the Commissioner’s appeal and held that an unpaid present entitlement is not a loan for Division 7A purposes.
The issue in plain terms
A discretionary trust will often distribute income to a corporate beneficiary taxed at the company rate. Where the trust records the entitlement but does not actually pay the cash across, the company is left with an unpaid present entitlement (UPE). Since 2010, the ATO has treated a UPE that remains outstanding as, in substance, a loan back from the company to the trust. That view forced placing the UPE on complying Division 7A loan terms, with interest and minimum annual repayments, or under an interest-only sub-trust arrangement for 7 or 10 years.
What the Court decided
The Court held that ‘doing nothing’ is not ‘making a loan’. Division 7A is concerned with value moving out of a private company to a shareholder or associate. A company makes a loan, or provides “financial accommodation”, only where it actively does something. A corporate beneficiary that simply does not call for payment of its entitlement has not provided anything, and so has not made a loan. The result confirms the earlier decisions of the Tribunal and the Full Federal Court, although the High Court reached it by reasoning that differs from the Full Court’s in several respects.
A win, but not a complete answer
The decision is a significant victory for taxpayers and removes a long-running source of uncertainty.
However, three qualifications matter.
First, part of that reasoning turns on the precise words used in the trust deed and in the annual trustee resolutions. The Court drew a clear line between a resolution that “pays” or “applies” income, which can create a debt owed to the beneficiary, and one that merely “sets aside” income on the terms of the particular deed, which may not. The label on a resolution does not necessarily control the outcome, the substance does.
Second, the ATO retains other tools. Where a trustee does not pay a corporate beneficiary its entitlement and instead lends funds to an individual shareholder or their associate, a separate set of rules (Subdivision EA) can still apply to tax the shareholder or associate. The general trust anti-avoidance rule in section 100A, and Part IVA, also remain available where arrangements are put in place mainly to obtain a tax benefit.
Third, and more broadly, the Court’s emphasis on substance over labels is a reminder that an annual distribution resolution must do what it says. If a resolution does not effectively make a beneficiary presently entitled to trust income, no beneficiary is taxed on that income and the trustee can instead be assessed at the top marginal rate.
The timing
In the recent Federal Budget, the Government announced a proposed 30% minimum tax on discretionary trust income from 1 July 2028. The measure is not yet law, but if enacted it would tax trust income at the trustee level, and corporate beneficiaries would not receive a credit for that tax. That would reduce the appeal of distributing income to bucket companies, regardless of the Division 7A position confirmed in Bendel.
What you should do
Family groups using trusts and corporate beneficiaries should review their existing UPE arrangements in light of the decision, confirm that their trust deeds and annual resolutions remain effective, and consider how the proposed 2028 reforms may affect their structures.