In March 2025, we reported a significant court decision with Steven Bendel winning his Federal Court case against the Australian Taxation Office (ATO) – The High Court of Australia has now had the final say on the matter.
The Federal Court held that the ATO had been incorrectly administering the Division 7A law and its 2010 tax ruling which had argued that an Unpaid Present Entitlements (UPE) of trust income to a company created a loan for the purposes of section 109D was wrong. Bendel Court Decision – A significant win for taxpayers, but proceed cautiously.
The ATO refused to accept the decision and subsequently appealed the decision to the High Court, declaring that it would continue applying its current ruling (despite being contrary to law) until the High Court had made a decision, leaving taxpayers in limbo.
To recap the issue, Division 7A of the tax act is an anti-avoidance division which can treat a shareholder, or associate of a shareholder of a private company as having received a ‘deemed’ dividend, where the company loans money to that shareholder or associate in lieu of paying a dividend. Where a trust makes a company presently entitled to a share of its income, but doesn’t pay that income amount to the company (a UPE), the ATO formed the view, published in a 2010 tax ruling, that the non-payment of the UPE should be treated as falling within the definition of a loan back to the trust under Division 7A. Many tax advisors and the professional accounting bodies have long disagreed with the ATO’s view. Fortunately, Mr Bendel (an accountant) stepped in as David against the might of the ATO’s Goliath to contest the ATO’s treatment of his trust’s UPEs owed to his company.
On 10 June the High Court of Australia issued a majority favourable decision in favour of Mr Bendel saying that in this case, due to income distribution clauses in the trust deed and the way the distribution resolution was articulated, the UPE did not create a debtor relationship and the non-calling for payment by the company did not amount to ‘financial accommodation’ as was argued by the ATO. Therefore it was not a loan for the purpose of the Division 7A deemed dividend rules.
Unfortunately, despite the successful outcome, as we suspect the ATO will soon articulate, the decision is based on the particular facts and does not create a general proposition that every UPE to a corporate beneficiary is not subject to Division 7A.
In Bendel’s case, the trust deed and the income distribution resolution had the effect of ‘setting aside’ income such that the amount of income set aside became held on a separate trust for the corporate beneficiary, pending payment. The trust deed provided the trustee with discretion to invest or deal with the amounts so set aside. This is critical, because the setting aside did not create an immediate requirement to pay to or apply the income for the corporate beneficiary. Unless the beneficiary called for payment, or the trustee admitted an indebtedness, no debtor-creditor relationship came into existence, so no loan for Division 7A purposes.
Most trusts had taken a conservative view and followed ATO guidance to treat each UPE as converting to a loan from the company back to the trust. If that ‘loan’ had been documented to avoid a deemed dividend under Division 7A, then that legal document stands and continues to apply.
If a trustee had taken the view that the UPE to a company did not create a loan, had not so documented the loan and the trust deed and resolutions support the fact that income had been ‘set aside’ for the corporate beneficiary, then section 109D may not apply. This should mean no top up tax arises until the company calls for the amount to be paid.
However, the ATO has previously advised in its Practical Compliance Guideline PCG 2022/2 that it may seek to apply the anti-avoidance rules in Section 100A of the tax act to situations where one person benefits from a trust distribution made in favour of another person.
The ATO has just been proven wrong in its application of Division 7A, so taxpayer’s need to take a cautious approach.
If your trust requires the income to reinvest in its business and investments, then the Bendel decision may be of benefit.
Trustees and their advisors will need to read the trust deed to determine whether it contains powers to ‘set aside’ amount for beneficiaries and hold those amounts on separate trusts. If so, the income distribution resolution must then be carefully drafted to achieve that setting aside and ensure there is no admittance of a requirement to pay.
While the Court decision is welcome, it may have limited application. The Government has announced plans to tax trusts at 30% with potential double taxation applying if corporate beneficiaries are used. These rules are proposed to apply from 1 July 2028, so there is only a potential 2-year window of application of this Bendel decision.
We recommend all trustees speak with their advisors ahead of making any income distribution resolutions ahead of 30 June 2026. If you require assistance, please speak with your usual Exant advisor or alternatively contact our Tax Partner, Jamie Towers, via the form below or on 07 3218 3900.
