Bendel Decision: What the High Court Ruling Means for Trust Distributions

The High Court has handed down an important decision for private business groups that use discretionary trusts and corporate beneficiaries as part of their structure.

In Commissioner of Taxation v Bendel [2026] HCA 18 (10 June 2026), the Court rejected the ATO’s long-held position that an unpaid distribution which is commonly referred to as an unpaid present entitlement (UPE), owed by a trust to a corporate beneficiary will automatically be treated as a loan for the purposes of Division 7A.

Division 7A is designed to prevent private companies from providing benefits to shareholders or their associates through payments, loans or forgiven debts without the appropriate tax consequences. Where the rules apply, the benefit can be treated for tax purposes as an unfranked dividend.

What the Bendel Decision Means for Private Companies

Discretionary trusts are commonly used within private business structures, and it is not unusual for a trust to distribute some of its income to a corporate beneficiary. This allows the income to be taxed at the applicable corporate tax rate which is currently 25% or 30% while the underlying cash can remain in the trust to support working capital, future investments or business growth.

Under the ATO’s previous approach, these unpaid distributions were generally treated as loans for Division 7A purposes. As a result, many groups entered into complying loan agreements, charged the required benchmark interest rate and made minimum annual repayments to avoid triggering a deemed unfranked dividend.

Apart from adding another layer of administration, these arrangements could restrict cash flow flexibility and increase ongoing compliance costs.

The High Court has now confirmed that an unpaid distribution does not automatically become a Division 7A loan simply because the corporate beneficiary has not called for the amount to be paid.

The outcome will depend on the circumstances of each arrangement, but the decision provides greater clarity for many companies that have historically retained funds within their trusts.

What About Division 7A Loans Already in Place?

Following the decision, the ATO issued a Decision Impact Statement (26 June 2026), confirming that it will generally administer the law consistently with the High Court’s findings. However, the ATO has also stressed that other integrity provisions may still apply.

Importantly, existing formal loan agreements entered into in response to the ATO’s previous position cannot simply be cancelled or unwound because of the Bendel decision.

Where a complying loan agreement is already in place, the trust will generally need to continue making the required minimum yearly repayments until the loan is fully repaid or the loan term comes to an end. Failing to do so could still result in a deemed unfranked dividend under Division 7A.

Bendel Doesn’t Remove Every Tax Risk

While the High Court decision is significant, it does not mean that Division 7A  or other integrity provisions can now be ignored when dealing with unpaid trust distributions.

The High Court’s decision heavily relied on the specific terms of the trust deed and the exact wording of the trustee resolutions in Bendel. The Court found that setting aside funds on a separate trust did not create a standard debtor-creditor relationship. Not all trust deeds operate the same way; if a deed or resolution creates an unconditional debt, Division 7A risks may still arise. 

For example, Division 7A may still come into play where a trustee distributes income to a corporate beneficiary and leaves that amount unpaid, before subsequently lending funds to a shareholder of the company or an associate of that shareholder. Depending on the circumstances, this could still result in a deemed unfranked dividend unless appropriate action is taken.

While Division 7A section 109D may not automatically treat a UPE as a loan, the ATO retains other tax integrity provisions:

• Subdivision EA: Remains active where trust funds associated with a UPE are subsequently loaned, paid, or forgiven to individual shareholders or their associates.
• Section 100A & Part IVA: The ATO continues to scrutinize reimbursement agreements and arrangements designed primarily to obtain a tax benefit from retained trust profits.

The application of these provisions depends heavily on the facts of each arrangement. For this reason, companies should avoid assuming that the Bendel decision has resolved every tax issue associated with unpaid trust distributions.

What Should Companies Do Now?

The decision creates a useful opportunity to review existing trust arrangements, including distribution resolutions and historical distribution patterns, accounting records and the way unpaid entitlements have been dealt with over time.

There is also a broader issue on the horizon.

As part of the recent Federal Budget, the Government announced plans to introduce a 30% minimum tax rate for discretionary trusts from 1 July 2028. The Government has also indicated that income distributed from discretionary trusts to corporate beneficiaries will generally be subject to double taxation, as companies will not receive a credit for tax already paid at the trust level.

If implemented as proposed, these reforms could significantly change the way companies approach trust distributions and tax planning in the years ahead.

A recent Treasury consultation paper on the proposed 30% minimum tax rate also raises the possibility of changes to ensure Division 7A can apply to unpaid trust distributions. These measures are not yet law, so further developments will need to be monitored closely.

For now, the Bendel decision provides welcome clarity, but it also highlights the importance of looking at trust arrangements as a whole rather than considering Division 7A in isolation.

If you would like to discuss what the Bendel decision or the proposed 30% minimum tax on discretionary trust income could mean for your business, please get in touch with the Bates Cosgrave team.