In the most significant tax law case concerning trusts for over a decade, on 10 June 2026 the High Court handed down its decision in Commissioner of Taxation v Bendel [2026] HCA 18.
The High Court (by majority) confirmed that, consistent with the lower Court and Tribunal decisions, and contrary to the ATO’s longstanding view, the definition of “loan” in section 109D does not extend to a subsisting unpaid present entitlement (“UPE”) created by a trust in favour of a private company.
In other words, the mere existence of a UPE, without more, does not amount to financial accommodation or otherwise fall within the extended meaning of a “loan” for division 7A purposes.
While the broader implications of the decision for private groups will no doubt become more certain over time pending the ATO and any possible legislative response, there are in our view a number of potential planning issues and opportunities that taxpayers should be considering.
Before turning to the planning issues, however, it is necessary to first make some comments on the reasoning of the High Court.
High Court’s Reasoning
In reaching its decision, the High Court reasoned from the context of the legislation that:
“Contrary to the Commissioner’s contentions, there is no “provision … of financial accommodation” … when a private company does nothing… In each case, the legislation requires that the private company is actively doing something to move value from it to someone, which is analogous with the payment of a dividend.” [1]
The High Court further reasoned that a company acquiescing to the retention of funds by the trustee does not amount to a transaction which in substance effects a loan by the company, the term “transaction” being construed by its ordinary meaning to require some interaction between entities and not mere inactivity on the part of the company.
The legislative history behind division 7A and subdivision EA was also emphasised in the decision. Specifically, the High Court noted the long history of subdivision EA (and its predecessor, section 109UB) and concluded that the Commissioner’s position was undermined by the existence of those provisions. Moreover, the Board of Taxation’s proposal to treat subsisting UPEs to private companies as loans, which was not taken up by Parliament at the time, was seen as further evidence that the legislation did not apply in the manner contended for by the Commissioner.
The outcome of this decision is consistent with the view shared by many specialist tax advisers that the ATO’s interpretation has fundamentally ignored the legislative context and history behind division 7A, which has resulted in needless and costly compliance for taxpayers with the Commissioner’s rulings and practice statements on the issue.
Planning Issues and Opportunities
The High Court’s decision may result in significant outcomes for private groups adopting trust structures with corporate beneficiaries.
The following observations can be made in this regard:
The High Court’s decision potentially restores the practice before the ATO’s change in position from 16 December 2009. That is, discretionary trusts can, in line with Bendel, create UPEs in favour of private companies, having the income taxed at the corporate tax rate and retaining funds in the structure while keeping the UPE “on foot” (i.e. without putting the UPE on a complying division 7A loan agreement and making minimum annual interest and principal repayments).
In such a situation, a deemed dividend under division 7A would only potentially arise in circumstances where the trustee with the subsisting UPE enters into an “actual transaction” (i.e. certain payments, loans or debt forgivenesses) with a shareholder/associate such that subdivision EA applies.
Where the above outcome can be achieved (i.e. retention of funds in the trust with a UPE in favour of a private company), this may assist private groups in funding debt repayments by trusts, meeting working capital requirements or acquiring new assets in trust structures should that be desirable. Historically this would have been beneficial in terms of using funds taxed at the corporate rate to acquire assets in trust structures that are eligible for the 50% CGT discount. Going forward, we expect this is likely to have more relevance to accessing indexation of the cost base from 1 July 2027 should the Federal Budget measures be passed in their present form (noting that companies will still not qualify for indexation under the new measures).
It may be beneficial for private groups, to the extent possible, to “quarantine” or “preserve” existing UPEs that have not yet become subject to a division 7A complying loan agreement. This is on the basis that these UPEs may, under the Bendel ruling, not ever need to be paid (subject to any position announced by the ATO on the application of section 100A). For instance, it may be preferable to treat monies paid from a trust to a corporate beneficiary during an income year as a credit loan owing from the corporate beneficiary to the trust rather than as payment in partial satisfaction of a pre-existing UPE. In this way, the ability to extract the funds representing the credit loan in the company on a tax-effective basis in the future is preserved.
Further to the above point, for distributions to corporate beneficiaries for the year ending 30 June 2026, it is likely preferable that those UPEs remain as UPEs and that no action is taken to convert them to a debt (or otherwise treat them as a debt) pending any further announcements from the ATO or Treasury. It will be important in this regard that the accounting records for the entities reflect the amount as a trust entitlement and not as a debt.
The High Court’s judgment appears to place some significance on the nature of the relationship between the distributing trust and the corporate beneficiary as giving rise to an equitable entitlement and not a debtor/creditor relationship. It may therefore be important to ensure that the manner in which the present entitlement is created is consistent with the facts in Bendel, lest the Commissioner seek to distinguish any given factual situation from Bendel.
This will require careful drafting of trust distribution resolutions in the context of the trust deed, in particular to effect the “setting aside” of trust income (as distinct from “paying”, “applying” or “distributing” income) in a manner consistent with there being a separate trust as opposed to a relationship of debtor/creditor (i.e. no suggestion that the funds have been notionally paid to, and then lent back by, the company). This approach of course reflects the drafting of trustee resolutions that experienced tax advisers will have been adopting for many years including during the pre-16 December 2009 period.
Practically speaking, the High Court decision may be a somewhat “hollow” victory for trusts generating non-primary production income in light of the taxation of trust measures announced in the 2026-27 Federal Budget. However, pending the ATO’s response (see below), taxpayers and their advisers should be alive to any potential planning opportunities in the interim period between the High Court’s decision and the proposed commencement date of the new measures on 1 July 2028.
For instance, in circumstances where value has been accumulated in a private company structure (perhaps on account of paying down existing UPEs converted to division 7A complying loans or historical trust distributions paid in cash), thought might be given to having the company pay a dividend to a discretionary trust shareholder. The discretionary trust shareholder might then create a UPE to the fully franked dividend income in favour of a private company (which remains unpaid under Bendel) and retain the funds for reinvestment in the trust structure. On the basis this occurs before 1 July 2028, this transaction should not be affected by the proposed taxation of trust measures and may allow for a more tax-effective investment structure being adopted compared against the private company.
The High Court decision may have long-term utility for trusts deriving primary production income beyond 1 July 2028. On this issue, Treasury’s intention appears to be to “carve out” primary production income from the proposed minimum 30% tax imposed at the trustee level (without a corresponding credit for corporate beneficiaries) under the new measures.
Taxpayers who have been subject to an adverse audit finding resulting in a deemed dividend arising on a subsisting UPE to a private company should consider whether there is a basis for challenging the ATO’s amended assessments and seeking a refund of the tax paid on the deemed dividend (and any resulting interest and penalties) on account of the Bendel decision. Time limits may be an issue here.
For taxpayers that have complied with the post-16 December 2009 ATO position and converted UPEs in favour of private companies to division 7A complying loans, it occurs to us that these would likely be treated as debit loans in fact made by the private company and therefore are unlikely to be affected by the Bendel decision. Naturally, this would need to be considered based on the facts of any given situation.
In contrast to UPEs that have been converted to loans, existing sub-trust arrangements that remain on foot pursuant to the ATO’s now withdrawn TR 2010/3 and PS LA 2010/4 may no longer need to be subject to the requirements to pay a sub-trust return (calculated at an interest rate) and payment of the sub-trust “principal” at the end of the term. This is arguably the case given that the nature of a sub-trust is that of an equitable entitlement in favour of the company and not a debt that gives rise to financial accommodation or an in-substance loan by the company.
The ATO can be expected to provide an announcement in relation to the High Court’s decision, possibly in the form of a Decision Impact Statement. It is not yet clear how the ATO will address the High Court’s decision, noting that the Commissioner has exhausted all appeal options. However, the ATO has previously expressed the position that where division 7A does not apply to subsisting UPEs in favour of private companies, the specific anti-avoidance rules under section 100A may apply (although providing no technical basis for this position).
There is a question as to whether Treasury will seek to overcome the Bendel decision through new legislation that treats subsisting UPEs to private companies as loans. Various proposals have previously been raised in this regard, although it occurs to us that the appetite for legislative amendment on this particular issue may potentially be diminished in the context of the proposed Federal Budget changes concerning the taxation of trusts. This may present a significant opportunity for trusts deriving primary production income for the reasons discussed above. Of course, time will tell.
The Way Forward
While the longevity of the favourable implications of the Bendel decision for private groups remains to be seen, it is pleasing that the Commissioner’s long-standing (and, in our view, somewhat dubious) interpretation of section 109D has finally been successfully challenged in the High Court. In Cowell Clarke’s experience, the management of division 7A issues prior to 16 December 2009 under the ATO’s previous (and now correct) interpretation was far more commercially sensible and consistent with the policy underlying division 7A.
We expect there to be opportunities for private groups to optimise their positions prior to the Federal Budget changes commencing and as the ATO and Treasury’s proposed approach becomes clear.
Cowell Clarke’s Tax & Revenue group is well placed to assist accounting advisers and their clients in optimising outcomes and managing the issues relating to these important developments.
[1] Gageler CJ and Gordon, Edelman, Steward and Gleeson JJ at [72].
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