Bendel, buckets, budget – bust?
The tax treatment of an unpaid present entitlement (UPE) set aside by the trustee of a trust for a “bucket company” beneficiary has finally reached its judicial end point after almost two decades of debate. In a 5-2 majority in Commissioner of Taxation v Bendel [2026] HCA 18, the High Court upheld the Full Federal Court decision and dismissed the Commissioner’s appeal, delivering a landmark win for the taxpayer…for now.
The decision is a clear rejection of the ATO’s long-held position that an UPE owed to a corporate beneficiary which remains uncalled gives rise to Division 7A loan. Yet, just as the courts have delivered clarity, the Federal Government’s proposed 2026–27 Budget measures targeting trust distributions to corporate beneficiaries threaten to narrow the practical benefit of that win post 1 July 2028.
Bendel and bucket companies
Bendel asked the question: Does an unpaid present entitlement to a corporate beneficiary constitute a “loan” for Division 7A purposes?
For more than fifteen years, the ATO’s answer was yes.
Whether under the now-withdrawn TR 2010/3 or the more recent TD 2022/11, the Commissioner’s position was that where a UPE remained unpaid, the company had effectively provided “financial accommodation” to the trust, triggering Division 7A unless mitigating steps were taken, such as putting a complying loan in place.
The High Court decision
The majority of the High Court eloquently dismantled the ATO’s position.
But the judgment does more than reject the Commissioner’s argument; it reinforces core principles of trust and tax law. The key points were:
A loan requires an obligation to “repay,” not just to “pay”: The decision turned on the distinction between a trustee’s equitable obligation to pay a beneficiary and a borrower’s obligation to repay a loan as a debtor. The courts held that a “loan” under s 109D(3) requires an obligation to repay an identifiable principal sum previously advanced , whereas a UPE creates an equitable relationship and obligation imposed on the trustee of the subject trust to pay an amount in the future when called upon to do so by the beneficiary concerned, not a common law loan.
Division 7A requires action: Division 7A arises where companies do something akin to paying a dividend.
“The legislation requires that the private company is actively doing something to move value from it to someone…Gleewin Investments did nothing… Its mere inactivity cannot satisfy the language of ‘advance’, ‘provision’, ‘payment’ or ‘transaction’.”
The Commissioner’s fallback was to rely on s 109D(3)(d) arguing that “in substance” something equivalent to a loan had occurred. The majority of the High Court rejected this, noting that one cannot repackage inaction as substance:
“Simply doing nothing, or acquiescing to the retention of funds, is not a transaction which in substance effects a loan.”
The crucial role of the trust deed and sub-trusts
The outcome in Bendel turned on the terms of the trust deed and the trustee resolutions. The resolutions set aside the relevant amounts, and the deed expressly provided that those amounts were to be held on sub-trust for the beneficiary.
As the sub-trust was validly created, the trustee’s obligation remained fiduciary in nature. The funds continued to be held for the beneficiary, albeit under a new trust, rather than being made available as financial accommodation. On that basis, the majority held that the arrangement did not involve the provision of “financial accommodation” for Division 7A purposes.
The decision underscores the importance of carefully reviewing the trust deed and ensuring trustee resolutions clearly support the intended treatment. Unfortunately, not all trust deeds are the same . For instance many “shelf trust” providers use different versions from time to time of .their deeds . Furthermore many standard trust deeds are varied from time to time for a variety of reasons. Accordingly, there can be no substitute for reading the subject trust deed (as may be varied) applicable to ensure a valid distribution/UPE has been created in the financial year or years concerned.
Subdivision EA – the part everyone tried to ignore
The High Court affirmed that the mischief the Commissioner sought to address through section 109D was already addressed elsewhere in the legislation. As the majority said: “The presence of Subdiv EA in Div 7A greatly undermines the Commissioner’s case…”
Subdivision EA applies where:
- A private company beneficiary has a UPE owing to it from a trustee of a trust; and
- The trustee makes a payment or loan to a shareholder (or their associate) of that company.
In these circumstances, the trustee is deemed to make the loan on behalf of the company, and a deemed dividend may arise for the shareholder who receives the funds under Division 7A.
The majority set out the legislative history of Subdivision EA showing how it effectively closes the door on the Commissioners attempt to apply 109D:
- Parliament knew about UPEs.
- It chose to tax shareholders via Subdivision EA when benefits flow to them.
- It considered other approaches (taxing the trustee/company).
- It did not enact them.
- It enacted Subdivision EA instead.
Against that legislative background, the Court stated: “The Commissioner’s case… must therefore be rejected.”
Enter the Budget
The proposed 30% minimum tax on trust income, together with the denial of a tax credit for a trust income distribution to a beneficiary “bucket company” announced in the latest Federal Budget, may turn Bendel into a hollow victory. If enacted, these measures would strike at the viability of the traditional bucket company structure.
While bucket companies may retain some non-tax benefits, their primary function of capping and deferring tax on trust income will be rendered ineffective and punitive if the proposed measures are enacted. The practical effect is a combined tax rate that significantly exceeds both the corporate tax rate and the top individual marginal tax rate:
| TRANSACTION STAGE | CURRENT RULES
(PRE-BUDGET) |
PROPOSED RULES
(POST-BUDGET) |
| Trust Income Distributed | $100.00 | $100.00 |
| Tax Paid by Trustee | $0.00 | $30.00 (at 30%) |
| Company’s Assessable Income | $100.00 | $100.00 |
| Company Tax Paid (at 30% rate) | $30.00 | $30.00 |
| Total Tax Paid | $25.00 | $60.00 |
| Effective Tax Rate | 30% | 60% |
| Net Cash in Company (pre-dividend) | $70.00 | $40.00 |
Once dividends are paid, shareholders may also face top-up tax.
Bust? – a win that may age quickly
In light of the decision, three practical points stand out:
- Legacy complying loans cannot be unwound: Taxpayers who converted UPEs into complying Division 7A loans under the ATO’s former view cannot simply unwind those arrangements. The loans remain on foot, and minimum yearly repayments must continue. That said, where penalties were imposed after audits for what now constitutes improperly asserted “financial accommodation”, there may be a strong basis to seek remission depending on amendment time limits. Clearly, those affected should review the position promptly. However, the High Court decision of course does not reverse the pervasive effect of s.100A of the ITAA 1936. It has no time limitation in its application, unlike for instance Part IVA of the ITAA 1936 which has a 4-year amendment period.
- Existing UPEs no longer Division 7A loans: UPEs that have not been converted into formal loans may no longer fall within Division 7A following Bendel. This position remains relevant in the interim period prior to the proposed 1 July 2028 start date of new integrity measures. However, taxpayers must remain alert to alternative risks, particularly under the above-mentioned section 100A and Subdivision EA.
- Structure reviews are now critical: Proposed trust measures in the Budget, together with ongoing risks under section 100A and Subdivision EA, mean many private group structures should now be carefully reviewed and analysed. Arrangements that were once efficient and defensible should no longer be assumed to remain suitable. Furthermore, many larger private client groups have many intra-group loans and payables which should be carefully reviewed and dealt with to ensure no inadvertent commercial or tax exposures are occasioned by their retention in current form.
The High Court’s decision in Bendel is a clear technical win for taxpayers in the limited factual context under which the case was litigated. The case on its facts limits the ATO’s overreach in tax interpretations and confirms that UPEs do not constitute loans for Division 7A purposes. But the practical value of that victory may be short-lived considering the Government’s proposed changes.
Taxpayers may have won the section 109D argument, but that victory may soon be overtaken by legislative change. That makes the closing question a fair one: Bendel, buckets, budget – bust?
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