Family Trusts and the Bendel Case: What You Need to Know

If you operate a discretionary trust with a private company beneficiary, now is the time to pay close attention. A recent decision by the Full Federal Court could have significant implications for how unpaid present entitlements (UPEs) are treated under Division 7A.

The Bendel Decision – A Turning Point?

On 19 February 2025, the Full Federal Court handed down its judgment in Bendel v Commissioner of Taxation. The Court held unanimously that where a private company has not called for payment of its trust distribution, it has not thereby provided a “loan” or “financial accommodation” to the trust.

This decision represents a departure from the Australian Taxation Office (ATO)'s long-held position. Since 2010, the ATO has treated a UPE from a trust to a corporate beneficiary as a loan for Division 7A purposes. If not repaid or dealt with under a complying loan agreement, such UPEs could trigger unfranked deemed dividends – often resulting in adverse tax consequences.

Why It Matters

The Court drew a key distinction: for something to be a loan, there must be a legal obligation to repay. In the case of a UPE, no such obligation exists. Therefore, the Court concluded, a UPE is not a loan within the meaning of Division 7A.

This finding, if it stands, could simplify the administration and funding of trusts significantly. It would potentially remove the need for complying loan agreements, reduce associated tax costs, and ease compliance burdens.

ATO’s Response: Business As Usual (For Now)

Despite the ruling, the ATO has announced it will continue to treat UPEs as loans for now. It has sought special leave to appeal the Full Court's decision to the High Court. That process could take months, and even then, a final decision may not arrive until late 2025.

In the meantime, the ATO has updated its Decision Impact Statement to confirm it will not change its compliance approach. This stance raises broader concerns about regulatory consistency and respect for judicial authority.

Looking Ahead: What Should You Do?

For trusts with corporate beneficiaries and unpaid UPEs in the 2023–24 financial year, this presents a dilemma:

• Rely on the Bendel decision, and potentially avoid entering into complying loan agreements — but risk ATO challenge, especially if the High Court overturns the Full Court ruling.

  
  

• Follow the ATO’s existing approach, by converting UPEs into complying loan agreements to avoid Division 7A issues — though this may involve tax costs and cash flow complications.

  
  

A more cautious strategy may be to adopt the ATO’s method and lodge an objection to preserve your position. This allows for flexibility depending on the eventual High Court outcome or possible legislative changes.

Key Takeaway

While the Bendel case offers hope for reduced compliance and greater simplicity in trust management, uncertainty remains. A decision on how to treat 2023–24 UPEs must be made before the relevant company tax returns are due. We strongly recommend reviewing your structure now and discussing the options with your advisor.