The High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18 (“Bendel”) is a landmark development for the taxation of trusts and private groups. It brings to an end almost two decades of debate around the ATO’s view on the treatment of unpaid present entitlements (“UPEs”) in the context of Division 7A.
In a 5-2 majority, the High Court ruled that a company’s failure or inaction to call for payment of a UPE owed to it by a trust is not, of itself, a loan for Division 7A purposes. While this is a clear taxpayer win, it raises a range of immediate and complex questions for groups that have structured their affairs in line with ATO guidance over the past 15 years.
Our view of the high court decision
The High Court’s decision in Bendel marks a decisive correction of a long-standing administrative overreach. The High Court firmly rejected the ATO’s attempt, maintained since 2009 in Taxation Ruling TR 2010/3 and reinforced in Taxation Determination TD 2022/11, to treat UPEs as Division 7A loans. That view, grounded in an expansive reading of “financial accommodation”, extended the statutory concept of a loan beyond its text and context, a construction now rejected at every judicial level on the basis that a UPE lacks the essential feature of a loan.
The decision exposes the tension between perceived policy mischief and statutory interpretation. While the ATO sought to address what it saw as an underlying mischief in the use of corporate beneficiaries within private groups, it did so by effectively re‑writing the provision through its rulings process, rather than relying on Parliament to address the issues through legislative amendment. Bendel therefore sends a clear constitutional signal, reaffirming the limits of administrative interpretation and the ATO’s role as administrator of the law as enacted by Parliament.
That this position persisted for over a decade, despite widespread professional scepticism, highlights the potential structural imbalance inherent in tax administration, where the cost of challenging ATO views is beyond the means of the ordinary taxpayer. While the courts have corrected that imbalance in this case, more recent ATO views, including Taxation Determination TD 2015/20 and Taxation Determination TD 2025/5 (and related positions on sections 109R and 109U), raise similar concerns where interpretation appears to stretch beyond the statutory text to achieve ATO desired policy outcomes.
The key lesson from Bendel is that the ATO’s role should be to apply and administer the law as enacted, not to broaden it beyond its intention in response to a perceived mischief.
Background
Since 2009, the ATO has taken the position that where a corporate beneficiary does not call for payment of a UPE, the arrangement gives rise to a loan for the purposes of Division 7A. Where that deemed loan is not dealt with appropriately (placed on complying loan terms that require annual repayments of principal and interest), it can result in a deemed dividend to the trustee that conferred the entitlement.
Bendel represented the first judicial challenge to that position. Consistent with his published view, the Commissioner assessed the taxpayer and a corporate beneficiary in relation to an arrangement where a discretionary trust resolved to distribute income for the 2013 to 2016 income years to a corporate beneficiary that was under the common control of the taxpayer. That position was rejected by both the Administrative Appeals Tribunal and the Full Federal Court, before the ATO was granted special leave to appeal the decision to the High Court.
What did the high court say?
What is a UPE?
The High Court confirmed that the failure to call for payment of the UPE did not give rise to the making of a loan by the corporate beneficiary for Division 7A purposes, even under the extended definition of loan which includes the provision of financial accommodation. The majority judgment focussed on the proper application of trust law principles to the UPE and the particular trust deed in question. The majority concluded that because the resolution of the trustee was to set aside an amount of net income for the corporate beneficiary on separate trust and invest that amount pending payment (or a demand for payment), there was no absolute unconditional requirement to pay the amount and without more, a debtor-creditor relationship did not arise. Before a call is made on a UPE, the UPE represents an equitable obligation owed by a trustee to a beneficiary rather than a legal debt. The recording of the UPE amounts as a liability in the accounts of the trust did not alter this outcome.
Financial accommodation
The majority concluded that this was not the ‘provision of financial accommodation’ for Division 7A purposes. Critically, the majority held that a corporate beneficiary does not provide financial accommodation to a trust merely because it fails to call for payment of an amount to which it is presently entitled, which in this case would require calling for an end to the separate trust .The majority held that the corporate beneficiary “did nothing” and for a loan to be made under Division 7A, there must be something actively done by the company to transfer value to someone else. Accordingly, the majority rejected the proposition that merely allowing a UPE to remain unpaid can be treated as the making of a loan for Division 7A purposes.
Extended meaning of loan
The majority also considered the extended definition of loan, which includes ‘transaction which in substance effects a loan of money’ and came to a similar conclusion that merely not demanding payment of a UPE (or not calling for an end to a separate trust), is not a transaction at all, let alone one that effects a loan of money. The majority emphasised that a Division 7A loan is something that must be capable of being ‘repaid’ and that this requires an initial transfer of value or property by the company.
Context of the provisions
Finally, the majority considered the broader context of Division 7A and its legislative history to support its conclusions. It noted the debt forgiveness provision in subsection 109F(6) which can apply to trigger a deemed dividend when the company would first reasonably be expected to not insist on repayment of a debt. The existence of such a provision was said to be inconsistent with the Commissioner’s interpretation of ‘loan’ as including the failure to demand payment of a debt. Additionally, the history regarding Subdivision EA and the treatment of UPEs clearly indicated a choice by Parliament for UPEs to give rise to deemed dividends under Division 7A only where the trust subsequently lent or paid amounts out to shareholders (or their associates) of the private company to which the UPE is owed, and not to tax the trustee merely where the UPE remains unpaid without more.
What does this mean for taxpayers?
For groups with existing UPE arrangements, the key issue is how those arrangements have been implemented in practice. While the decision represents a clear shift away from the framework that has governed UPEs since 2009, it does not automatically unwind the practical arrangements that many taxpayers may have already put into place.
In many cases, UPEs have not simply remained unpaid: instead, taxpayers have entered into Division 7A loan agreements or sub-trust agreements (in line with the ATO’s administrative approach in Law Administration Practice Statement PSLA 2010/4), to comply with the guidelines set by the ATO. Where this has occurred, taxpayers would need to consider the legal and tax character of the arrangement. As a result, the treatment may depend on the specific steps taken and the terms of the documentation in place.
For many groups, positions will have already been taken for the 30 June 2023 and 30 June 2024 income years. Those positions may now need to be revisited in light of the High Court’s decision and assessed against the arrangements implemented. Importantly, the decision does not reduce the importance of other integrity provisions
What other provisions are relevant?
The ATO has consistently highlighted the potential application of section 100A and Subdivision EA in the context of unpaid entitlements in its previous Interim Decision Impact Statements on Bendel.
Section 100A
Section 100A targets reimbursement arrangements, broadly where trust income is appointed to one beneficiary but enjoyed by another. If applied, section 100A can result in tax by the trustee at the top marginal tax rate. We note that the Commissioner was successful in applying section 100A in the case of Bblood Enterprises Pty Ltd v Commissioner of Taxation [2023] FCAFC 114, where income was distributed to a corporate beneficiary. In that case, there was a difference between the quantum of the taxable income and the income of the trust estate, such that there was a permanent difference that arose from using the corporate beneficiary.
Subdivision EA
Subdivision EA (and EB), on the other hand, is a specific Division 7A anti-avoidance provision that can give rise to a deemed dividend where a trust provides a benefit, such as a loan or payment, to a shareholder or associate of a corporate beneficiary where there was a present entitlement owed to the company (or where the company was later made presently entitled to trust income). Critically, the High Court held that Subdivision EA may have applied in the case of Bendel (but had not been pursued by the Commissioner).
A deemed dividend under Subdivision EA (and EB) can occur in the year of the UPE. In practice, where the UPE has been treated as a loan, Subdivision EA (and EB) should not have had application. Accordingly, since the ATO’s position that UPEs are loans (as first publicised in 2009), these provisions were largely made redundant for any UPEs arising after 2009.
With UPEs no longer being treated as a loan, these provisions are likely to become relevant again, but with much less favourable timeframes than provided by the ATO in Taxation Ruling TR 2010/3 and Taxation Determination TD 2022/11. Taxpayers should carefully consider the potential application of these provisions before making any changes to existing UPE arrangements.
Part IVA
The ATO successfully applied Part IVA to the use of a ‘bucket’ company in the case of Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3. This case involved a permanent tax saving where trust income distributed to a company were later paid out as franked dividends to a non-resident free, from further tax. Accordingly, care needs to be taken when distributing to a corporate beneficiary where the sole or dominant purpose involves tax benefits.
What now?
The High Court’s decision may not be the final word on this topic. Given the long‑standing nature of the ATO’s position and the breadth of its application across the private group market, a legislative response is expected.
More broadly, the practical significance of the decision may be limited for future years. The recent Federal Budget measures introduce a minimum 30 per cent tax on discretionary trust distributions from 1 July 2028, together with changes that affect the use of corporate beneficiaries. These reforms are expected to significantly reduce the attractiveness of the structures that underpinned the UPE arrangements considered in Bendel.
What are the next steps?
It is critical that clients consider their position and how the rules apply. Clients should contact their Pitcher Partners representative to review their existing arrangements and determine what action is required in light of the changes.
