Background

The High Court has now handed down its decision in Commissioner of Taxation v Bendel [2026] HCA 18. The Commissioner’s appeal was dismissed (5:2).

A simple and tempting headline is that a majority in the High Court said that UPEs to corporate beneficiaries are not Division 7A loans. That may be right in some cases, but perhaps not in all.

The majority did not decide the case by simply saying an “unpaid present entitlement” cannot be a “loan” (within the definition of section 109D). The majority started with a more basic question: what was the legal effect of the trust deed and the resolutions actually made by the trustee?

On the facts of Bendel, the trustee had resolved to “set aside” income for the corporate beneficiary. The deed provided that amounts set aside for a beneficiary would be held on separate trust pending payment. The corporate beneficiary did not call for payment, and the trustee had not admitted that it was indebted to the corporate beneficiary.

The majority’s starting point: what did the resolutions do?

The 2005 Trust Deed gave the trustee power to “pay apply or set aside” net income. The term “set aside” was defined to include placing sums to the credit of a beneficiary in the trust books, and clause 3(5) provided that amounts set aside would cease to form part of the trust fund and be held on separate trust pending payment.

The resolutions themselves used the heading “Distribution of Income”, but their operative wording said that relevant classes of income were “hereby set aside” for the relevant beneficiaries. The resolutions also stated that, “for the avoidance of doubt”, the income “shall be distributed as specified above”.

The Commissioner argued that this language created an unconditional obligation to pay the corporate beneficiary. The majority rejected that argument.

For the majority, the label “Distribution of Income” and the later reference to income being distributed did not override the operative text. The method chosen by the trustee was to “set aside” income, not to pay it. Until there was a call for payment, Gleewin had no unconditional duty to pay that income to Gleewin Investments.

This leads to the first practical warning from Bendel. Many trust deeds use the familiar formulation “pay, apply or set aside”. But not all deeds do. Distribution minutes use all kinds of wording. Some minutes refer to amounts being “distributed”, “allocated”, “credited”, “appointed”, “paid”, “applied”, “set aside” or “made presently entitled”. The wording in the minutes may also not clearly match the language of the relevant trust deed.

From the majority’s judgment, it is difficult to definitively state whether those distinctions matter. However, those differences might change the Division 7A outcome.

Separate trust, not debtor-creditor relationship

The majority held that the resolutions created separate trusts. The amounts set aside ceased to form part of the general trust fund and were held by the trustee on separate trust for the corporate beneficiary.

The Commissioner argued that those separate trusts failed because the trust property was uncertain. The majority rejected that argument. The property was ascertainable by reference to “net income”, a concept defined by reference to section 95 of the Income Tax Assessment Act 1936 (Cth).The majority said there was nothing ambiguous or uncertain about identifying the trust property in that way.

On the majority’s analysis, the trustee had not become a debtor of the corporate beneficiary. The relationship remained one of trustee and beneficiary, not debtor and creditor.

The majority accepted that a debtor-creditor relationship can arise between a trustee and beneficiary in some cases. For example, that may occur where there is an unconditional obligation to pay, where the beneficiary calls for payment in circumstances where it is entitled to do so, or where the trustee admits indebtedness. But none of those things had happened in Bendel.

What about the accounts?

The Commissioner relied on the 2005 Trust’s accounts, including an entry described as “Beneficiaries Current Account”, to argue that the trustee had admitted a debt to Gleewin Investments.

The majority rejected that contention on the evidence.

The majority did not say accounting records are irrelevant. Rather, the accounts were equivocal. The “Beneficiaries Current Account” was not specifically listed as a current liability or non-current liability, no expert evidence was led about what the entry represented, and no evidence was led about whether the accounts complied with any applicable accounting standard. The entry might have been no more than recognition of an amount set aside on separate trust that could be called for at any time.

It would be unsafe to read Bendel as saying that financial statement labels can never matter. If financial statements describe a UPE as a “loan”, if loan schedules are prepared, if interest is accrued, if repayment terms are adopted, or if the parties otherwise record an express debtor-creditor relationship, a future case may look very different.

Why there was no Division 7A loan

The Commissioner’s central argument was that the corporate beneficiary had provided “financial accommodation” to the trustee, or had entered into a transaction that in substance effected a loan, because it did not insist on payment of the UPE.

The majority rejected that argument.

For section 109D(3)(b), the majority held that there is no provision of financial accommodation where a private company does nothing. The provision of financial accommodation requires some initial or anterior transfer of value, or some supply or grant of pecuniary assistance, involving bilateral activity. Division 7A requires the private company to actively do something to move value from itself to another person in a way analogous to a dividend. On the facts, Gleewin Investments had done nothing.

The majority also relied on the statutory context. References in section 109D to loans being “fully repaid”, amounts that have “not been repaid”, and an obligation to “repay” supported the view that the expanded definition of loan still requires some obligation to repay an amount or value supplied. The majority accepted that section 109D is not limited to transfers of money, but it does require a transfer of value burdened with an obligation of repayment.

Relevance of Subdivision EA

The majority also placed significant weight on Subdivision EA of Division 7A.

Subdivision EA expressly deals with UPEs of private company beneficiaries in circumstances where value is shifted from the trust to a shareholder or associate. The majority noted that, in the years in question, much of the money to which Gleewin Investments was presently entitled had been lent by the trust to Mr Bendel, meaning the facts broadly corresponded with the circumstances to which Subdivision EA is addressed.

The majority also observed that Parliament had long been aware of UPEs to private company beneficiaries. Where those entitlements were, in substance, lent or paid to a shareholder or associate of the private company, Parliament’s chosen response was to tax the shareholder or associate, not to treat the trustee as the recipient of a deemed dividend under section109D.

While the majority noted Subdivision EA, they did not go so far as to say that an UPE could only be assessed under Subdivision EA.

Practical implications

Private groups should review the following.‍

1. Trust deed wording

Start with the deed. Does it distinguish between “pay”, “apply” and “set aside”? Does it create a separate trust for amounts set aside? Does it include “pending payment” wording? Does it permit amounts to be credited to a beneficiary? Does it require segregation of assets? Does it create an unconditional obligation to pay?

2. Distribution minutes

Distribution minutes should be drafted consistently with terms of the deed. If the intention is to set aside income, or to pay or apply income, the minutes should say that clearly.

Inconsistent template language may create unnecessary risk. For example, a minute that says income is “paid”, “loaned”, “credited as a loan”, “distributed and retained by agreement”, or “converted to a loan” may be more difficult to defend under Bendel than the resolutions considered by the High Court.

Private groups should also ensure that present entitlement exists as at the relevant 30 June, per Harmer v. FCT (1991) 173 CLR 264.

3. Financial statements

The majority did not accept that the financial statements in Bendel proved an admission of indebtedness. However, that does not mean financial statements are irrelevant in another case.

If financial statements record a UPE as a “loan” merely as shorthand, that label should be revisited. If the intention is not to create a debtor-creditor relationship, the financial statements should not describe the entitlement in a way that suggests one.

4. Actual flow of funds

The actual movement of cash remains critical. If trust funds are used while a UPE to a corporate beneficiary remains outstanding to pay expenses of a shareholder or associate, or if amounts are lent to a shareholder or associate, Subdivision EA may need to be considered.

Similarly, if a corporate beneficiary actively agrees to defer payment, enters into a repayment arrangement, executes documents, charges interest or otherwise does something that moves value to the trust, the section 109D analysis may differ from Bendel.

5. Historical Division 7A and sub-trust arrangements

Many groups have already put UPEs on complying Division 7A loan terms, or adopted sub-trust arrangements, because of the ATO’s historical view.

A section 109N loan agreement, a sub-trust arrangement, a maturity event or a refinance may have legal consequences independent of the original UPE. Those steps may involve more than mere inactivity. They may include acknowledgments of debt, repayment obligations, interest terms or other bilateral conduct.

The fact that the parties did so only to (begrudgingly) comply with the ATO’s view, will not determine the legal character of what was done.

6. Section 100A

Section 100A was not considered in Bendel. A trust distribution to a corporate beneficiary may still raise section 100A questions depending on the broader arrangement, including whether there is a reimbursement agreement, who benefits from the trust funds and whether the arrangement is within ordinary family or commercial dealings.

ATO response and legislative reform

The ATO has stated that it is considering the implications of the adverse High Court decision and will update its Interim Decision Impact Statement as soon as possible to provide practical guidance to affected taxpayers.

It remains to be seen whether the ATO’s final position will simply accept that UPEs are outside section 109D in all cases, or whether the ATO will seek to identify categories of arrangements where, in its view, taxpayers have done something more than merely leave a UPE unpaid.

Legislative reform may also impact Bendel’s practical significance. Firstly, in the 2016-17 Budget, the Government announced targeted amendments to Division 7A. In the 2018-19 Budget, it announced that UPEs would be brought within the scope of Division 7A, with the broader Division 7A amendments to proceed as a consolidated package. Those reforms have remained unenacted for several years. Secondly, in the 2026-27 Budget, the Government has announced a proposed 30 per cent minimum tax on discretionary trusts from 1 July 2028, with the tax to be paid by the trustee and non-refundable credits available to beneficiaries other than corporate beneficiaries (This would effectively make distributions to corporate beneficiaries unviable from a tax-planning perspective).

The potential legislative changes means the practical significance of Bendel is likely to be greatest for historical years, current year planning and the period before any legislative change to the 30 percent minimum tax on discretionary trusts.

Takeaway

Bendel is a major taxpayer win, but it is not a licence to ignore UPEs.

The majority’s reasoning is more nuanced than that. On the facts, the corporate beneficiary had not made a loan because the trustee had set aside income on separate trust, no debtor-creditor relationship had arisen, there was no admission of indebtedness, and the corporate beneficiary had not done anything amounting to the provision of financial accommodation or a transaction that in substance effected a loan.

For private groups, the immediate task is to review trust deeds, distribution minutes, financial statements and fund flows. The next task is to consider how any existing Division 7A, sub-trust or UPE management arrangements should be dealt with in light of the decision.

To discuss the impact of Bendel, UPEs, Division 7A, Subdivision EA, section 100A or trust distribution planning, contact Velocity Legal’s tax team.