Family trust set up and advice.
Recent court decision affecting family trusts.
You may have read about a recent court decision affecting some family trusts. In a case called Bendel, published on 19 February 2025, the Full Federal Court unanimously held that a private company beneficiary of a discretionary trust has not made a “loan” or “financial accommodation” to the trust merely by not calling for payment of its trust distribution.
Who does this apply to?
This issue applies to clients with business structures involving trusts that have private company beneficiaries, where the company has not demanded payment of a trust distribution — creating what’s known as an Unpaid Present Entitlement (UPE).
What was the Court’s decision?
It’s a subtle but significant distinction. The Full Court found that in order for a UPE to be considered a “loan”, there must be a legal obligation to repay an amount — and that does not apply to UPEs, as there’s no such obligation.
ATO’s position and Division 7A
Since 2010, the ATO has treated UPEs owing by a trust to a corporate beneficiary as loans for the purposes of Division 7A. These rules are designed to catch disguised distributions made by private companies to shareholders or associates.
Under Division 7A:
- If the “loan” (i.e., the UPE) remains unpaid at the time the company’s tax return is lodged,
- The UPE amount is treated as an unfranked dividend to the trust,
- Unless the company and trust enter into a complying loan agreement, involving both capital and interest repayments.
This can avoid the deemed dividend outcome, but usually brings tax costs, funding challenges, and compliance burdens.
ATO’s response and what happens next?
Despite the Full Court ruling, the ATO has:
- Applied for special leave to appeal the decision to the High Court
- Announced it will continue to apply its current position — treating UPEs as loans under Division 7A
- Updated its Decision Impact Statement (DIS) to reflect this
The High Court’s decision on whether to grant special leave may take several months, and if granted, a final ruling is unlikely before Christmas.
This is not the first time the ATO has continued to apply its view contrary to court rulings. Unfortunately, this is not something taxpayers can get away with — but the ATO seemingly can.
Even if the High Court appeal fails, the ATO may push for legislative change. The previous Coalition government announced in the 2018–19 Budget its intention to legislate that corporate UPEs fall under Division 7A — but nothing has eventuated.
Depending on the outcome of the High Court appeal, a legislative response remains a real possibility.
What if the Court’s decision stands?
If the Full Court’s decision is upheld (a big if), it could have significant implications for trusts with corporate beneficiaries:
- Funding discretionary trusts would become easier
- Compliance costs may be significantly reduced
Trusts may no longer need to enter into Division 7A loan agreements for UPEs
What should you do about 2023–24 UPEs?
Here’s the issue: 2023–24 UPEs must be dealt with soon, before company tax returns are due.
While taxpayers may be within their rights to rely on the court’s decision and not convert UPEs into complying loan agreements, there are risks to that approach:
The ATO may reject your position
- Future legal or legislative developments may reverse the current interpretation
- Penalties or deemed dividends could still apply
A safer approach, for now, might be to follow the ATO’s current position while lodging a protective objection to preserve your rights, should the law later change in your favour.
More information
Contact us for family trust assistance
This is a highly technical and evolving area of tax law with real financial consequences for those with family trusts and private company beneficiaries.
If your structure includes unpaid entitlements, we need to talk — soon.
Let’s discuss your options before your company return is due and make sure you’re protected, whatever the outcome of the High Court appeal.
Based in Noosa, on the Sunshine Coast Queensland, we work with clients throughout Australia.