Unpaid Present Entitlements and Division 7A: The High Court Settles the Debate in Bendel

Introduction

On 10 June 2026, the High Court of Australia delivered its judgment in Commissioner of Taxation v Bendel [2026] HCA 18. It is no exaggeration to describe this as one of the most consequential taxation decisions in recent memory for anyone involved in the administration of discretionary trusts that utilise corporate beneficiaries.

For the better part of sixteen years, the Australian Taxation Office maintained the position that where a discretionary trust resolved to distribute income to a private company beneficiary and those funds remained unpaid, the resulting unpaid present entitlement (commonly referred to as a "UPE") could be treated as a "loan" within the extended definition contained in section 109D(3) of the Income Tax Assessment Act 1936 (Cth) (the "1936 Act"). The consequence of that characterisation was severe: the UPE would be deemed a dividend under Division 7A, triggering an immediate and often unexpected tax liability.

The High Court has now comprehensively rejected that position. In doing so, it has brought long awaited clarity to a question that has shaped trust distribution practices, compliance obligations, and the structuring of private groups for well over a decade.

What Is Division 7A, and Why Does It Matter?

Division 7A of Part III of the 1936 Act was enacted to prevent private companies from distributing profits to shareholders, or their associates, in forms that circumvent the dividend withholding tax regime. It operates by deeming certain payments, loans, and forgiven debts made by private companies to shareholders or associates to be unfranked dividends, thereby bringing those amounts within the assessable income of the recipient.

At the heart of the Bendel dispute was section 109D, which provides that a private company is taken to pay a dividend to an entity if the company makes a "loan" to that entity and the entity is a shareholder or associate of a shareholder. Critically, section 109D(3) extends the ordinary meaning of "loan" to include "the provision of credit or any other form of financial accommodation" and any transaction which "in substance" effects a loan of money.

The question that has animated practitioners, revenue authorities, and the courts for years is this: when a discretionary trust resolves to distribute income to a corporate beneficiary but retains the funds (creating a UPE), does the corporate beneficiary's failure to call for payment amount to the company providing "financial accommodation" to the trust? If so, Division 7A would deem that amount a dividend of the corporate beneficiary, taxable as such.

The Facts in Bendel

The factual matrix in Bendel involved the Bendel group: a cluster of entities through which Mr Steven Bendel conducted an accounting and tax agency practice and invested in commercial property syndicates. The key entities were Gleewin Pty Ltd ("Gleewin"), which served as trustee of the Steven Bendel 2005 Discretionary Trust (the "2005 Trust"), and Gleewin Investments Pty Ltd ("Gleewin Investments"), a corporate beneficiary. Mr Bendel owned all of the issued shares in each company and was the sole director and secretary of both.

In each of the income years ending 30 June 2014 through to 30 June 2017, Gleewin as trustee resolved to "set aside" defined percentages of the 2005 Trust's net income for the benefit of its discretionary objects, being Gleewin Investments and Mr Bendel. Under the terms of the 2005 Trust deed, the amounts set aside for Gleewin Investments were required to be held on separate trusts (sub-trusts). Gleewin did not pay to Gleewin Investments those amounts set aside and held on separate trust. Gleewin Investments did not, at any relevant time, call for payment to be made.

Despite this, Gleewin Investments included in its assessable income all of the net income set aside in its favour, and income tax was paid accordingly. The Commissioner of Taxation nevertheless issued amended assessments to Gleewin Investments, asserting that the UPEs constituted loans under section 109D(3), and were therefore deemed dividends under section 109D(1).

The Litigation History

The Commissioner's position was rejected at every level prior to the High Court. The Administrative Appeals Tribunal found in favour of the taxpayer. On appeal, the Full Federal Court unanimously dismissed the Commissioner's appeal in Commissioner of Taxation v Bendel [2025] FCAFC 15. The Full Court, drawing on the analysis of Sackville and Lehane JJ in Commissioner of Taxation v Radilo Enterprises Pty Ltd, held that while section 109D(3) expanded upon the ordinary meaning of "loan," it did not embrace every debtor-creditor relationship. The essence of a loan required an advancement of money or credit, and a UPE did not satisfy that requirement.

The Commissioner sought and was granted special leave to appeal to the High Court on 3 April 2025. The matter was heard on 14 October and 3 December 2025. The Solicitor-General of the Commonwealth, Dr Stephen Donaghue KC, appeared on behalf of the Commissioner, reflecting the significance the revenue attached to this case.

What the High Court Decided

The High Court dismissed the appeal by a majority of five to two.

The Majority: Gageler CJ, Gordon, Edelman, Steward and Gleeson JJ

The majority engaged in a rigorous analysis of both the trust law principles governing unpaid present entitlements and the proper construction of section 109D(3) of the 1936 Act.

On the trust law question, the majority held that the trustee's resolutions to "set aside" income did not create a debtor-creditor relationship between Gleewin and Gleewin Investments. The 2005 Trust deed required amounts set aside for beneficiaries to be held on separate trusts, and the resolutions gave effect to that requirement. The amounts were held on sub-trusts for the benefit of Gleewin Investments, pending payment. Crucially, the resolutions did not make Gleewin a debtor of Gleewin Investments, did not create an unconditional duty for Gleewin to pay, and did not give rise to an action in money had and received unless and until Gleewin Investments sought payment or Gleewin admitted a debt.

Key finding: inaction is not financial accommodation. The majority held that the corporate beneficiary's decision not to call for payment did not amount to the "provision of credit or any other form of financial accommodation" within the meaning of section 109D(3)(b). The provision of financial accommodation requires some initial or anterior transfer of value, or the supply or grant of some form of pecuniary assistance involving bilateral activity. Division 7A is directed at the transfer of value from a private company to a shareholder or associate. Implicit in its structure is that the private company does something to effect that transfer. A corporate beneficiary that simply remains passive, doing nothing, does not provide financial accommodation.

Nor, the majority held, did the UPE amount to a transaction which "in substance" effected a loan of money. There was no advancement of funds by Gleewin Investments to the trust. The income was generated by the trust's own assets and activities. Gleewin Investments had never been in possession of those funds and had never parted with anything.

The majority also rejected the Commissioner's contention that the trust's financial accounts, which recorded the UPEs against a beneficiary loan account, constituted an admission of indebtedness.

A notable aspect of the majority's reasoning was its observation that Division 7A already contains a specific anti-avoidance mechanism for the very situation the Commissioner sought to address through the broader "loan" definition. Subdivision EA of Division 7A (sections 109XA and 109XB) applies where a UPE owed to a corporate beneficiary is used, directly or indirectly, to provide a loan or other financial benefit to a shareholder or associate of that company. The majority observed that the facts in Bendel may well have fallen within Subdivision EA, but the Commissioner chose not to pursue that line of assessment.

The Dissent: Jagot and Beech-Jones JJ

Justices Jagot and Beech-Jones dissented. They favoured a broader construction of section 109D(3) and were prepared to treat the retention and use of trust funds, in conjunction with the corporate beneficiary's failure to insist on payment, as capable of constituting "financial accommodation" within the extended definition of "loan." Justice Jagot would have allowed the appeal and remitted the matter to the Administrative Appeals Tribunal for determination in accordance with the law as she construed it. Justice Beech-Jones agreed with the orders proposed by Jagot J.

The dissenting position reflects a purposive approach to Division 7A that emphasises the anti-avoidance character of the provisions. On this view, where the economic substance of an arrangement is that a corporate beneficiary has effectively left funds at the disposal of the trust (and, through the trust, at the disposal of its controller), there is a sufficient basis to characterise that passivity as a form of financial accommodation. It is an intellectually respectable position, but one that ultimately did not command a majority.

CMH Commentary

The significance of this decision cannot be overstated. The Commissioner's administrative position on UPEs and Division 7A, first formalised in Taxation Ruling TR 2010/3 and subsequently reinforced in Taxation Determination TD 2022/11, has governed the structuring and compliance behaviour of thousands of private groups across Australia for the better part of two decades. Trustees, accountants, and legal practitioners have spent considerable time and resources converting UPEs into complying Division 7A loan agreements, establishing sub-trust arrangements, and ensuring annual minimum repayments were made, all on the basis of the Commissioner's view that a UPE was a "loan."

The High Court has now held, at the highest appellate level, that the Commissioner's position was wrong. A UPE, without more, is not a loan. A corporate beneficiary that does nothing is not providing financial accommodation. Division 7A requires a positive act, a transfer of value, and silence does not suffice.

For practitioners, there is a quiet vindication in this result. The Commissioner's interpretation always sat uncomfortably with orthodox trust law principles. The creation of a present entitlement through a distribution resolution, and the subsequent retention of funds by the trustee, does not transform the beneficiary into a lender. The beneficiary is a beneficiary. The trustee holds the funds on trust. That is a fiduciary relationship, not a commercial lending arrangement, and the majority's reasoning properly respects that distinction.

That said, the decision is not a licence for unbridled optimism. Several important qualifications apply.

Practical Implications for Private Groups

The decision is trust deed specific

The majority's reasoning turned materially on the specific terms of the 2005 Trust deed, which required amounts set aside for beneficiaries to be held on separate trusts. Not every discretionary trust deed operates in the same way. Some trust deeds may use language that creates a debtor-creditor relationship upon distribution, or may not contain sub-trust provisions at all. Before concluding that Division 7A does not apply to a particular UPE, it is essential to review the relevant trust deed and distribution resolutions to determine whether the legal characterisation of the UPE is consistent with the position accepted in Bendel.

Subdivision EA remains in play

The majority expressly noted that the Commissioner could have, but did not, pursue assessment under Subdivision EA of Division 7A. This subdivision applies where a trust uses funds attributable to a UPE owed to a corporate beneficiary to provide a loan or other benefit to a shareholder or associate. Where the trust's funds are in fact advanced to the individual controller, Subdivision EA may produce the very deemed dividend outcome that the Commissioner sought through the broader "loan" characterisation. Private groups should not assume that the absence of a Division 7A loan characterisation for UPEs means that all Division 7A risk has evaporated.

Section 100A remains relevant

Section 100A of the 1936 Act is a separate anti-avoidance provision that applies where a beneficiary is made presently entitled to trust income as part of a "reimbursement agreement," broadly an arrangement under which someone other than the entitled beneficiary benefits from the distribution. The provision's scope and the ATO's compliance focus in this area, particularly in light of the Full Federal Court decision in Bblood Enterprises Pty Ltd v Commissioner of Taxation [2023] FCAFC 114, remain matters that private groups and their advisers should continue to monitor closely following Bendel.

Existing Division 7A loan agreements

Many private groups have, over the past sixteen years, converted UPEs into complying Division 7A loan agreements in reliance on the Commissioner's published guidance. Those loan agreements remain legally operative instruments. They were not entered into under compulsion but by agreement, and they carry their own contractual and taxation consequences. The Bendel decision does not retrospectively unwind those arrangements. Whether a group should seek to restructure, terminate, or continue those existing loan agreements is a question that requires careful analysis of the specific terms, any accrued interest obligations, and the broader tax position of the group.

Prospect of legislative reform

It would be imprudent to assume that the Bendel decision represents the final word on the taxation treatment of UPEs. The ATO has indicated that it is considering the implications of the decision and will update its published guidance, including the status of Taxation Determination TD 2022/11. More significantly, the possibility of legislative amendment to section 109D cannot be excluded. The Government, as part of the 2026-27 Federal Budget, has already signalled broader reforms to the taxation of trusts, including a proposed minimum 30 per cent tax on discretionary trust income from 1 July 2028. The interaction between the Bendel decision and these proposed reforms will require close monitoring.

Review of past assessments

For taxpayers who were assessed on the basis of the Commissioner's now-overturned position on UPEs, there may be scope to review those assessments. Depending on the circumstances, objection rights or amendment opportunities may exist. The availability and timeframe for any such review will depend on individual circumstances, the relevant statutory limitation periods, and the ATO's forthcoming Decision Impact Statement.

What Should You Do Now?

The Bendel decision arrives at a critical juncture, with 30 June 2026 only weeks away and trustees and their advisers in the process of finalising distribution resolutions for the current financial year. For private groups that utilise corporate beneficiary structures, we recommend the following steps.

First, review your trust deed. The outcome in Bendel was inextricably linked to the specific language of the trust deed, including its sub-trust provisions. Not all trust deeds will produce the same legal characterisation of a UPE, and the application of Bendel to your particular trust requires a careful reading of the instrument.

Second, review the accounting treatment of existing UPEs. The practice of recording UPEs against a "beneficiary loan account" as a matter of accounting convenience may create an evidentiary risk that is inconsistent with the legal position. If the intended position is that the amounts are held on separate trust, the accounts should reflect that characterisation.

Third, consider whether Subdivision EA or section 100A may apply to your arrangements, particularly where trust funds have been advanced to individual shareholders or associates. The absence of a Division 7A loan characterisation does not eliminate all integrity provisions.

Fourth, do not unwind existing Division 7A loan agreements without professional advice. Those agreements remain legally operative and may have consequences if terminated prematurely.

This article is intended for general informational purposes only and does not constitute legal or taxation advice. The content of this article is current as at the date of publication and may be subject to change as a result of subsequent legislative amendment, regulatory guidance, or judicial decision. The application of Division 7A, and the implications of the Bendel decision, will depend on the specific terms of your trust deed, the nature of your distribution resolutions, and your individual circumstances. You should obtain professional legal and taxation advice before taking any action in reliance on the information contained in this article. CMH Lawyers accepts no liability for any loss or damage arising from reliance on this article.