Trust Taxation Rewritten Again
As any taxation professional will tell you, the taxation of trusts is complex. In 2010, the judges in the Bamford case ruled that the tax profession and the Australian Taxation Office (ATO) had profoundly misunderstood trust taxation law for eight decades (FCT v Bamford [2010] HCA 10).
In February 2025, the judges in the Bendel case ruled that the ATO had overreached for the past 16 years in applying Division 7A on Unpaid Present Entitlements. Today 10 June 2026, the Full Bench of the High Court of Australia dismissed the ATO appeal in Bendel and confirmed that overreach (FCT v Bendel [2026] HCA 18).
When the trustee of a discretionary trust resolves to distribute income to the beneficiaries, they receive a present entitlement. While this entitlement is often resolved by the trust paying out the distributed amount, outstanding payments are called Unpaid Present Entitlements (UPEs).
Since 2010, the ATO has administered Division 7A on the basis that certain UPEs owing to corporate beneficiaries could give rise to deemed loans and therefore attract Division 7A consequences (i.e. if beneficiaries still have not enforced their rights to be paid by the time the trust lodges its tax return, they must have chosen to lend the money to the trust). This becomes problematic where the beneficiary is a company, as borrowings from companies by related parties can give rise to deemed unfranked dividends. This is all part of Division 7A, which ensures that company profits are not drawn out of the corporate environment without paying the ensuing top-up tax.
The High Court has now confirmed that the legislation does not operate in the manner contended by the ATO, and that UPEs do not give rise to deemed loans. Yet, very few are likely to celebrate this taxpayer victory. In practice, many taxpayers followed the ATO's guidance and implemented complying loan arrangements, thereby self-fulfilling the creation of loans. Consequently, the decision may provide limited retrospective benefit for a significant proportion of affected groups.
In fact, we would expect that the Government would rush to introduce new legislation to correct this perceived gap in the taxation system. Indeed, the Federal Budget last month announced a 30% tax on distributions imposed on trustees, with no associated credits allowed for corporate beneficiaries. While this is a mere proposal at this stage, this could impose double taxation on structures interposing a company between a trust and the ultimate beneficiary (for an effective tax rate that could reach 63%).
Whether by design or coincidence, the Budget proposal substantially reduces the practical significance of the Bendel victory for many taxpayers. Even if UPEs no longer fall within Division 7A, the proposed minimum-tax regime would significantly diminish the advantages of traditional trust-and-bucket-company structures.
For more information on this matter, please contact us. To receive our tax updates, follow us on LinkedIn.
