The Bendel Decision: Good News for Business Owners… But Don’t Throw Away Your Trust Planning Yet
There has been plenty of excitement following the High Court’s decision in the Bendel case.
Many headlines have suggested this is the end of one of the biggest Division 7A issues affecting trusts and bucket companies.
The truth?
It’s certainly good news… but it isn’t a free pass.
The Australian Taxation Office (ATO) has now released its Decision Impact Statement, explaining how it intends to apply the High Court’s decision going forward.
So, what was the issue?
Many business owners operate through a discretionary trust.
Often, part of the trust’s annual profit is distributed to a company (commonly called a bucket company) to cap the tax payable.
The company is taxed on that income.
However, in many cases, the cash isn’t actually transferred to the company. Instead, it simply remains inside the trust to fund the business.
That unpaid amount is known as an Unpaid Present Entitlement (UPE).
For years, there has been debate about whether leaving those amounts inside the trust effectively creates a loan that falls under the Division 7A rules.
Those rules can result in unexpected tax consequences if not managed correctly.
What did the High Court decide?
The High Court confirmed something many advisers had argued for years.
Simply leaving a company beneficiary’s unpaid entitlement inside the trust does not automatically create a Division 7A loan.
In simple terms…
If the company does nothing other than leave its entitlement sitting in the trust, that alone isn’t enough for Division 7A to apply.
That is a significant outcome and provides welcome certainty for many trust structures.
So is the issue over?
Not quite.
The ATO has accepted the High Court’s decision.
However, it has also made it very clear that other tax rules may still apply depending on how the arrangement operates.
Think of it like this.
Imagine the High Court closed one door.
The ATO is reminding taxpayers there are still several other doors that remain open.
What is the ATO still looking at?
The Decision Impact Statement specifically highlights a number of areas that advisers and business owners still need to consider.
These include:
- whether trust funds are ultimately used for the benefit of shareholders or their associates (Subdivision EA)
- whether anti-avoidance rules such as Section 100A could apply
- how the trust deed is written
- what the trustee resolutions actually say
- how the accounting records have been prepared
- what has happened to the entitlement after it arose.
In other words…
Just because the UPE itself isn’t automatically treated as a loan doesn’t mean every arrangement is acceptable.
What if you’ve already entered into a Division 7A loan agreement?
This is another point many people have misunderstood.
If you previously converted your UPE into a complying Division 7A loan agreement, it remains a loan.
The Bendel decision doesn’t unwind arrangements that have already been documented that way.
The ATO is changing its guidance
The ATO has also confirmed it will withdraw its previous guidance (TD 2022/11), which reflected its earlier view that certain unpaid entitlements could amount to Division 7A loans.
It will also review several other public rulings and practical compliance guidelines to ensure they align with the High Court’s decision.
This means we can expect further guidance over the coming months.
What should business owners do now?
For most business owners, there is no need to panic or rush into changing anything.
However, this decision is an excellent opportunity to review your trust structure and ensure it still operates the way it was intended.
In particular, it’s worth checking:
- How your trust distributions are documented.
- Whether your trust deed supports your current arrangements.
- Whether any UPEs have already been converted into Division 7A loans.
- Whether your accounting records accurately reflect what has occurred.
- Whether your current structure remains appropriate under the evolving ATO guidance.
Every trust is different, and the outcome often depends on the specific facts.
The Bottom Line
The Bendel decision is undoubtedly one of the most important trust taxation cases in recent years.
It removes one significant uncertainty around unpaid present entitlements.
But it doesn’t remove the need for careful tax planning.
The ATO has accepted the High Court’s decision, while also making it clear that other provisions of the tax law remain firmly in its sights.
As is often the case in tax, the headline rarely tells the whole story.
If your business operates through a trust and distributes profits to a bucket company, now is a good time to review your structure and ensure everything is still working as intended.
Need a review of your trust structure?
If you’re unsure how the Bendel decision affects your business, we’d be happy to help. We can review your trust arrangements, explain the implications in plain English, and ensure your structure remains both tax-effective and compliant as the ATO updates its guidance.
Contact AD Partners to arrange a trust structure review before making any changes.
