Unpaid present entitlements (UPEs) involving private companies and discretionary trusts raise complex issues under Australian tax law. Division 7A of the Income Tax Assessment Act 1936 (Cth) determines when a private company beneficiary’s unpaid entitlement is treated as a loan to the trust. The Australian Taxation Office considers that a trustee’s retention of an unpaid entitlement may constitute a loan, with Division 7A consequences. The High Court’s decision in Bendel provides guidance on when an unpaid present entitlement is treated as a loan for Division 7A purposes. It clarifies the tax treatment of trusts and company beneficiaries.
Background to the Case
Commissioner of Taxation v Bendel [2026] HCA 18 addressed whether a private company beneficiary makes a loan to the trustee of a discretionary trust by failing to demand payment of an unpaid present entitlement. The proceedings concerned Gleewin Pty Ltd, as trustee of the Steven Bendel 2005 Discretionary Trust, which resolved to set aside income for Gleewin Investments Pty Ltd and Mr Bendel for the income years ending 30 June 2014 to 30 June 2017. The High Court was required to interpret Division 7A of the Income Tax Assessment Act 1936 (Cth), in particular s 109D, and to consider the application of the anti-double taxation provision in s 6-25 of the Income Tax Assessment Act 1997 (Cth).
Facts and Trust Arrangements
For each income year, Gleewin Pty Ltd, as trustee, resolved to set aside specified percentages of net income for Mr Bendel and Gleewin Investments Pty Ltd. Mr Bendel controlled both entities. The trust deed required that amounts set aside for Gleewin Investments be held on separate trust. Gleewin Investments did not demand payment of these unpaid present entitlements.
Unpaid Present Entitlement
An Unpaid Present Entitlement (UPE) occurs when a trust grants a beneficiary an immediate entitlement to trust income; however, the funds remain physically unpaid and are retained by the trust. The Australian Taxation Office (ATO) primarily examines UPEs through two regulatory mechanisms:
Division 7A (Corporate Beneficiaries): When the beneficiary is a private company, the ATO assesses whether the UPE functions as a loan. Although landmark judicial decisions have challenged the longstanding view that UPEs are automatically considered loans, compliance with proper loan agreements remains crucial, depending on the specific circumstances.
Section 100A (Reimbursement Agreements): If trust distributions are made to beneficiaries with lower tax rates—especially when they are unaware of the income or treat it as a gift and subsequently return the funds to the trust or other family members—the ATO may invoke Section 100A. This provision subjects the income to taxation at the highest marginal rate (currently 45%) plus the Medicare levy.
ATO Assessments and Proceedings
The Commissioner issued amended assessments to Gleewin Investments, treating the amounts set aside as loans for s 109D(3). These loans were treated as deemed dividends under s 109D(1) and included in Gleewin’s assessable income under s 44(1) of the 1936 Act. Mr Bendel and Gleewin Investments were also assessed on their respective shares of the trust’s net income as discretionary objects.
Tribunal and Court Decisions
Mr Bendel and Gleewin Investments sought review of the Commissioner’s objection decisions in the Administrative Appeals Tribunal. The Tribunal found that the amounts set aside were not loans for s 109D(3). Instead, the unpaid present entitlements were, in substance, lent to Mr Bendel and should be taxed under Subdivision EA of Division 7A. The Full Court dismissed the Commissioner’s appeal.
Commissioner’s Appeal to the High Court
The Commissioner appealed from the decisions of the Tribunal and the Full Federal Court. The Commissioner submitted that by permitting the trustee to retain trust income to which the company beneficiary was presently entitled, the beneficiary provided financial accommodation and made a loan within the meaning of s 109D(3).
Key Legal Principles and High Court Reasoning
The Court accepted that the statutory definition of loan in s 109D(3) includes financial accommodation, not only traditional advances of money. However, Division 7A requires an active transfer of value or transaction. Where a company beneficiary authorises the trustee to use its entitlement as an interest-free loan, for example by written agreement, this may constitute a loan for Division 7A purposes. By contrast, if a beneficiary takes no action and leaves an unpaid present entitlement outstanding without agreement or arrangement, this passive inaction does not constitute a loan to the trustee. The Full Court was correct to dismiss the Commissioner’s appeal. Unpaid present entitlements are addressed by Subdivision EA, not the general loan provisions in s 109D.
Outcome of the High Court Appeal
The High Court dismissed an appeal from a judgment of the Full Court of the Federal Court of Australia. The appeal concerned the construction of the expanded definition of “loan” in s 109D(3) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”).
Majority Judgment and Trust Law Principles
The majority comprising Gageler CJ, Gordon, Edelman, Steward and Gleeson JJ said when there is an unconditional obligation to make payment – whether because a trustee resolves to distribute income to a beneficiary and there remains nothing for a trustee to do except to carry out the payment of money, or because a beneficiary entitled to do so invokes the rule in Saunders v Vautier, or because the trustee admits a debt to a beneficiary – the beneficiary may sue for money had and received. Where there is no resolution to distribute, whether the resolution gives rise to a debtor-creditor relationship turns on the construction of the trust deed.
Rule in Saunders v Vautier
The rule in Saunders v Vautier states that if all beneficiaries of a trust are adults of sound mind with an absolute, vested interest, they can demand the immediate transfer of assets and the termination of the trust. This gives the beneficiaries control over the assets, overriding any instructions from the trust creator, such as delaying distributions until a certain age.
Nature of ‘Set Aside’ Amounts
There was no duty to distribute income until the vesting day. ‘Set aside’ was defined as ‘placing sums to the credit of such beneficiary in the books of account of the Trust Fund’. Income set aside was required by the trust deed to be held in a ‘separate trust… pending payment’ and invested in such manner as the trustee in its absolute discretion thinks fit.
No Unconditional Obligation or Loan
The majority found that the resolutions to set aside income did not give rise to an unconditional obligation to pay or create a debtor-creditor relationship. The unpaid amounts set aside were not loans for s 109D.
Division 7A: Active vs Passive Conduct
The Court held that a company’s failure to demand payment of an unpaid present entitlement does not constitute financial accommodation or a loan for s 109D. Division 7A requires an active transfer of value and an obligation of repayment. The judgment clarifies the construction of Division 7A and the distinction between unpaid present entitlements and deemed loans. Where Parliament intended to tax unpaid present entitlements, it did so through Subdivision EA.
Effect of the High Court’s Decision
The High Court held, by majority, that by not calling for payment of the unpaid present entitlements set aside for it, Gleewin Investments did not provide “financial accommodation” under s 109D(3)(b), nor did it “in substance” effect a “loan of money” under s 109D(3)(d), to Gleewin. In addition, by majority, the High Court held that the resolutions to set aside the amounts for Gleewin Investments did not relevantly effect the distribution of those unpaid present entitlements, nor did there arise a relationship of debtor and creditor between Gleewin and Gleewin Investments. Rather, by the resolutions, a separate trust held the unpaid present entitlements for Gleewin Investments.
Application of Division 7A to UPEs
The judgment clarifies the operation of Division 7A in relation to unpaid present entitlements and the meaning of a loan under s 109D. In Bendel, the company beneficiary did not take active steps or enter into any arrangement with the trustee to allow continued use of its entitlement. The entitlement remained unpaid without agreement or accommodation.
Division 7A applies where a company beneficiary goes beyond inaction, for example by entering into an agreement or permitting the trustee to use funds for trust purposes, thereby creating an obligation of repayment.
In those circumstances, the unpaid entitlement is treated as a loan due to the active provision of financial accommodation. In Bendel, there was no such arrangement, so Division 7A did not apply to the UPE on these facts.
Anti-Double Taxation Provision (s 6-25)
In rejecting the taxpayers’ reliance on the anti-double taxation provision in s 6-25 of the Income Tax Assessment Act 1997 (Cth), the High Court held that the trust’s assessable income and the deemed dividend arose under different statutory provisions and represented different taxable amounts, notwithstanding their historical connection. Consequently, s 6-25 did not prevent the deemed dividend from being included in assessable income.
Practical Implications and Guidance for Trustees
The High Court confirmed that Division 7A applies where a company beneficiary intentionally allows a trustee to retain immediately payable funds. Courts will consider the practical substance of arrangements, not only formal trust accounting entries. Ensuring that trustees, private companies, and advisers properly document and manage unpaid present entitlements, particularly where there is common control, to avoid unintended Division 7A consequences.
Compliance Steps Following Bendel
Recommended Compliance following Commissioner of Taxation v Bendel [2026] HCA 18, follow these specific steps:
Review the terms of the trust deed to verify the requirements for
- distributing income,
- setting aside entitlements, and
- Creating separate trusts for unpaid amounts.
- Implement written agreements if there is any intention for the trustee to use company entitlements as loans or for other trust purposes, ensuring such arrangements are clear and align with Division 7A requirements.
- Regularly monitor and analyse trust accounts to confirm that no implicit loans or financial accommodation arise through informal arrangements or inaction.
- Maintain clear records of all trustee and beneficiary communications and any steps taken in relation to unpaid present entitlements.
Proactive management and documentation of unpaid present entitlements reduce the risk of Division 7A being inadvertently triggered and assist in demonstrating compliance if the ATO reviews the arrangements.