Overview
In a previous alert, we looked at the decision of the Full Federal Court in February 2025 in Commissioner of Taxation v Bendel [2025] FCAFC 15. In that case, the Court held that, where a corporate beneficiary of a family discretionary trust – a common structure to manage family wealth for asset protection purposes, which in some cases is also used to operate a family business – allows distributions owing to it to remain in the trust rather than calling for their payment, those amounts (being “unpaid present entitlements” or “UPEs”) are not loans from the beneficiary to the trust.
The decision meant that UPEs could not be treated as assessable income for the trustee of the trust for tax purposes (as a Division 7A loan under the Income Tax Assessment Act 1936 (Cth) (Act)) – thereby minimising the overall tax payable by the trust and allowing it to accumulate capital for investment purposes to benefit the relevant family group as a whole.
As you could expect, the Commissioner of Taxation did not like that outcome, and appealed the decision to the High Court.
In its decision on 10 June 2026 in Commissioner of Taxation v Bendel [2026] HCA 18, the High Court, by a 5:2 majority, rejected the appeal – authoritatively bringing to an end decades of debate about the ATO’s strict approach to treating UPEs as assessable income absent exceptional circumstances.
The High Court affirmed that a UPE lacks the commercial character of “a loan of money”. The High Court also rejected the Commissioner’s attempt to expansively read the term “financial accommodation” referred to in Division 7A of the Act as capturing a situation where a party simply fails to call for funds owing to it rather than positively advancing those funds to another party after having in fact received the funds in the first place.
What Next?
The High Court’s decision may offer some degree of comfort to family groups using discretionary trusts to manage their wealth or operate their businesses – offsetting some of the pain from the Government’s recent tax changes, including the replacement of the 50% CGT discount with an inflation-based discount from 1 July 2027 and the 30% minimum tax on the taxable income of discretionary trusts due to take effect on 1 July 2028.
However, some caution is recommended, as the High Court may not have the final word on the matter.
We understand that the Commissioner of Taxation is considering lobbying the Government to introduce legislation that would override the High Court’s decision, so that UPEs are automatically deemed by the Act to be assessable income. Given the Government’s policy agenda which led to the recent tax changes – a key feature of which is to seek to control the use of discretionary trust structures to achieve optimal tax outcomes – a further legislative response to the UPE issue would not come as a surprise.
If you would like to discuss the implications of Bendel and what it means for your family’s business, wealth and tax position, please get in touch with James Barritt and Matthew Kumnick.
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