UPEs After Bendel: Division 7A, ATO Guidance and Trust Tax Reform

Sally Preston

For many years, the practical tax compliance position for unpaid present entitlements to corporate beneficiaries was relatively clear, even if technically contentious: if a trust made a private company presently entitled to trust income and the amount remained unpaid, the ATO generally expected that entitlement to be managed as if it could give rise to a Division 7A loan.

That expectation was reflected first in the ATO’s earlier guidance on UPEs and later in TD 2022/11, which treated the failure of a corporate beneficiary to demand payment of its entitlement as the provision of financial accommodation to the trust. In practical terms, many advisers responded by placing UPEs on complying Division 7A loan terms, using sub-trust arrangements, making repayments, charging interest, or otherwise documenting the position to reduce deemed dividend risk.

The High Court’s decision in Commissioner of Taxation v Bendel has changed the legal landscape. But the more difficult question is whether it should change day-to-day compliance behaviour. In my view, Bendel removes one automatic pathway into Division 7A, but it does not make UPEs risk-free. The better approach is not to abandon discipline around UPEs, but to apply it more precisely.

What the ATO expected before Bendel

Before Bendel, the Commissioner’s position developed in stages. The first major public expression was the view announced in December 2009 and later reflected in TR 2010/3 and PS LA 2010/4. In broad terms, the Commissioner accepted that a UPE owing from a trust to a private company beneficiary was not necessarily an ordinary loan, but could still fall within the extended definition of loan in section 109D(3) because it involved the private company providing financial accommodation to the trustee.

However, the earlier administrative approach was more concessional than the later 2022 position. Under the TR 2010/3 and PS LA 2010/4 framework, there was a practical timing buffer. Broadly, the ATO accepted that the relevant Division 7A consequences could be managed by the private company’s lodgment day for the income year after the year in which the entitlement arose. This gave advisers what was often described in practice as an “extra year” to identify the UPE, finalise accounts, decide whether to pay the entitlement, and, if the funds were to remain with the trust, put an accepted sub-trust or complying arrangement in place.

That earlier approach also allowed particular sub-trust options. In practical terms, the UPE could be placed on an investment-style sub-trust arrangement for the sole benefit of the corporate beneficiary, including arrangements that were commonly treated as seven-year or ten-year investment options. These were not the same as ordinary Division 7A complying loans. They were an ATO administrative pathway for dealing with UPEs in a way that avoided an immediate deemed dividend outcome.

TD 2022/11 changed that landscape. For trust entitlements arising on or after 1 July 2022, the Commissioner withdrew TR 2010/3 and PS LA 2010/4 and replaced the earlier administrative framework with a more direct view: once the corporate beneficiary has knowledge of an amount it can demand from the trustee, and does not demand payment while allowing the trustee to retain and use the funds, the company is taken to have provided financial accommodation.

The important practical change was that the old sub-trust investment options effectively disappeared for new UPEs. If the trust wanted to retain the use of the funds, the cleaner compliance route under the 2022 guidance was to pay the entitlement, transfer assets of equivalent value, or put in place a complying Division 7A loan agreement by the relevant lodgment day. The earlier “investment agreement” style approach was no longer the preferred ATO pathway for post-1 July 2022 entitlements.

So, before Bendel, the practical evolution was this: the Commissioner first moved UPEs into the Division 7A orbit, but with an administrative system that gave advisers time and accepted sub-trust options to manage the issue. TD 2022/11 retained the Commissioner’s core view that a UPE could be financial accommodation, but replaced that more concessional framework with a more formal payment or complying loan approach for new entitlements.

In practice, this led to a conservative compliance culture. Advisers often treated corporate beneficiary UPEs as something that needed to be actively managed each year. The focus was not only on the trust resolution, but also on whether the entitlement was paid, converted to a complying loan, held on sub-trust, or otherwise dealt with in a way that addressed the ATO’s Division 7A concerns.

What Bendel held

In Bendel, the High Court held that a corporate beneficiary’s unpaid present entitlement to trust income is not, merely because it remains unpaid, a loan for Division 7A purposes. The passive non-payment of an entitlement is not the same thing as the company making a loan, providing credit, or providing financial accommodation to the trustee.

That conclusion is significant because it rejects the foundation of the ATO’s long-standing approach. A UPE is an equitable entitlement arising from trust law. It is not necessarily an advance of money by the company to the trust, nor does it necessarily involve the company doing anything that can properly be characterised as lending funds back to the trustee.

The decision does not mean that every arrangement involving a corporate beneficiary and unpaid trust distributions is benign. It simply means that the mere existence of a UPE, without more, is not enough to trigger section 109D as a Division 7A loan.

What the ATO’s Decision Impact Statement says

The ATO’s Decision Impact Statement accepts the effect of the High Court’s decision: where a private company beneficiary does nothing in respect of its entitlement to trust income, no loan arises for Division 7A purposes merely because the entitlement remains unpaid.

However, the ATO has also made clear that Bendel is not a general clearance certificate for UPE arrangements. The DIS points to other provisions that may still apply, particularly Subdivision EA and section 100A.

Subdivision EA may be relevant where funds representing the corporate beneficiary’s entitlement are used in a way that benefits a shareholder of the corporate beneficiary or an associate. In that situation, the concern is not the UPE itself, but what happens to the value represented by that entitlement.

Section 100A also remains important. If the entitlement arises under a reimbursement agreement, the trustee may be assessed at the top marginal rate. That risk is separate from Division 7A and is likely to remain a central ATO compliance focus, particularly where trust income is appointed to a corporate beneficiary but the economic benefit is enjoyed elsewhere.

Does Bendel change the way UPEs should be treated?

Technically, yes. A UPE to a corporate beneficiary should no longer be automatically treated as a Division 7A loan simply because it remains unpaid. That is the direct consequence of Bendel and the ATO’s acceptance of the decision in the DIS.

Practically, however, the answer is more nuanced. Bendel does not justify a wholesale abandonment of careful UPE management. It changes the starting point, but not the need to understand the trust deed, resolutions, accounts, cash movements and subsequent dealings with the entitlement.

The key distinction is between passive non-payment and an active dealing. If the company is simply made presently entitled and does nothing, Bendel says that is not, of itself, a Division 7A loan. But if the entitlement is satisfied, converted, assigned, lent, forgiven, applied for someone else’s benefit, or otherwise dealt with, the tax outcome depends on the legal and commercial character of that later step.

That means advisers should resist two overreactions. The first is to pretend Bendel changes nothing and continue treating all UPEs as deemed loans as a matter of reflex. The second is to assume that UPEs can now be ignored altogether. Both positions miss the point.

And now the goal posts may move again

Just as advisers are recalibrating their approach to UPEs after Bendel, the proposed changes to the taxation of discretionary trusts may move the goal posts again. Treasury has now released its consultation paper on the proposed 30% minimum tax on discretionary trusts, so this is no longer just a Budget announcement awaiting detail. The measure is still not law, but the consultation paper gives a clearer sense of the direction of travel and the issues Treasury is actively considering.

The consultation paper proceeds on the basis of the core proposal that, from 1 July 2028, trustees of discretionary trusts would pay a minimum tax of 30% on taxable income, subject to the final design of the legislation. Non-corporate beneficiaries who are presently entitled to trust income would then generally receive a non-refundable tax credit for tax paid by the trustee. Importantly, corporate beneficiaries are not proposed to receive that credit. That is the critical point for bucket company planning.

If income is distributed to a bucket company, the trust may first bear trustee-level tax, and the company may then be taxed on the distribution without credit for that trustee tax. Depending on the final mechanics, the trustee tax may not operate as a prepayment of the company’s tax. It may become an additional layer of tax before the company’s own tax position, and before any later dividend consequences for shareholders are considered.

This matters for UPE planning because the consultation paper expressly recognises that the reform must interact with existing private group rules, including the High Court’s decision in Bendel and the history of unpaid present entitlements. Bendel clarifies that a UPE is not automatically a Division 7A loan. But the proposed trust tax regime may change the broader commercial question: if a discretionary trust is already subject to a trustee-level minimum tax, does distributing to a corporate beneficiary still achieve the outcome that justified the structure in the first place?

For many family groups, appointing income to a corporate beneficiary has historically been attractive because it capped the initial tax rate and allowed cash to remain within the broader group, subject to Division 7A and other integrity rules. If the proposed rules are enacted in their current broad form, that advantage may be significantly reduced or eliminated because the same economic income may be taxed at both the trust and company levels.

The consultation paper also means advisers should avoid treating Bendel as a settled long-term planning answer. Bendel may affect how UPEs are managed under current law, especially for 2026 and 2027 year-end planning. But for later years, the proposed trust tax changes could alter the value of discretionary trust and corporate beneficiary strategies altogether. The result is that Bendel is a significant taxpayer win on the Division 7A characterisation issue, but it may not rescue bucket company planning if the proposed minimum tax regime proceeds in a form that denies credits to corporate beneficiaries.

A sensible compliance approach after Bendel

The better approach is to review UPEs on their facts rather than automatically forcing them into a Division 7A loan framework. In particular, advisers should consider:

·         whether the trust deed and distribution resolution validly create the corporate beneficiary’s entitlement;

·         whether the entitlement remains unpaid, or whether there has been a later dealing with it;

·         whether trust funds have been used for the benefit of shareholders or associates of the corporate beneficiary;

·         whether Subdivision EA may apply to any loans, payments or debt forgiveness by the trust;

·         whether section 100A concerns arise because the economic benefit of the distribution is enjoyed by someone other than the beneficiary presently entitled;

·         whether the Treasury consultation paper on the proposed 30% minimum tax for discretionary trusts could change the commercial benefit of using a discretionary trust or corporate beneficiary structure, particularly if a bucket company does not receive credit for trustee-level tax; and

·         whether existing complying Division 7A loan arrangements should be maintained, varied or reviewed in light of their legal terms and commercial purpose.

For existing arrangements, care is needed. If a UPE has already been converted into a complying Division 7A loan, Bendel does not necessarily unwind that conversion. The relevant question becomes what the parties actually did, what documents were executed, and whether there is now a real loan or other enforceable obligation that must be dealt with on its own terms.

For new year-end planning, the decision gives advisers more flexibility. It may no longer be necessary to automatically place every corporate beneficiary UPE on complying Division 7A terms. But it remains important to document the intended treatment, ensure the accounts reflect the legal position, and avoid informal use of trust funds in a way that creates a different Division 7A or section 100A problem.

My view

Bendel is a significant correction to the law. It confirms that a UPE is not automatically a Division 7A loan merely because it remains unpaid. That is a meaningful change, and advisers should not continue to apply the old ATO position without considering whether it is still legally justified.

However, it would be unwise to treat Bendel as permission to ignore UPEs. The ATO’s DIS makes clear that the compliance focus has shifted rather than disappeared. The issue is no longer simply whether a UPE exists, but what has happened to the funds, who has benefited, and whether another integrity provision applies.

So, should we change the way UPEs are treated for tax compliance purposes? Yes, but not reflexively. Bendel means the automatic Division 7A loan treatment should be reconsidered, particularly where the facts involve a passive UPE and no further dealing with the entitlement. But the proposed trust tax changes also mean there may only be a relatively small window in which changing approach produces a meaningful commercial benefit.

In some cases, it may be worth changing course now. If a group has simple passive UPEs, no shareholder or associate use of trust funds, no section 100A concerns, and no need to retain unnecessary Division 7A loan documentation, Bendel may justify moving away from automatic complying loan treatment for current and near-term years.

In other cases, the answer may be no. If the group already has established complying loan arrangements, real cash use by shareholders or associates, complex historical UPEs, or limited commercial benefit from changing systems for only a short period before the proposed trust reforms commence, the safer and more practical approach may be to maintain the current discipline.

The practical message is this: Bendel narrows the Division 7A problem, but it does not remove the need for careful trust distribution planning. UPEs are no longer automatically Division 7A loans, but they remain tax-sensitive entitlements. For the short window before the proposed trust reforms may take effect, changing approach may be worthwhile in some cases and unnecessary in others. The decision should be made case by case, based on the legal character of the entitlement, the use of funds, existing documentation and the commercial benefit of changing course.