For more than a decade the ATO treated a very common trust arrangement as if it were a loan — and taxed it accordingly. In Bendel, the Full Federal Court said that reading of the law was wrong.
The setup most owners don't realise they have
A huge number of Australian small businesses run through a discretionary (family) trust. At the end of each year the trust distributes its profit to beneficiaries — and one of those beneficiaries is very often a company (a "corporate beneficiary" or "bucket company"), because company tax is capped at 25–30% while individuals can be taxed up to 47%.
Here's the catch: the trust often declares the distribution to the company but doesn't actually pay the cash across. The company is owed the money but the funds stay in the trust, working in the business. That owed-but-unpaid amount is called an unpaid present entitlement — a UPE.
What Division 7A is, and why it mattered
Division 7A is an anti-avoidance rule. Its job is to stop business owners pulling money out of a company tax-free by dressing a dividend up as a "loan." If a company lends money to a shareholder (or their associate) and it isn't put on proper commercial terms, Division 7A treats it as a taxable dividend.
Since 2010, the ATO's position (set out in TR 2010/3 and TD 2011/16) was that an unpaid present entitlement from a trust to a corporate beneficiary could itself be treated as a loan back to the trust — and therefore caught by Division 7A. In practice that forced thousands of businesses onto complex 7-year or 10-year loan agreements with minimum yearly repayments, or risked a deemed dividend and a tax bill.
The whole industry built its trust advice around an interpretation that, it turns out, the law may not have supported.
What the court actually decided
Mr Bendel challenged that interpretation. The Administrative Appeals Tribunal sided with him in 2023, and in February 2025 the Full Federal Court agreed: an unpaid present entitlement is not a "loan" within the meaning of Division 7A. A beneficiary being owed money it hasn't called for is simply not the same legal thing as lending money.
In other words, the ATO had been applying Division 7A to UPEs for roughly 15 years on a basis the court found the legislation didn't actually carry.
Why this case matters
This isn't an obscure technicality. The trust-distributes-to-a-bucket-company structure is one of the most common setups in Australian small business. A change in how UPEs are treated affects how much tax is payable, when it's payable, and whether years of "Division 7A loan" paperwork was ever necessary.
Before you do anything: it's not fully settled
This is the part that matters most, and the part that gets lost in the headlines. The Commissioner indicated he would seek to take the matter further, and the ATO has flagged it would maintain its administrative approach until the position is finally resolved. The law in this area can still move.
So the worst thing an owner can do is read "the ATO got it wrong" and unwind their Division 7A arrangements on their own. If the position later shifts, that can create exactly the deemed-dividend problem the paperwork was protecting against.
What a switched-on owner should do now
- Know whether you're exposed. If your business runs through a trust that distributes to a company, you almost certainly have UPEs sitting on the books. Find out the dollar value.
- Don't tear up existing loan agreements. Until the position is final, the conservative path is usually to keep complying while the dust settles.
- Model both outcomes. A good adviser can show you what your position looks like if the Bendel view holds versus if it's overturned — so you're ready either way.
- Review past years. Depending on how this lands, there may be opportunities to revisit prior treatment — but only with proper advice.
The lesson underneath the legal detail is the one we come back to constantly: structure is not "set and forget." The arrangements that were standard advice in 2015 are being tested in court in 2025. If nobody is reviewing yours against where the law is now, you're carrying a risk you can't see.
This article is general information only, current as at the date of publication, and does not take into account your specific circumstances. Tax law in this area is unsettled and may change. It is not tax, legal or financial advice. Please speak to a registered tax agent or adviser about your own situation before acting. Precision Business Services is a registered tax agent based in Cronulla, NSW.