“We leave some trust distributions owing to our company. Does the Bendel decision change what we need to do?”

If your family or business group uses a discretionary trust with a corporate beneficiary, there has been a significant development worth knowing about.

The High Court’s recent Bendel decision has rejected the ATO’s long-standing position that an unpaid trust distribution owed to a corporate beneficiary automatically becomes a loan for the purposes of Division 7A. That sounds technical, but the practical impact could be meaningful.

What was the problem?

Many private business groups distribute some trust income to a company, often called a corporate or bucket company.

The company is taxed on that income, but rather than physically transferring all the cash to the company, the money may stay inside the trust to help fund:

• working capital
• future investments
• business growth
• or other group expenses.

Historically, the ATO generally treated these unpaid amounts as loans from the company back to the trust. That meant businesses often needed formal Division 7A loan agreements, benchmark interest and annual minimum repayments to avoid an unwanted deemed dividend.

What did the High Court decide?

The High Court has now confirmed that simply leaving a trust distribution unpaid does not automatically create a Division 7A loan. That potentially removes some of the compliance burden and gives private groups more flexibility around how cash is retained within their structures.

But there is an important word in that sentence: automatically. The decision does not mean every unpaid trust distribution is now problem-free.

What about existing loan agreements?

If your group already entered into formal Division 7A loan agreements under the ATO’s previous approach, you generally cannot simply tear them up because the Court has changed the interpretation.

Those existing loans still need to be managed properly, including making required minimum repayments, until they are repaid or the agreed loan term ends.

Other tax rules have not disappeared

The ATO has also made it clear that other integrity rules remain relevant. For example, problems can still arise where trust income is distributed to a company, but the underlying cash ultimately benefits a shareholder or an associate.

Section 100A can also become relevant where income is formally appointed to one beneficiary, but someone else receives the real economic benefit.  So Bendel is good news, but it is not a “do whatever you like with trust money” decision.

What should business groups do now?

This is a sensible opportunity to review:

• unpaid trust distributions
• existing Division 7A loan agreements
• trust distribution resolutions
• accounting treatment
• where cash has actually flowed
• and whether anyone other than the beneficiary has enjoyed the economic benefit.

There is another reason to review things now. The Government’s proposed 30% minimum tax on discretionary trust income from 1 July 2028 could significantly change the attraction of distributing trust income to corporate beneficiaries in the future. 

Final thought

The Bendel decision provides welcome clarity, but it should be viewed as a chance to review existing arrangements, not assume all trust distribution issues have disappeared. If your structure uses a discretionary trust and corporate beneficiary, speak with your Aspen advisor about what the decision means for your group and whether anything should change.