The recent High Court decision has an important impact on small business groups that use discretionary trusts with corporate beneficiaries. In that landmark case (Tax Commissioner v Bender) on 10 June 2026, the court denied the Australian Tax Office’s (ATO’s) belief that unpaid present entitlements (UPEs) a trust owes a corporate beneficiary automatically becomes a loan back to the trust.
This is important because if the ATO treats a UPE as a loan there could be a tax bill under the rules of Division 7A. These rules apply to private companies that pay benefits, such as payments or loans, or forgive debts, to their shareholders
Why the court ruling matters
A lot of discretionary trusts form part of the structure of private business groups. The trust may distribute income to the company (referred to as a bucket company) but the money stays in the trust to fund future investment or as working capital. When money is owed to a beneficiary, but not paid, it becomes a UPE.
For the past 15 years, the ATO treated a UPE as a loan back to the trust and taxed it if there was not a formal loan agreement and regular repayments. This can increase the cost of compliance and administration while reducing the flexibility of cash flow.
The crux of the Bendel case against the ATO was that he kept income aside for many years for a related company. The company never asked for the funds, so they stayed within the trust and the ATO treated the unpaid amounts as loans and wanted Bendel to pay tax on the amount.
High Court decision
The High Court ruled against the ATO saying it was not a loan if an entitlement remains unpaid. It decided there has to be an obligation to repay money received as an advance. UPEs are not an advance and the company had simply not asked for their entitlement.
According to the High Court, providing finance or a loan is not the same as merely doing nothing. So the company’s entitlement is exactly that—an entitlement. It does not become a debt the trust needs to pay until the company requires the trust to pay the entitlement. Basically, the ATO was found to be wrong in its assessment and tax requirements on UPEs.
Whet this means for taxpayers
While this is a good outcome, it does not mean you can simply ignore unpaid entitlements. The June 2026 outcome rested on the fact the company never asked for payment and the specific wording in the trust deed. There are other tax rules that may apply. Whether or not you owe the ATO tax depends on individual circumstances.
With the government about to start taxing discretionary trust income at a minimum of 30% from 1 July 2028, the appeal of receiving income may be reduced. Now may be the time to consider your options.
All this makes UPEs and discretionary trusts and taxation complex. Contact Ben for more information about how it affects your trust and what you can do.