What the Bendel decision means for trusts and bucket companies

Recent tax developments have created an important planning opportunity for private business owners, family groups and taxpayers who operate through discretionary trusts and corporate beneficiaries, commonly known as “bucket companies”.

The High Court’s decision in Commissioner of Taxation v Bendel is a positive development for taxpayers. In broad terms, the Court confirmed that an unpaid trust distribution to a corporate beneficiary is not automatically treated as a Division 7A loan.

This is significant because, for many years, the ATO treated many unpaid amounts as Division 7A loans. This often required complying loan agreements, interest calculations and annual repayments.

However, while the Bendel decision may provide greater flexibility for some trust and company structures, it does not mean all unpaid trust distributions are now risk-free.

It also comes at a time when the Federal Government has proposed major changes to the taxation of discretionary trusts from 1 July 2028, which could significantly reduce the future benefit of using bucket companies.

Why this matters for discretionary trusts and bucket companies

Many private business and family groups use a discretionary trust to distribute income to a corporate beneficiary. This may allow profits to be taxed at the company tax rate, while cash remains within the broader group for working capital, investment or asset protection purposes.

Where a trust distributes income to a company but does not physically pay the cash, the unpaid amount is generally referred to as an unpaid present entitlement, or UPE.

The Bendel decision challenges the long-standing approach to how some of these unpaid entitlements are treated for Division 7A purposes.

What did the Court say in Bendel?

The Court confirmed that an unpaid present entitlement is not automatically the same as a loan.

Put simply, there is an important difference between:

• a trust being required to pay an amount to a beneficiary; and

• a borrower being required to repay money that has been advanced as a loan.

The Court also made it clear that a corporate beneficiary simply not demanding immediate payment does not, by itself, mean the company has provided a loan or financial accommodation to the trust.

This is welcome news for taxpayers. However, the correct treatment will still depend heavily on the specific trust deed, trustee resolutions, accounting records and how the arrangement has been managed in practice.

Important cautions for taxpayers

Although the Bendel decision is positive, it should not be treated as a blanket approval for all unpaid trust distributions to companies.

Other tax rules may still apply, including rules dealing with:

• benefits provided to shareholders or their associates;

• reimbursement-style arrangements involving trust income;

• anti-avoidance provisions; and

• actual loans, payments or benefits made by companies within a family group.

Existing Division 7A loans also need to be managed carefully. If an unpaid trust distribution has already been converted into a complying Division 7A loan, it should not be assumed that the loan can simply be reversed or ignored.

Proposed trust tax changes from 1 July 2028

The practical benefit of the Bendel decision may also be short-lived.

As part of the 2026–27 Federal Budget, the Government announced proposed changes that would introduce a 30% minimum tax on discretionary trusts from 1 July 2028.

If legislated in their current form, these rules may significantly reduce the tax benefit of distributing trust income to bucket companies. In some cases, the combined tax outcome could be materially less favourable than under the current rules.

The Government has also proposed transitional rollover relief to help some groups restructure out of discretionary trusts. However, the detailed legislation is still to come, and not every structure will be easy or practical to unwind.

What should you do now?

If you operate through a discretionary trust and use, or have previously used, a corporate beneficiary, now is a good time to review your structure.

In particular, you should consider:

• whether your trust deed supports the intended treatment of unpaid distributions;

• whether trustee resolutions have been correctly prepared;

• whether existing unpaid entitlements have been converted into Division 7A loans;

• whether annual loan repayments and interest have been properly managed;

• whether other trust anti-avoidance rules may apply; and

• whether your current structure is likely to remain appropriate if the proposed 2028 changes become law.

Our view

The Bendel decision is a welcome development and may provide greater flexibility for some clients in the short term.

However, it is not a simple “green light” to leave trust distributions unpaid without further review. The correct treatment will depend on the documents, accounting records and commercial reality of each structure.

With proposed trust tax changes on the horizon from 1 July 2028, this is an ideal time to review existing trust and bucket company arrangements before making future distribution or restructuring decisions.

If you would like to understand how these developments may affect your structure, please contact our office.