Division 7A Explained: How It Works and What the Bendel Decision Means
Division 7A has become one of the most important and widely discussed areas of Australian tax law for business owners who use private companies and trusts. It influences how money can move between entities, how profit distributions are managed, and how owners can access funds from their business structures.
Below is a comprehensive overview of where things stand and what business owners should consider during this uncertain period.
What Is Division 7A?
Division 7A is a set of rules designed to ensure that when a private company provides money, value, or financial benefits to its shareholders (or to entities connected to those shareholders), those transactions are treated consistently for tax purposes.
In other words, it prevents situations where company funds are withdrawn by individuals or related entities in a way that bypasses the normal processes for distributing profits and paying appropriate tax.
When Division 7A applies, amounts are included in the recipient's assessable income as dividends under section 44(1) of the Income Tax Assessment Act 1936—commonly referred to as "deemed dividends."
Key point: Division 7A only applies to private companies, not public companies.
What Does Division 7A Cover?
Division 7A can apply when a private company provides any of the following to a shareholder or their associate (which includes family members, related entities, and trusts):
1. Loans : Money that is borrowed from a company and not placed under a complying Division 7A loan agreement.
To comply, loans must:
Be documented by the company's tax return lodgment day
Charge minimum interest rates (set annually by the ATO)
Be repaid within 7 years (unsecured) or 25 years (secured by registered mortgage)
2. Payments: Amounts paid for the benefit of shareholders or their associates, including private expenses paid from company accounts.
3. Debt forgiveness: When a company decides not to collect money it is owed.
4. Use of company assets: For example, where company property is used privately without appropriate arrangements or market-rate compensation.
5. Certain trust arrangements: Especially when a trust makes distributions to a company but someone else uses or enjoys the economic benefit—this is the exact issue at the heart of the Bendel case currently before the High Court.
When these situations occur and don't meet Division 7A's requirements, the amount is included in the recipient's assessable income as a dividend.
How Does Division 7A Get Triggered?
Division 7A is triggered when:
A private company provides money, value, or a financial benefit, and
The benefit is received by a shareholder or associate, and
The transaction isn't supported by the required documentation or isn't structured in line with Division 7A's requirements.
Common examples include:
Individuals taking funds out of a company as informal "borrowings"
Private expenses paid from company accounts
Loans to related trusts
Trust distributions made to a company where the funds are then used by individuals
Use of company assets for personal purposes
If a transaction falls within Division 7A and does not meet the required conditions, a deemed dividend may arise, resulting in additional assessable income for the recipient.
The Bendel Case: The Journey to the High Court
The case Commissioner of Taxation v Bendel has become the most significant Division 7A case in over 15 years, specifically addressing whether an unpaid present entitlement (UPE) to a corporate beneficiary constitutes a "loan" for Division 7A purposes.
What is a UPE? An unpaid present entitlement is a beneficiary's legal right to receive trust income that has been allocated to them, but which hasn't yet been paid in cash.
The Structure:
The case involves Gleewin Investments Pty Ltd (Gleewin Investments), which was a discretionary beneficiary of the Steven Bendel 2005 Discretionary Trust (the 2005 Trust).
Mr Steven Bendel was the sole director, secretary and shareholder of Gleewin Investments. He also controlled Gleewin Pty Ltd (Gleewin), which acted as trustee of the 2005 Trust.
This is a typical family business structure, one person controlling both the corporate beneficiary and the trustee company, with the trust distributing income to the related company.
The Facts:
The 2005 Trust made distributions totaling approximately $1.66 million to Gleewin Investments over the 2013-14 to 2016-17 income years
Gleewin Investments (the corporate beneficiary) did not receive payment of these amounts in cash
The trust satisfied the company's entitlement only to the extent necessary to meet the company's tax liabilities and expenses
The trust subsequently made substantial loans to Mr Bendel (the individual shareholder)
The ATO assessed the unpaid entitlements as loans from Gleewin Investments back to the trust for Division 7A purposes
This assessment was based on long-standing ATO guidance in TR 2010/3 and TD 2022/11
The ATO's Position:
The ATO argued that when a trust doesn't pay a corporate beneficiary its entitlement, the company has effectively "lent" that money back to the trust. Because Mr Bendel then borrowed from the trust, the ATO viewed this as an indirect way for company funds to reach the shareholder without being treated as dividends.
The Court Decisions
In a unanimous decision, the Full Federal Court found in favor of the taxpayers but on different reasoning than the Tribunal.
The Court held:
While a debtor-creditor relationship existed between Gleewin Investments and the trust, subsection 109D(3) requires more than just a debtor-creditor relationship
It requires an obligation to repay and not merely an obligation to pay
The company never "parted with" any money. It simply has an entitlement to receive money from the trust
That Gleewin Investments consented or acquiesced to the trust not paying the amounts did not constitute a "loan" within the meaning of subsection 109D(3)
High Court Appeal (Current Status)
The Commissioner applied for special leave to appeal on 18 March 2025. Special leave was granted on 12 June 2025. The High Court hearing took place on 14 October 2025. A decision is expected in the first half of 2026.
What's the Current Status During the Appeal?
The ATO's Current Position: The ATO maintains its view that UPEs can constitute Division 7A loans pending the High Court's decision.
Specifically:
TD 2022/11 remains in effect for UPEs arising on or after 1 July 2022
TR 2010/3 and PS LA 2010/4 continue to apply for UPEs arising before 1 July 2022 (despite being "withdrawn" with effect from 1 July 2022)
The Full Federal Court decision does not represent binding law while the matter is under appeal
The ATO will not grant blanket lodgment extensions or exercise the Commissioner's discretion broadly to remit penalties and interest
Other integrity provisions remain applicable regardless of Division 7A, including:
Section 100A (reimbursement agreements)
Subdivision EA (loans through interposed entities)
General anti-avoidance provisions
Final Thoughts
The Bendel case represents the most significant Division 7A litigation in over 15 years. The High Court's decision, expected in early 2026, will definitively resolve whether unpaid present entitlements to corporate beneficiaries constitute "loans" for Division 7A purposes.
What’s clear now is that:
Division 7A remains an active compliance requirement for private companies and their shareholders
Other integrity provisions (s100A, Subdivision EA) apply regardless of the Bendel outcome
Documentation and commercial substance remain critical for all trust-company arrangements
Professional advice is essential to navigate this period of uncertainty
The High Court's decision will be binding and will require all taxpayers to adjust their approach accordingly
The tax profession, taxpayers, and the ATO eagerly await the High Court's decision, which will shape the operation of Division 7A for years to come.
⚠️ Important Disclaimer
This article provides general information only and does not constitute financial or tax advice. The Division 7A landscape is currently subject to significant uncertainty due to the High Court appeal in the Bendel case.
You should seek specific professional advice about your particular circumstances before making any decisions or implementing any strategies based on this information.
Need help navigating the Division 7A uncertainty and making the right strategic choice for your business? Contact our team to discuss your specific circumstances and ensure your approach appropriately balances risk and opportunity during this transitional period.