High Court Rules on Trust Distributions: What's Changed for You

If your business operates through a discretionary trust, a recent High Court decision is worth understanding.

A significant High Court decision handed down on 10 June 2026 has brought greater clarity to an area of tax law that has created considerable compliance burden for private business groups for many years.

In Commissioner of Taxation v Bendel [2026] HCA 18, the Court rejected the ATO's long-standing view that an unpaid distribution owed by a trust to a corporate beneficiary automatically constitutes a loan under Division 7A. This is a meaningful shift, and one that is worth understanding clearly if your business operates through a discretionary trust structure.

What Is Division 7A and Why Does It Matter

Division 7A is the set of tax rules designed to prevent private companies from providing tax-free benefits to shareholders or their associates through payments, loans, or forgiven debts. When these rules are triggered, the benefit is treated as an unfranked dividend for tax purposes, which can create a significant and unexpected tax liability.

For many private business groups, Division 7A has long been a source of complexity, particularly where trusts distribute income to corporate beneficiaries but leave those distributions unpaid.

It is common for a discretionary trust to distribute income to a corporate beneficiary so that the income is taxed at the company rate, currently 25% or 30%, while the cash remains within the trust to fund working capital, future investment, or business growth. Until now, the ATO's view was that these unpaid distributions would typically be treated as loans under Division 7A.

That meant businesses needed to put formal complying loan agreements in place, charge benchmark interest rates, and make annual repayments to avoid the risk of deemed unfranked dividends. For many groups, this created ongoing administrative burden, reduced cash flow flexibility, and added compliance costs year after year.

What the High Court Decided

The High Court has now clarified that an unpaid distribution does not automatically constitute a Division 7A loan simply because the corporate beneficiary has not demanded payment.

This is a significant departure from the ATO's previous position and provides greater certainty for many business groups that have historically retained funds within their trusts while distributions to corporate beneficiaries remained unpaid.

The decision will not apply uniformly to every arrangement. As always with tax law, the specific facts of each situation will matter. But as a general principle, the ruling removes the automatic assumption that unpaid distributions trigger Division 7A obligations.

The ATO released a Decision Impact Statement on 26 June 2026, confirming it will generally administer the law in accordance with the Court's decision, while noting that other integrity provisions may still need to be considered in certain circumstances.

What Happens to Existing Loan Agreements

This is a question many business owners will have immediately, and it is an important one.

Where formal written loan agreements have already been put in place in response to the ATO's previous position, those agreements cannot simply be unwound as a result of the Bendel decision.

If a complying loan agreement is in place, minimum annual repayments must continue to be made until the loan period ends or the loan is fully repaid. Failing to maintain those repayments will still trigger a deemed unfranked dividend under the tax rules, regardless of the Court's decision.

If you have existing loan agreements in place, it is important to continue meeting your obligations under those agreements.

Other Rules That Still Apply

The Bendel decision is a positive development, but it should not be read as removing all Division 7A or tax-related considerations from trust structures.

Division 7A can still apply in certain circumstances.

If a trustee distributes income to a corporate beneficiary, leaves it unpaid, and then lends money to a shareholder of that company or an associate, this can still potentially trigger a deemed unfranked dividend. The specific facts of each arrangement will determine the outcome.

Section 100A remains relevant.

The rules in section 100A can produce adverse tax outcomes where a trustee distributes income to a beneficiary but the real economic benefit of those funds is enjoyed by someone else. This provision continues to be an area of ATO focus and is highly fact-dependent.

The Bendel decision resolves one specific question. It does not remove the need to consider how other provisions of the tax law interact with your trust arrangements.

The Bigger Picture

The Bendel decision arrives at a particularly significant moment for discretionary trust structures, given the Government's proposed trust tax reforms announced in the recent Federal Budget.

From 1 July 2028, the Government is proposing to introduce a 30% minimum tax rate on the net taxable income of discretionary trusts. Under the proposed rules, income distributed to corporate beneficiaries will generally be subject to double taxation because companies will not receive a credit for tax paid at the trust level.

This proposed change has the potential to significantly reshape tax planning strategies for private groups over the coming years.

Adding further complexity, a recent Treasury consultation paper connected to the proposed 30% minimum tax rate suggests the Government may also modify the tax rules to ensure Division 7A can apply to unpaid distributions. This is not law yet, but it is a development worth monitoring closely, as it could mean that arrangements which appear more straightforward today may need to be revisited before 1 July 2028.

What This Means for Your Business

For private business groups using discretionary trusts, the Bendel decision provides a timely opportunity to review your structure with fresh eyes. A few areas worth working through with your adviser:

• How unpaid distributions to corporate beneficiaries have been managed historically, and whether existing loan agreements need to continue to be maintained
• Whether your current distribution resolutions and patterns remain appropriate in light of the decision and the proposed trust tax reforms
• How the proposed 30% minimum tax rate on discretionary trusts may affect your group's tax position from 2028, and whether any restructuring conversations are worth starting now
• Whether section 100A or other Division 7A provisions remain relevant to your specific arrangements

The intersection of the Bendel decision and the proposed trust reforms creates both an opportunity and a planning imperative. Getting clarity on where your structure sits now, before the legislative landscape changes further, is a practical and worthwhile investment.

Looking Ahead

The Government's proposed trust tax reforms, including the 30% minimum tax rate on discretionary trusts from 1 July 2028 and the potential modification of Division 7A to capture unpaid distributions, remain proposals at this stage. Neither has passed into law yet.

We will continue to monitor developments in this area and keep you updated as the legislative position becomes clearer.

In the meantime, if you have questions about how the Bendel decision may be relevant to your trust structure or distribution arrangements, we are happy to discuss your specific circumstances.

Reach out to the Trekk Advisory team and we will help you work through what the decision means for your group.

Trekk Advisory provides accountant-led tax, bookkeeping, and advisory services for Australian business owners. This article is general in nature and does not constitute personal advice. Please speak with a qualified adviser regarding your specific circumstances.