Division 7A Trust Distribution Disputes: What Advisers and Directors Need to Know After Bendel

You distribute income from your family trust to your company each year. The company is entitled to the money, but it doesn’t actually get paid out. The funds stay in the trust, floating around the group.

For years, your accountant managed this with careful documentation. Then in 2025, the Full Federal Court handed down a decision that seemed to change everything. Suddenly, unpaid present entitlements to companies were no longer automatic Division 7A loans.

But has the risk actually gone away?

If you run a discretionary trust that distributes to a corporate beneficiary, you’re still navigating a minefield. The ATO hasn’t fully retreated. Legacy structures are still under scrutiny. And the way you documented (or didn’t document) those unpaid entitlements over the past decade might be the difference between a clean outcome and a costly dispute.

This is not about celebrating a legal win and moving on. It’s about understanding how Division 7A disputes arise in trust–company structures, what the Bendel decision really changed, and what you need to do now to keep your files defensible.

Why Division 7A Still Matters for Trust–Company Structures

Division 7A exists to stop one specific thing: shareholders accessing company profits as tax-free loans instead of paying tax on dividends.

It’s anti-avoidance legislation. Blunt, unforgiving, and deliberately broad.

The most common target is the obvious scenario: a private company lends money to a shareholder or their spouse, interest-free, with no real expectation of repayment. Division 7A treats that “loan” as a deemed dividend, taxable in the shareholder’s hands.

But the legislation doesn’t stop at direct loans. It extends to payments, forgiven debts, and anything that looks like financial accommodation flowing from a private company to a shareholder or their associate.

This is where trusts come into the picture.

Many family businesses operate through a combination of discretionary trusts and corporate beneficiaries. The trust earns income, distributes it to the company, and the company holds the entitlement without necessarily receiving a cash payment. The funds stay in the trust, used for working capital, investments, or other group needs.

On its face, this seems fine. The company is taxed on its entitlement. The trust has distributed the income. No one has accessed untaxed profits.

But the ATO has long been interested in what happens next. If the trust uses those “company” funds to lend money to shareholders, or pays personal expenses, or shuffles cash around the group in ways that ultimately benefit individuals, Division 7A can be triggered.

And despite recent case law, that risk has not disappeared.

How Division 7A Interacts with Trust Distributions to Companies

Start with the mechanics.

A discretionary trust distributes income to a private company beneficiary. The trustee makes the company “presently entitled” to that income, usually by resolution before year end. The company includes the distribution in its assessable income and pays tax at the corporate rate.

So far, straightforward.

The question is: does the company actually receive the money?

In many structures, the answer is no. The entitlement is recorded in the books, but the cash stays with the trustee. This creates an unpaid present entitlement, a UPE.

Division 7A cares about three things:

Each of these can be treated as a deemed dividend, taxable to the recipient.

Now apply that to a UPE scenario. The company is owed money by the trust. If the company does not demand payment, and the trustee continues to use the funds, is that a “loan” from the company to the trust? And if the trust then uses those funds to benefit shareholders, does Division 7A apply?

For over a decade, the ATO’s position was yes. The logic went like this: by not demanding payment, the company is providing financial accommodation to the trustee. That accommodation is a “loan” for Division 7A purposes. If the trustee then lends money to shareholders or pays their expenses, the arrangement can trigger a deemed dividend.

This interpretation was set out in ATO guidance and applied in audits. It created significant compliance pressure. Advisers responded by converting UPEs to formal Division 7A loans, complete with loan agreements, minimum yearly repayments and market interest rates. Others used sub-trust arrangements, attempting to quarantine the company’s entitlement within the trust structure.

Then in early 2025, the Full Federal Court decided Commissioner of Taxation v Bendel.

The court held that an unpaid present entitlement is not a “loan” for Division 7A purposes. A loan requires an obligation to repay. A UPE is simply a right to receive payment. The company is a creditor, but there is no debt owed by the company to anyone else.

This was a significant shift. It restored the position that existed before the ATO’s more aggressive interpretation took hold around 2010.

But here is what Bendel did not do: it did not say that Division 7A can never apply to arrangements involving trusts and company beneficiaries.

Unpaid Present Entitlements After Bendel: What Changed and What Didn’t

The Bendel decision matters because it removes one automatic trap.

If your company has a UPE from a trust, the mere existence of that UPE is not a Division 7A problem. You do not need to convert it to a complying loan. You do not need to charge interest. You do not need minimum yearly repayments.

That is the headline win, and it is real.

But the decision is not a free pass.

The court’s reasoning turned on the nature of a loan. For Division 7A to apply, there must be an advance of money creating a debt owed by the borrower to the lender. A UPE does not fit that description. The company is owed money; it has not advanced money to anyone.

Fair enough.

But what if the trust takes the funds it owes to the company and lends them to a shareholder? Or uses them to pay a shareholder’s personal expenses? Or advances them to another entity controlled by the shareholders?

In those scenarios, the question is not whether the UPE is a loan. The question is whether there is an arrangement involving the company that provides financial accommodation to a shareholder or associate.

Division 7A can apply to indirect payments and loans. The legislation is broad enough to catch multi-step arrangements where the economic substance is that company funds have been made available to shareholders.

This is where disputes arise.

The ATO may accept that a UPE is not automatically a Division 7A loan. But if the facts show that the trust used the money in ways that benefited shareholders, the Commissioner can still argue that Division 7A applies to that use.

Consider a typical scenario. Family trust distributes $500,000 to the family company. The company does not receive payment. The trustee uses the $500,000 as working capital, then advances $300,000 to Mum and Dad to help them buy a holiday house.

Pre-Bendel, the ATO might have treated the UPE as a loan, then looked at whether the trust’s use of funds created a further Division 7A issue. Post-Bendel, the UPE is not a loan. But the $300,000 advanced to Mum and Dad is still a problem. The question becomes: is that advance a payment or loan from the company (via the trust) to shareholders?

The answer depends on the facts, the documentation, and how the arrangement is characterised. But it is not a question that Bendel resolved.

Can you articulate why the trust’s loan to Mum and Dad is not a Division 7A issue? Can you show that the funds advanced came from trust assets, not from the company’s entitlement? Can you demonstrate that the company’s UPE was genuinely preserved as a separate debt?

If you can, you are ahead of most structures. If you cannot, the ATO has room to argue.

Where Disputes Are Arising in Practice

Division 7A disputes do not usually start with a philosophical debate about the nature of loans. They start with an audit, a question about cash flows, and a set of inconsistent documents.

Here are the fact patterns that trigger ATO scrutiny.

Funds Distributed to a Company but Used for Shareholder Benefits

Trust distributes income to a corporate beneficiary. The company does not receive payment. The trustee uses the funds to pay directors’ personal expenses, lend money to family members, or acquire assets in individual names.

The ATO’s question: where did the money for those payments actually come from?

If the answer is “from the trust, which owed it to the company”, you have a problem. The substance is that the company’s entitlement funded shareholder benefits. Division 7A is designed to catch exactly that.

Your defence depends on whether you can credibly separate the trust’s own funds from the company’s unpaid entitlement. If the trustee has other assets, other income, or a documented source for the payments, you can argue the company’s UPE was not touched. If you cannot show that separation, the ATO will treat the payments as coming from the company.

This is where lack of contemporaneous documentation kills your position.

Sub-Trust Arrangements That Exist on Paper but Not in Substance

In response to pre-Bendel ATO guidance, many advisers put corporate UPEs on “sub-trust” for the benefit of the company. The idea was to quarantine the funds, demonstrating that the company’s entitlement was not being used by the trust for other purposes.

In theory, clean. In practice, messy.

A genuine sub-trust requires the trustee to hold the company’s entitlement separately, invest it separately, and account for it separately. If that discipline is maintained, the sub-trust can be real.

But in many cases, the sub-trust exists only in the minutes. There is no separate bank account, no separate investment, no separate accounting. The trustee continues to use the funds as general working capital.

Years later, the ATO reviews the structure. There is no evidence of a genuine sub-trust. The documentation does not match the cash flows. The company’s entitlement has been mixed with the trust’s other funds and used for unrelated purposes.

At that point, the sub-trust is disregarded, and you are back to arguing about whether the trust’s use of funds created a Division 7A issue.

Inconsistent Treatment Across Years

Another common dispute trigger: changing strategies mid-stream without a clear transition.

Before Bendel, adviser treats UPEs as Division 7A loans, documents complying loan agreements, charges interest, requires minimum repayments. After Bendel, adviser stops doing that, relying on the court’s decision.

The problem is not the change itself. It is the lack of explanation. Why did you treat the 2022 UPE as a loan but the 2025 UPE differently? Was the underlying arrangement the same? If so, how can both treatments be correct?

The ATO will argue that inconsistent treatment signals that the true nature of the arrangement was never properly analysed. And when the facts are unclear, the Commissioner usually wins.

The fix is documentation. If you are changing your approach post-Bendel, minute the decision, explain the reasoning, and apply the new treatment consistently going forward. Do not leave a trail of contradictory positions with no explanation.

Legacy Structures That Pre-Date Current Understanding

Many disputes involve UPEs that are five, ten, even fifteen years old.

Those entitlements were created under different ATO guidance, different case law, and different compliance practices. The paperwork may or may not exist. The people who made the decisions may have moved on. The cash flows are buried in old bank statements.

When the ATO reviews these structures now, they apply current interpretation to old facts. If the evidence does not support your position, age is not a defence.

This is where proactive file review matters. If you have legacy UPEs that were never properly documented, never converted to loans, or were treated inconsistently, you need to understand the exposure before the ATO does.

Legacy UPEs and Existing Structures: Practical Choices for Advisers

You have clients with old unpaid present entitlements on the books. Some were converted to Division 7A loans years ago. Some were put on sub-trust with varying degrees of rigour. Some were just left as debts, unresolved.

Bendel has changed the law, but it has not cleaned up your files.

What do you do now?

You have four broad options, each with trade-offs.

Option 1: Leave Everything as It Is

If you are confident that:

• The UPEs were genuine present entitlements
• The trust did not use the funds to benefit shareholders or associates
• The documentation supports the separation of the company’s entitlement from the trust’s other funds…then you can reasonably take the position that Bendel supports your treatment and no further action is required.

But “leave it” is not the same as “do nothing”. It requires a documented assessment of the position. You need to be able to explain, if challenged, why you concluded that Division 7A does not apply.

If you cannot articulate that reasoning, you are not leaving it. You are ignoring it. Those are different things.

Option 2: Document and Ring-Fence Going Forward

For UPEs that are still on the books but lack clear documentation, consider this approach:

Acknowledge that the historic position is unclear, but document the current position clearly. Put the UPE on a formal inter-entity loan (not a Division 7A loan, just a commercial loan from the trust to the company). Charge interest if appropriate. Ensure the company’s debt is properly accounted for.

This does not fix the past, but it creates a defensible line: “From this point forward, the arrangement is clear.”

If the ATO challenges the historic position, you deal with it then. But at least you have stopped the bleeding.

Option 3: Convert to Complying Division 7A Loans (Where Appropriate)

In some cases, the safest course is to treat the UPE as a Division 7A loan, even post-Bendel.

Why would you do that?

Because the facts are messy, the use of funds is unclear, and the cost of a dispute outweighs the cost of compliance.

If you convert the UPE to a complying loan now, you lock in a known outcome. The deemed dividend is avoided (assuming the loan meets the requirements), and the position is defensible.

This is a conservative choice. It may not be legally required. But for clients who value certainty over technical correctness, it is a rational option.

Option 4: Restructure

If the trust–company arrangement is fundamentally problematic, consider unwinding it.

Pay out the UPE. Distribute assets from the trust to the company. Simplify the structure so that future distributions are actually paid, not left as entitlements.

Restructuring has costs: stamp duty, CGT, administrative burden. But it also has benefits: clarity, reduced compliance load, and elimination of ongoing Division 7A risk.

For some groups, particularly those under ATO review or contemplating significant transactions, restructuring is the right answer.

The choice depends on your risk tolerance, the quality of your existing documentation, and your appetite for future disputes.

What the ATO Looks for in a Review

When the ATO opens a Division 7A review, the first request is usually straightforward: “Please provide copies of trust minutes, company resolutions, loan agreements, and bank statements for the relevant years.”

What they are actually looking for is coherence.

Do the minutes match the resolutions? Do the resolutions match the accounting entries? Do the accounting entries match the bank statements? Do the bank statements support the narrative you have constructed?

If the answer is yes at every level, the review usually closes quickly. If there are gaps, inconsistencies, or documents that contradict each other, the review deepens.

Here is what matters in practice.

Minutes and Resolutions

The trustee’s resolution to distribute income to the company should be dated before the end of the financial year, should specify the amount, and should be executed properly.

The company’s resolution to accept the distribution (or not demand payment) should exist and should be contemporaneous.

If the minutes are undated, unsigned, or created years after the fact, the ATO will question whether the distribution was ever properly made.

Loan Agreements

If you converted a UPE to a Division 7A loan, the loan agreement should comply with the legislation: minimum term, minimum yearly repayment, interest at the benchmark rate, and execution by the relevant parties.

If the agreement was signed late, or the repayments were not made, or the interest was not charged, the loan does not comply and the deemed dividend applies.

The ATO has seen every variation. They know when a loan agreement was backdated, when repayments were fictitious, and when interest was only charged in the accounts but never actually paid.

Bank Statements and Cash Flows

This is where most disputes are won or lost.

The ATO will trace the cash. If the trust distributed $500,000 to the company, where did that money actually go? If the trust then lent $300,000 to a shareholder, where did that $300,000 come from?

If the trust had $200,000 of its own funds and $500,000 owed to the company, and it lent $300,000 to a shareholder, the ATO will argue the loan came from the company’s entitlement.

Your defence is to show that the loan came from the trust’s own funds, not the company’s UPE. That requires you to demonstrate, with evidence, that the trust’s funds and the company’s entitlement were kept separate.

This is hard to do if you did not actually keep them separate.

Related-Party Transactions

The ATO pays close attention to any payments or loans from the trust to shareholders, directors, or their associates.

If those payments occurred while the trust owed money to the company, the question is whether the company’s funds were used. If they were, Division 7A applies. If they were not, you need to prove it.

The proof is contemporaneous documentation: separate accounts, separate reconciliations, and a clear audit trail.

If you do not have that, you are arguing about substance without evidence. That is a losing position.

Practical Steps to Reduce Division 7A Dispute Risk Going Forward

You cannot fix the past, but you can control the future.

Here is what disciplined practice looks like for trust–company distributions.

Year-End Decisions Must Be Clear and Documented

Before 30 June each year, decide:

• Will the trust distribute income to the company?
• Will the company actually receive payment, or will the entitlement remain unpaid?
• If unpaid, what is the commercial reason, and how will the entitlement be treated?

Do not leave these questions unanswered. Do not assume the accountant will “sort it out” in August when the tax return is prepared.

The decision must be made before year end, and it must be documented in trustee resolutions.

If a UPE Is Created, Document the Treatment

If the company will not receive payment, document what happens to the entitlement.

Will it remain on the company’s loan account? Will it be converted to a commercial loan? Will it be placed on sub-trust?

Whatever the choice, write it down. Explain the reasoning. Create a paper trail that shows you understood the options and made a deliberate decision.

Keep the Company’s Entitlement Separate from the Trust’s Own Funds

If you want to argue that the trust did not use the company’s UPE for other purposes, you need to demonstrate separation.

That means:

• Separate accounting for the UPE
• Separate reconciliation of the company’s loan account
• Clear evidence that payments to shareholders or associates came from the trust’s own funds, not the company’s entitlement

This is easier if the trust maintains a separate investment or bank account for the company’s UPE. It is harder if everything is pooled in one account.

Treat Inter-Entity Loans as Loans

If the trust lends money to shareholders, directors, or related entities, document those loans properly.

Written agreement, interest rate, repayment terms, security if appropriate. Treat the loan like you would treat a loan to an external party.

This is not just good governance. It is evidence that the loan was a genuine commercial arrangement, not a device to access company funds tax-free.

Review and Reconcile Annually

At the end of each financial year, reconcile the company’s loan account with the trust.

Are there unexplained debits or credits? Are there amounts that should have been repaid but were not? Are there transactions that do not match the minutes?

If so, correct them before the tax return is lodged. Do not let errors accumulate.

Responding When Division 7A Is Raised

You receive a letter from the ATO. They are reviewing your client’s tax affairs, and they have questions about trust distributions to the family company.

What do you do?

Step 1: Understand What the ATO Is Actually Asking

Division 7A reviews can start broad and narrow quickly, or they can start with a very specific question.

Read the ATO’s request carefully. Are they asking for general information about the trust–company structure? Are they querying a specific transaction or year? Are they suggesting a particular Division 7A pathway (payment, loan, forgiven debt)?

Your response should address what they asked, not what you assume they are thinking.

Step 2: Reconstruct the Facts

Before you respond, gather the evidence.

Pull the trust minutes, company resolutions, loan agreements, bank statements, and accounting records for the relevant years. Trace the cash flows. Map out what actually happened, not what you think should have happened.

If the facts support your position, this exercise is easy. If the facts reveal problems, you need to know that before you respond to the ATO.

Step 3: Frame the Response Around Substance

The ATO is not interested in technical arguments divorced from commercial reality. They want to know: what was the economic substance of the arrangement?

If the substance is that the company was genuinely entitled to the distribution, the trust did not use the funds for shareholder benefits, and the UPE was properly accounted for, say that clearly.

If the substance is messy, acknowledge it. Explain what happened, why it happened, and what the correct tax treatment should be.

Attempting to construct a technical position that does not align with the facts will prolong the review and damage your credibility.

Step 4: Assess the Cost of Dispute Versus Settlement

If the ATO proposes an adjustment (treating a payment or loan as a deemed dividend), you need to decide whether to contest or settle.

Contesting means objection, possible litigation, professional costs, and time. Settlement means accepting the adjustment (or negotiating a reduced position) and moving on.

The decision depends on:

• The strength of your facts and documentation
• The amount at stake
• Your client’s appetite for dispute
• The likelihood of success if the matter proceeds to court

Not every Division 7A issue is worth fighting. Some are better resolved by agreement, particularly where the facts are unclear or the documentation is weak.

Step 5: Engage Specialist Advice Early

Division 7A disputes are technical, high-stakes, and unforgiving.

If the ATO raises a substantive issue, do not attempt to manage it alone. Engage a disputes specialist who has run these arguments before.

The earlier you bring in specialist advice, the more options you have. Waiting until after the ATO has issued an assessment limits your strategic choices.

What This Means for Clients and Advisers

Division 7A is not going away.

Bendel clarified one aspect of the law: unpaid present entitlements to companies are not automatically loans. That is a real shift, and it removes a compliance burden that was never intended by the legislation.

But Bendel did not eliminate the need for rigorous documentation, clear separation of funds, and careful management of shareholder benefits.

If your trust distributes to a company and leaves the entitlement unpaid, you need to know:

• Why the entitlement is unpaid
• What is happening to the funds
• Whether any part of those funds is being used to benefit shareholders or associates
• How the arrangement is documented and whether it can withstand scrutiny

These are not theoretical questions. They are the questions the ATO will ask when they review your structure in three, five, or ten years.

The clients who will avoid disputes are the ones who can answer those questions now, with evidence, not assumptions.

For advisers, the message is the same. Division 7A compliance is not about filling out loan agreements or ticking boxes. It is about understanding the substance of the arrangements your clients have in place, documenting them properly, and being able to defend them if challenged.

If you cannot explain, clearly and confidently, why Division 7A does not apply to your client’s trust–company structure, then you have work to do.

And if you are relying on Bendel to save you from poorly documented arrangements, you are misunderstanding what the decision achieved.

Disclaimer: This article provides general information only and does not constitute legal advice. Division 7A compliance depends on the specific facts of each arrangement, and outcomes can vary. If you are facing an ATO review or have concerns about Division 7A exposure in your trust–company structure, seek specialist advice tailored to your circumstances.