In a major decision affecting the area of trust taxation in Australia, the Full Federal Court last week ruled in Bendel (Commissioner of Taxation v Bendel [2025] FACFC 15) that an unpaid present entitlement (trust entitlement) owed to a company beneficiary of a trust, cannot be treated as a form of financial accommodation and is therefore not considered to be a ‘loan’ as defined under Section 109D(3) of Division 7A of the Income Tax Assessment Act 1997.
This overturns the approach taken by the ATO in rulings and determinations relating to the issue which have been in place for over almost 15 years.
The ATO has long considered that where a family trust confers an entitlement to income upon a company, that the company is taken to provide financial accommodation (a loan) to the Trust if the said company does not insist on being paid its trust entitlement.
The decision has positive implications for the management of family trusts which distribute all or part of their income to family owned companies. It has the potential to simplify tax compliance in this area while maintaining the integrity of the tax system.
The Federal Court’s decision has brought into focus Subdivision EA of Division 7A which has long been sidelined. Subdivision EA applies to situations where a trust monies that are due to be paid to a corporate beneficiary is instead lent or paid out of the Trust to other beneficiaries, usually individual family members, or if such family members are forgiven debts that they owe the Trust.
It is unclear whether there will be a High Court appeal in relation to the matter or whether the Government will respond by changing the law.
Arguably changes in the law should not be required since Subdivision EA already operates (if properly administered) to safeguard the tax system from the inappropriate accessing of company profits. That point has been unequivocally made by the Federal Court.
