What the Bendel High Court decision and Federal Budget mean for your trust – and what to do next

Written by Daniel Dubois

The past few weeks and months have seen major developments that affect how trusts are taxed in Australia.

While the technical details are complex, the key message for clients is simple:

  • Some tax risks around trust distributions have reduced

  • The overall tax advantage of discretionary trusts is expected to reduce significantly from 2028

  • The next 1 - 2 years are critical for reviewing and potentially restructuring your arrangements

We explain here what has changed and what it means for you.

What this means for you

If you operate through a trust (particularly a family trust with a company beneficiary):

  • You may no longer need to worry about automatic Division 7A issues on unpaid distributions (UPE) to companies/corporate beneficiaries

  • The ATO is likely to increase scrutiny using other rules

  • From 1 July 2028, trust income may be taxed at a minimum 30% rate, reducing flexibility

  • The traditional benefits of income splitting may be significantly limited

The rules are getting simpler in one area (UPEs) - But more restrictive at a system level (trust taxation overall)

What has changed – the Bendel High Court decision

In June 2026 the High Court confirmed that:

  • An unpaid distribution to a company (UPE) is not a loan under Division 7A

  • Leaving cash in a trust does not automatically create a deemed dividend

For many years, advisers have been forced to manage for clients the physical payment of distributions OR:

  • Putting these amounts on formal loan terms

  • Charging interest

  • ensuring minimum repayments have been made

That specific requirement has now been removed however:

  • The decision does not eliminate tax risk altogether

  • Other rules can still apply (particularly where arrangements are seen as artificial or tax-driven)

ATO response – expect continued scrutiny

The ATO has acknowledged the decision and is reviewing its position:

  • They will issue further guidance, but have not yet provided a replacement framework

  • They continue to rely on broader anti‑avoidance provisions where appropriate

In practice, this shifts the focus from:

  • “Have we followed the technical loan rules?”
    to

  • “Does the arrangement make commercial sense?”

What about existing Division 7A loans?

Many clients already have:

  • Formal Division 7A loans

  • Sub-trust arrangements

  • Ongoing repayment schedules

These arrangements:

  • Do not automatically unwind as a result of Bendel

  • Generally continue as existing obligations

Where loans arose historically from trust distributions (as seen in many client structures), they were created under the law as understood at the time and typically cannot simply be reversed without consequences.

Recommendation:

  • Review existing loan balances

  • Confirm whether continuing, repaying or restructuring is appropriate

FY2027 – a critical planning window

The period between now and 30 June 2027 is particularly important given:

  • Current trust rules still broadly apply

  • The new Budget measures are not yet in force

  • The Government is expected to allow restructuring relief from 1 July 2027

Planning opportunities include:

  • Utilising the last effective year of distributing income to lower taxed entities and/or corporate beneficiaries

  • Reviewing trust structures while flexibility remains

  • Simplifying multi-entity groups

  • Preparing for post‑2028 tax outcomes

From 1 July 2028 – the new trust tax regime

The Federal Budget is implementing a major structural change introducing a minimum 30% tax on discretionary trust income

In practical terms:

  • Trustees may pay tax directly at 30%

  • Beneficiaries may receive limited credit benefits available only to individuals, not companies

    • Income splitting opportunities are therefore reduced without incurring double taxation

This represents a fundamental shift away from traditional trust taxation, where income could be streamed to lower-taxed beneficiaries

Bendel as a catalyst for change in trust tax policy

The High Court’s decision in Bendel may also help explain the Government’s move to broader trust tax reform. By confirming that unpaid distributions to companies are not automatically treated as loans, the decision potentially re-opened planning strategies that had been constrained for years. The proposed 30% minimum tax can therefore be seen as a policy response - shifting from relying on ATO interpretation to legislating a more controlled outcome for trust taxation.

What this means for group structures going forward

Historically, discretionary trusts were used for:

  • Asset protection

  • Income flexibility

  • Tax management

Going forward:

  • Tax flexibility will reduce

  • Asset protection and succession planning remain valid reasons to use trusts

  • In some cases, companies or fixed trusts may become more attractive from a tax perspective

Key actions to consider now

We recommend that clients with trust structures work with Salt to:

  • Review:

    • Current trust distributions and beneficiary structures

    • Existing Division 7A loans and UPE positions

  • Model:

    • Potential opportunities for FY27 distributions and structuring in the last year of the current regime

    • Expected tax outcomes under a 30% trust regime

  • Consider:

    • Whether the current structure remains appropriate

    • Whether simplification or restructuring is warranted

Final observations

The Bendel decision initially looks like a win for taxpayers and in a narrow window it is.  Opportunities for the remaining financial years until the Federal Budget changes are fully implemented should not be ignored.

However the system is moving away from flexible trust taxation from FY28 onwards toward a more controlled framework where tax management will be more constrained.  The key risk is not immediate compliance - but strategic positioning over the next 1 - 3 years.

Salt are here to assist you in navigating these complex and continually changing legislative and regulatory developments, and to ensure your structure remains both compliant and appropriately positioned for the changes ahead.  We look forward to working with you over the next 12 months to ensure your structure remains compliant, commercially aligned, and well positioned for the upcoming changes to the trust taxation landscape.

Jenni Anderson