On 19 February 2025, a landmark Full Federal Court decision in respect of trust law and Division 7A was handed down in favour of the taxpayer.

How This Helps a Small Business

Imagine Sarah, who runs a small marketing agency through a trust. Each year, her trust distributes profits to her bucket company to take advantage of the lower corporate tax rate. Under the old ATO rules, if she didn’t immediately transfer the cash to the company, she had to set up a formal loan agreement with interest and repayments – creating extra paperwork and tax stress.

Thanks to the recent Bendel ruling, Sarah may no longer need to treat these unpaid distributions as loans. Instead, she can keep the funds in the trust and reinvest in her business without triggering additional tax obligations. This means more financial flexibility and reduces compliance costs.

The Issue at Hand

If your small business operates through a trust and distributes income to a company (a “bucket company”), this court decision could simplify your tax obligations. The Full Federal Court has ruled against the Australian Taxation Office (ATO) in the Bendel case, challenging a 15-year-old tax position that created extra paperwork and potential tax bills.

Since 2009, the ATO has treated unpaid trust distributions to a company – known as Unpaid Present Entitlements (UPEs) – as loans under Division 7A tax rules. This meant that unless businesses paid out the funds quickly or set up formal loan agreements with interest and repayments, they could face additional tax liabilities.

What the Court Decided

The court ruled that UPEs are not loans, meaning they should not trigger Division 7A rules. This decision could remove the need for complex loan agreements, giving businesses greater flexibility in managing their cash flow.

What This Means for You

• Less red tape: You may no longer need to establish special loan agreements simply because your trust hasn’t paid out a distribution.
• Improved cash flow: Your business could retain more money within the trust for operations rather than rushing to distribute funds.
• Potential tax refunds: If you’ve previously been impacted by Division 7A rules, consult your accountant to see if you can amend past tax returns.

What You Should Do Now

• Wait before making changes. The ATO could appeal this decision by 19 March 2025, or the government could amend the law.
• Stay compliant. Until there’s further clarity, continue following the existing tax rules.
• Consult your tax advisor. Every business is unique, so seek expert advice before adjusting your tax strategy.

The Bendel case presents a significant opportunity for small businesses using trusts, but staying informed is crucial. Keep an eye on the ATO’s next steps and ensure you’re getting the right advice to protect your business.

For a confidential conversation with an SRJ Walker Wayland advisor, contact us today.