The High Court has ended a 17-year dispute between taxpayers and the ATO over how family trusts distribute profits to companies. If your family trust distributes income to a bucket company, the decision changes your tax position from this financial year. You may also be able to recover tax outcomes from previous years.

What is a bucket company and why does this matter?

When a family trust distributes all of its income it pays no tax itself. Whoever receives the profits pays tax on them. Distribute to family members on the top marginal rate and up to 47% of the profit goes to the ATO. Distribute to a family owned “bucket” company instead and the profit is only taxed at the company rate of 30%. 

In practice, despite the nominated profit distribution, the cash was often retained in the trust.   The trust kept the money for working capital, debt reduction  or reinvestment purposes and simply recorded the profit distribution as an amount owing to the company. Accountants call this unpaid amount an unpaid present entitlement, or UPE.

What was the ATO’s position?

Since 2009, the ATO had insisted on treating a UPE as if it was a loan from the company back to the trust. Loans from private companies to related parties fall under Division 7A of the tax law. So the trust had to pay the company minimum annual interest and repayments, or risk the ATO taxing the whole amount as an unfranked dividend. For many family groups, this created years of compulsory interest charges and minimum annual loan repayments from the Trust to the company.

What did the High Court decide?

In Commissioner of Taxation v Bendel, the High Court ruled a UPE is not a loan for Division 7A purposes. A loan requires an obligation to repay. A UPE is simply an entitlement to be paid. Where the company leaves the entitlement sitting there and does nothing more, no Division 7A loan arises.

The ATO has now issued a Decision Impact Statement accepting the outcome. It has withdrawn its previous position and confirmed taxpayers assessed on the old basis can seek amendments to prior year returns, or lodge objections where the amendment window has closed.

What changes for you from 2026 onwards?

Your family trust can distribute profits to your bucket company without the UPE triggering Division 7A. We will no longer need to charge minimum interest or structure loan repayments on new entitlements from the 2026 year onwards, provided the entitlement is left undisturbed.

Two cautions:

First, the decision covers UPEs where the company does nothing with the entitlement. If the trust diverts the cash by lending or paying those funds to a shareholder of the company or their associates, other integrity rules can still apply, including Subdivision EA and section 100A. Each arrangement still needs proper structuring, so talk to us before moving money around the family group.

Second, the Federal Government has announced proposed rules applying a minimum 30% tax to discretionary trust distributions from 1 July 2028.  The currently proposed  new rules will effectively result in trust distributions to companies getting double taxed.  So, if those rules pass in their current form, the practical benefit of the Bendel decision may narrow from that date. It remains fully relevant for the 2026, 2027 and 2028 years.

Can you recover the Division 7A interest already charged?

Possibly. The ATO has confirmed taxpayers assessed under the old approach can request amendments where they remain within the standard amendment period, generally two to four years depending on circumstances, or lodge objections where they sit outside it. The ATO will also consider extensions of time for objections arising from this decision.

Whether pursuing it is worthwhile depends on the numbers. Undoing prior year treatment means adjusting entries in both the trust and company financial statements, amended tax returns for both entities, and possibly formal objections. For some clients the recoverable amounts will comfortably justify the work. For others the accounting and paperwork will outweigh the benefit. We need to look at your specific figures and years before we can tell you which camp you fall into.

What should you do now?

If your family group uses a bucket company, ask us to review your position. We will assess whether you are eligible to unwind prior year Division 7A interest charges and for which years, and whether the recoverable amount justifies the cost of amendments and adjusting entries. We will also confirm your distribution arrangements for 2026 onwards take advantage of the new position without tripping the remaining integrity rules.

Contact your DFK Everalls adviser to arrange a review of your bucket company arrangements.