If you’ve recently started a company or transitioned from being a sole trader or partnership, understanding Division 7A of the Income Tax Assessment Act 1936 is essential. These tax rules prevent private companies from distributing money to shareholders and associates without the correct tax being paid.
HOWEVER a recent Federal Court ruling in Commissioner of Taxation v Bendel [2025] FCAFC 15 has overturned the ATO’s long-standing view on trusts, bucket companies, and unpaid present entitlements (UPEs)—potentially changing how businesses handle their distributions.
Let’s break it all down, including what Division 7A means for company directors, trusts, and bucket companies, and what this landmark ruling means for you…
What Is Division 7A?
Think of your company as a separate legal entity—it has its own money, and you can’t just take money out of it whenever you like. Division 7A ensures that any funds taken out of a company (besides wages) are properly accounted for and taxed.
If a company:
- Lends money to directors, shareholders, or associates
- Allows company assets to be used personally (e.g., a car or property)
- Makes payments on behalf of individuals
…the ATO may treat these withdrawals as unfranked dividends, meaning they become taxable income for the recipient without franking credits to reduce the tax liability.
What Are Franking Credits?
Franking credits (also called imputation credits) are tax credits designed to prevent double taxation on company profits. When a company pays tax on its profits (currently 25%–30% in Australia), it can attach franking credits to the dividends it distributes to shareholders. Shareholders then receive the tax credit, which reduces their personal tax liability or can even lead to a tax refund if their tax rate is lower than the company tax rate.
With Division 7A, however, withdrawals classified as unfranked dividends do not receive franking credits, making them more costly from a tax perspective.
Common Division 7A Mistakes to Avoid
If you’re a company director, here are key Division 7A pitfalls to be aware of:
1. Using the Company Account for Personal Expenses
- What NOT to do: Swiping the company card for personal purchases (e.g., holidays, clothes, groceries).
- What TO do: Keep business and personal finances completely separate—if you need money, take it as a salary, dividend, or properly structured loan.
2. Taking Money Without a Loan Agreement
If you borrow money from the company, it must be structured as a formal loan with:
✔ A written loan agreement
✔ Interest charged at the ATO’s benchmark rate
✔ A structured repayment plan (typically over seven years)
Failing to set this up correctly triggers Division 7A, turning the loan into a taxable dividend.
3. Not Paying Yourself Correctly
Instead of taking money informally, ensure you pay yourself properly through:
- A salary (includes PAYG withholding and superannuation)
- Dividends (potentially with franking credits)
This keeps everything compliant and prevents unexpected tax bills.
How Does Division 7A Apply to Trusts?
If you operate through a trust with a bucket company, Division 7A has historically been a major tax consideration.
- Trusts distribute profits at the end of the financial year.
- Instead of keeping profits in the trust (where they may be taxed at the highest marginal tax rate), they are distributed to a private company beneficiary (often called a bucket company) with a lower tax rate (25%-30%).
- If the company doesn’t actually receive the cash and the trust simply records it as an unpaid present entitlement (UPE), the ATO has treated this as a loan under Division 7A, triggering tax consequences.
This meant that either:
- The trust had to pay out the amount to the company, or
- The UPE had to be placed under a Division 7A loan agreement
But the Bendel case has now challenged this interpretation…
What Happened in the Bendel Case?
The Commissioner of Taxation v Bendel [2025] FCAFC 15 case questioned whether a UPE from a trust to a company is actually a loan under Division 7A.
The ATO’s Argument:
📌 A UPE is effectively a loan, meaning Division 7A should apply.
Bendel’s Argument:
📌 A UPE is simply a future right to money, not a loan or advance.
The Court’s Decision:
- The Federal Court ruled in favour of Bendel, stating that a UPE is not a loan under Division 7A.
- This means a company receiving trust distributions does NOT automatically fall under Division 7A just because it hasn’t received the cash yet.
Why This Matters: Key Takeaways for Business Owners
- If your trust distributes profits to a bucket company, the ATO can no longer automatically treat unpaid amounts as a Division 7A loan.
- This reduces the need to force distributions or enter into unnecessary loan agreements just to comply with Division 7A.
- Businesses now have more flexibility in managing trust profits, allowing for better reinvestment of funds.
- The ruling provides greater certainty on how trusts and bucket companies should be structured, reducing the risk of unexpected tax bills.
What’s Next? Will the ATO Challenge This Decision?
The ATO may respond by:
- Appealing to the High Court (uncertain at this stage)
- Revising its tax rulings & Division 7A guidance
- Adjusting compliance activity, potentially taking a less aggressive stance on UPEs
For now, business owners with trusts should review their Division 7A exposure and tax planning strategies—this ruling could provide an opportunity for greater flexibility in managing distributions.
Final Thoughts: How to Stay Compliant & Reduce Risk
If your business operates through a trust with a bucket company, now is the time to:
✔ Review your trust distribution strategy with your accountant
✔ Assess whether existing UPEs still require Division 7A loan agreements
✔ Stay updated on ATO announcements regarding this ruling
Key Tax Planning Tips:
- Keep personal & business finances separate
- Structure loans correctly to avoid Division 7A implications
- Pay yourself properly through wages or dividends
- Seek professional advice before making trust distributions
Staying on top of these rules will ensure your company remains tax-efficient and compliant—without unnecessary ATO scrutiny.
Need guidance? At Freshwater Taxation, we help business owners navigate Division 7A and tax structuring strategies. Get in touch to ensure your business is set up for success.
