Smart Trust Planning: Navigating Section 100A, Division 7A, and the Bendel Case

Smart Trust Planning: Navigating Section 100A, Division 7A, and the Bendel Case | Family Trust Tax Planning

Family trusts are one of the most powerful structures in Australia for asset protection and tax planning. But like a delicate, high-performance machine, they need constant care and expert management to run correctly—especially with the ATO increasing its scrutiny.

When managed well, a trust provides a strong barrier of protection and immense flexibility. When managed poorly, it can lead to complex problems and severe tax consequences.

Today, we're diving into the key strategies and high-stakes "hot topics" that every trust owner needs to have on their radar.

Our Client's Experience: 

"I’m incredibly grateful to Ben at Aevum Accounting for his exceptional support in setting up our new company. From start to finish, he made the process seamless and stress-free with his clear communication, professionalism, and in-depth knowledge. It’s reassuring to know that all of my accounting and tax needs are in expert hands." — Bianca

1. The Anti-Avoidance "Spy Novel": Understanding Section 100A

Section 100A is the ATO’s anti-avoidance rule designed to stop trusts from playing "tax games." It targets arrangements where a trust distributes income to one beneficiary (e.g., a low-income adult child) on paper, but the actual benefit is enjoyed by someone else (e.g., the parents, who are on a high tax rate).

• The Red Flag: A trust distributes $30,000 to a university student, who then immediately "gives" that exact amount back to their parents to pay for the family holiday or mortgage. The ATO sees this as a "reimbursement agreement" designed purely for tax avoidance.

• What is 'Genuine'? If the distribution genuinely benefits the adult child—by paying for their university fees, their car, or reasonable board while living at home—it's generally fine. The tax outcome must match the economic reality of who truly benefits.

  
  

2. The Big Decision: Removing a Beneficiary

This sounds drastic, but it can be a critical strategic move. Common reasons include:

• Asset Protection: If a beneficiary is in a high-risk profession, removing them can help shield the trust's assets from potential claims against them personally.

• Foreign Surcharges: This is a major issue. If a beneficiary becomes a foreign resident, their mere inclusion in the trust (even if they never get a cent) can trigger huge foreign owner land tax and duty surcharges on any Australian property held by the trust.

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The Trap: You cannot do this yourself. If done incorrectly, you can accidentally cause a "Trust Resettlement." The ATO may deem the original trust to have ended and a new one to have begun, triggering a massive Capital Gains Tax (CGT) and stamp duty bill on all trust assets, even though nothing was sold.

3. The Smart Restructure: Small Business Restructure Rollover (SBRR)

This is a powerful provision that allows eligible small businesses to reorganise their structure without immediate tax consequences. Think of it as moving your chess pieces on the board without paying a penalty for each move.

It allows you to transfer active assets between entities (e.g., from a trust to a company) to:

• Improve Asset Protection: Separate your high-risk trading business from your valuable property (like the building you operate from).

• Improve Succession Planning: Bring in new business partners or the next generation of your family in a tax-effective way.

The key is that it must be part of a "genuine restructure" of an ongoing business, not a one-off trick to avoid tax.

The "Hot Topic": Division 7A, UPEs, and the Bendel Case

This is the most complex and contentious issue facing trust owners today.

1. The Basics (Div 7A): Division 7A prevents private companies from giving tax-free loans or payments to shareholders. If they do, it's treated as an unfranked dividend and taxed at the shareholder's top marginal rate.

2. The Problem (UPEs): A Family Trust distributes income to a corporate beneficiary (a "Bucket Company") to cap the tax at the 25% company rate. However, the trust doesn't physically pay the cash to the company. This creates an "Unpaid Present Entitlement" (UPE)—an amount the trust owes to the company.

3. The ATO's View (TD 2022/11): The ATO argues that this UPE is effectively a loan from the company back to the trust, which triggers Division 7A.

4. The Court Case (The Bendel Decision): A recent court case (Bendel) ruled that a UPE is not automatically a loan for Division 7A purposes, contradicting the ATO's stance.

The "Rock and a Hard Place" Dilemma

This is the critical issue: The ATO is appealing the Bendel case and has publicly stated they will continue to apply their own interpretation (TD 2022/11).

This creates a period of intense uncertainty. But here's the real kicker: the ATO has also warned that if taxpayers follow the Bendel decision (and don't put their UPEs on complying loans), they are at a greater risk of Section 100A (the anti-avoidance rule from Step 1) being applied.

You are truly caught between a rock and a hard place.

What Does This Mean for You? (Practical Advice)

• For Prior Year UPEs (2022 and earlier): If you already put these UPEs on complying Division 7A loan terms and have started making repayments, do not stop. You have likely created a new, binding obligation to repay. Stopping now could trigger a deemed dividend.

• For 2023 UPEs: This was the major decision point. Business owners had to choose whether to follow the ATO's view (and create a loan) or the Bendel case (and do nothing). Each path carries significant risk.

• The Safety Net: If the ATO ultimately wins its appeal, those who followed Bendel may be able to seek relief under a special discretion (Section 109RB), but this is a complex safety net and not guaranteed.

  
  

This Is Not a DIY Area

Family trusts, UPEs, and bucket companies offer incredible flexibility and protection. But as you can see, the rules are intricate, and the current legal landscape is uncertain.

This is not an area for guesswork. Making the wrong move based on outdated advice or a misunderstood court case can result in tens or even hundreds of thousands of dollars in unexpected tax.

At Aevum Accounting, we specialise in navigating these exact rules. We help you structure your affairs to be compliant, protected, and optimised for your long-term goals, giving you peace of mind.

Book a consultation with our team today to ensure your trust structure is a fortress, not a house of cards.

Disclaimer: The information and strategies shared in this article are for general informational purposes only and do not constitute specific tax or financial advice. Everyone's situation is unique, and tax laws are complex and constantly evolving. For personalized advice tailored to your specific individual or business needs, we always recommend consulting with a qualified professional at Aevum Accounting.