Business restructuring is one of those conversations that gets put off indefinitely. There’s always a reason to wait — the business is busy, the timing isn’t perfect, it feels like something to worry about later. But the cost of waiting to restructure can be enormous: years of overpaid tax, growing personal liability exposure, and missed opportunities that compound year after year. In my experience, most business owners need to restructure before they actually do it. Here are the five clearest signs that it’s time to act — and what’s at stake if you don’t.

Why Most Business Owners Restructure Too Late

A business generating $300,000 in profit under a sole trader structure, where all profit is taxed at 47%, is paying approximately $141,000 in income tax annually. The same business under a well-structured trust and bucket company arrangement might pay $75,000–$90,000 in total tax — a saving of $50,000–$65,000 per year. The restructure might cost $3,000–$5,000 in professional fees. The payback period is less than one month.

Sign 1: You’re Operating as a Sole Trader Over $100,000

As a sole trader, every dollar of profit is taxed at your personal marginal rate. There is no ability to split income with a spouse, distribute to adult children, or channel profits to a lower-tax entity. If your net income as a sole trader exceeds $100,000 and you have not reviewed your structure with an advisor, you are almost certainly overpaying tax.

Sign 2: Your Tax Bill Shocks You Every June

If you find out how much tax you owe from your accountant in July or August — after the financial year has already ended — you’re getting compliance, not advice. A shocking tax bill is a symptom of a reactive accounting relationship and almost certainly a suboptimal structure. Learn about our proactive tax planning approach here.

Sign 3: Your Personal Assets Are Exposed

If you operate as a sole trader without proper structure, your personal assets — your home, your savings — may be at risk if something goes wrong in the business. The right structure — a trust with a corporate trustee, or a holding company — can provide meaningful protection. The time to put protection in place is before any claim or problem arises.

Sign 4: You Want to Split Income With a Spouse or Family Member

A family trust allows the trustee to distribute income to a spouse in a lower tax bracket each year. For example, if you earn $400,000 and your spouse earns $0, a distribution of $180,000 to your spouse would see that amount taxed at approximately 25–30% rather than 47%. The annual tax saving on that distribution alone is $30,000–$40,000.

You cannot retrospectively restructure to achieve this for past years — it only works going forward. Every year you wait is another year of overpaid tax.

Sign 5: You’re Planning to Sell or Exit

If you’re planning to sell your business in the next two to five years, the time to restructure is now. The structure in which you hold your business assets determines whether you can access the small business CGT concessions, whether the 15-year CGT exemption applies, and how the sale proceeds are taxed. Restructuring just before a sale is likely to attract ATO scrutiny. Planning must happen years in advance.

The Cost of Waiting: Real Numbers

• Business generates $250,000 net profit annually as a sole trader — tax approximately $117,500
• Under a properly structured trust with income splitting and bucket company — approximately $65,000–$75,000
• Annual tax saving: $42,500–$52,500
• Restructure cost: approximately $3,000–$6,000 in professional fees
• Payback period: less than two months of tax savings

Over five years of delayed restructuring: $200,000+ in overpaid tax that you cannot recover.

How Pinnacle Approaches This With Clients Ready to Restructure

When clients come to Pinnacle for a restructure review, we analyse your current structure, model two to three structural options with actual dollar impact, and manage the entire implementation process — company and trust incorporation, ASIC registrations, TFN and ABN applications, and coordination with your solicitor.

If any of the five signs in this post sound familiar, contact Pinnacle today for a no-obligation structure review.

Frequently Asked Questions

How long does a business restructure take?

The administrative side — incorporating companies, establishing trusts, obtaining TFNs and ABNs — typically takes two to four weeks. For restructures that need to be effective by 30 June, start discussions no later than April.

Will I pay CGT when I restructure?

Potentially — transferring assets between entities can trigger CGT. However, several rollover provisions can defer CGT in legitimate restructures, including the small business restructure rollover (Subdivision 328-G). Whether rollover is available depends on the specific assets, entities, and transactions involved.

How much does a business restructure cost?

The cost varies depending on complexity. A straightforward restructure involves professional fees, ASIC registration fees, and potentially stamp duty. In virtually all cases, the annual tax savings far exceed the restructure cost.

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BOOK APPOINTMENT

A Division 7A loan agreement is a written agreement that puts a loan from your private company to you or an associate on complying terms, so it is not treated as a dividend. Under section 109N it must be in writing, charge at least the ATO benchmark rate, and run no more than 7 years unsecured or 25 years if secured by a registered mortgage.

If your accountant has told you that you need one, they are almost certainly right, and the clock is already running. The part that catches business owners out is not the paperwork. It is the deadline. Get it wrong by a day and there is no retrospective fix, only an application to the Commissioner and a hope.

I am Mina Baselyous, a CPA, Chartered Tax Advisor and Registered Tax Agent in Melbourne. Division 7A is the single most common area where we see otherwise well run businesses carrying a live tax problem they do not know about. This article sets out exactly what a complying agreement has to contain, when it has to exist, what the rate is for the current year, and what your options are if you have already missed it.

What a Division 7A Loan Agreement Actually Does

A Division 7A loan agreement converts what the tax law would otherwise treat as a disguised dividend into a genuine, commercially documented loan. Without it, money you draw from your company is deemed to be an unfranked dividend in your hands. With a complying agreement in place by the deadline, it is simply a loan you repay over time with interest.

The logic is straightforward once you see it. Your company pays tax at the company rate. You pay tax at your marginal rate. If you could simply take company profits home as a loan that nobody ever repays, you would have converted company tax into no tax at all. Division 7A of the Income Tax Assessment Act 1936 exists to stop that.

This applies to money actually drawn out of the company. In our experience the most common triggers are not deliberate schemes at all. They are a director paying a personal expense on the company card, a loan to fund a deposit, or a shareholder loan account that quietly drifted into debit across a busy year and nobody looked at it until the accounts were prepared. For the full background on how the rules fit together, see our guide to Division 7A for Australian business owners.

The Deadline: Lodgment Day, and Why There Is No Retrospective Fix

The agreement must be in place before your company’s lodgment day for the year the loan was made. The ATO defines lodgment day as the earlier of the due date for lodging the company’s income tax return, or the date the return is actually lodged. Miss it and the loan is a deemed dividend for that year. You cannot sign a document in a later year and backdate the problem away.

Read that definition carefully, because the word “earlier” does a lot of work. If your company’s return is due on 15 May but your accountant lodges it on 3 March, your deadline was 3 March. Lodging early shortens your own window. We have seen agreements prepared in good faith in April for a return that was lodged in February, and the document was worthless for that year.

The ATO’s own guidance on loans by private companies, last updated 2 July 2026, states it plainly: a loan is deemed to be a dividend if it is “not fully repaid before the private company’s lodgment day for the year when the loan is made”, and a private company’s lodgment day “is the earlier of the due date for lodgment, or the actual date of lodgment of their income tax return for the income year”.

You do have one alternative to signing an agreement: repay the loan in full before lodgment day. That is a real option and sometimes the cleaner one. Be careful, though, because repaying the loan and then immediately reborrowing a similar or larger amount is specifically disregarded, so the repayment does not count. More on how the repayment rules work in practice is in our article on Division 7A loan repayments.

The Three Tests Your Agreement Has to Pass

Section 109N sets three requirements, and all three must be satisfied before lodgment day. The agreement must be in writing. The interest rate for years after the year the loan is made must equal or exceed the benchmark rate. And the term must not exceed the statutory maximum for that kind of loan. Fail any one and the whole loan is caught.

1. In writing

There is no prescribed ATO form. A verbal understanding, a board minute noting an intention, or a line in the accounts is not an agreement. It has to be a document that exists, signed and dated, before lodgment day.

2. Interest at or above the benchmark rate

The rate must be at least the Division 7A benchmark interest rate. You may charge more. You may not charge less, and you certainly may not make the loan interest free. Note the timing quirk: no interest is payable in respect of the year the loan is made. Interest starts from the following income year.

3. A maximum term of 7 or 25 years

An unsecured loan runs a maximum of 7 years. A 25 year term is available, but only on strict conditions that a lot of commentary skips. The whole of the loan, all 100% of it, must be secured by a mortgage over real property that is actually registered under state or territory law. And when the loan is first made, the market value of that property, less any liabilities secured over it in priority, must be at least 110% of the loan amount.

That 110% buffer is where most 25 year loans fall over. A property with an existing bank mortgage rarely leaves enough unencumbered equity to clear the test. In practice, for the great majority of owners we work with, the answer is a 7 year unsecured loan and a repayment plan that is actually affordable.

The Division 7A Benchmark Interest Rate for 2026-27

The Division 7A benchmark interest rate is 8.77% for the income year ending 30 June 2027, and was 8.37% for the year ended 30 June 2026. These are published by the ATO and set from the Reserve Bank’s standard owner occupier variable housing loan rate last published before the income year starts.

Both figures are from the ATO’s Division 7A benchmark interest rate page, last updated 1 July 2026. The rate for the year ended 30 June 2025 was also 8.77%.

Here is the point people get wrong. The benchmark rate is not fixed at the rate applying when the loan was made and then locked in for the life of the loan. The minimum rate is reset every year to that year’s benchmark, and your minimum yearly repayment is recalculated using the current year’s rate. What is fixed at the year the loan was made is the maximum term, and therefore the repayment schedule you are locked into. If you want to model the numbers, use our Division 7A loan calculator.

Minimum Yearly Repayments: Where It Goes Wrong in Year Two

Signing the agreement is only the start. From the year after the loan is made, you must make a minimum yearly repayment of principal and interest by 30 June each year. Fall short and the shortfall itself becomes a deemed dividend for that year, even though your agreement was perfectly compliant when you signed it.

The minimum yearly repayment is an amortisation calculation. It takes the loan balance not repaid at the end of the previous year, applies the current year’s benchmark rate, and spreads the result over the remaining term. Because the benchmark rate moves, the required repayment moves with it. A repayment amount that was right last year may be short this year.

The more expensive mistake is how the repayment is made. A repayment has to be a real payment. The ATO’s guidance is explicit that a backdated journal entry recording a payment on a date when no payment was actually made will not be accepted, and it works through an example where a family group moved $150,000 between related entities entirely by journal and the minimum yearly repayment was still treated as unmade.

There is an important nuance here that is worth getting right, because a lot of published commentary flattens it. A legally effective offset does count. If the company declares a dividend payable to you, and before 30 June you and the company enter into an agreement to offset that liability against your loan obligation, the ATO accepts the minimum yearly repayment as made. What does not work is a book entry with no underlying mutual liability and no agreement behind it. The distinction is whether a real legal obligation was genuinely discharged.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the failure we see most is not the first year. It is year three or four, when the business is tight on cash, the repayment is treated as a bookkeeping formality, and nobody notices the shortfall until the following March.

What Happens If There Is No Complying Agreement

The unrepaid loan is treated as an unfranked dividend paid to you at the end of that income year. It goes into your assessable income and is taxed at your marginal rate, up to 47% including the Medicare levy for 2026-27. Because it is unfranked, you get no credit for the tax the company already paid on those profits. That is the sting.

The 47% figure is the top marginal rate of 45% on taxable income above $190,000 plus the 2% Medicare levy, per the ATO’s resident tax rates for 2026-27, last updated 13 August 2026. Set that against company tax already paid on the same profits and you are looking at effective double taxation of the same dollar.

Two things soften the blow. The total deemed dividend is capped at the company’s distributable surplus for the year, which is why the distributable surplus calculation matters so much. And the Commissioner has a discretion, covered next. Neither is a plan. They are damage control.

Section 109RB: The Relief Most Pages Do Not Mention

Section 109RB gives the Commissioner a discretion to disregard a deemed dividend, or to allow the company to frank it, where the breach arose from an honest mistake or an inadvertent omission. It is a genuine second chance, and it is the reason a missed deadline is serious but not always fatal. It is not automatic and it is not a substitute for getting it right.

The ATO applies a two step test. Step one asks whether the breach really did result from an honest mistake or inadvertent omission. Only if the answer is yes does step two follow, where the Commissioner weighs the statutory factors: the circumstances that led to the mistake, how much corrective action was taken and how quickly, whether Division 7A has bitten these entities before, and anything else considered relevant.

Corrective action is the lever you actually control. The ATO describes it as putting the parties back in the position they would have been in had Division 7A not been breached: executing a complying section 109N agreement, and making catch up repayments of principal and interest as if the loan had always complied, with interest compounded to reflect the years of non payment. In the ATO’s own worked example a $700,000 loan left undocumented from 2013 required a catch up payment of $541,708.

The ATO’s guidance on the section 109RB discretion, last updated 14 October 2024, includes six worked examples. The pattern across them is clear. Taxpayers who found the problem themselves, disclosed it promptly and fixed it succeed. The one example that fails involves a company that never documented the loan, never recorded it in its books, and funded it from undisclosed income. That is not an honest mistake, and the discretion does not reach it.

There is a separate discretion for a shortfall in a minimum yearly repayment caused by circumstances beyond your control where you would suffer undue hardship. Different test, different section, and it is worth knowing which one applies to your facts before you write to the ATO.

What Your Division 7A Loan Agreement Must Contain

There is no prescribed ATO form, but the ATO sets out a minimum. The agreement must identify the parties, set out the essential terms of the loan, and be signed and dated by the parties. In our experience a document that covers the following list, and is signed before lodgment day, holds up.

• The full legal names of the lender company and the borrower, including ACNs and, where the borrower is a trust, the trustee in its capacity as trustee.
• The amount of the loan, or the mechanism for loans made across the year.
• The date the loan was made, which drives the deadline and the maximum term.
• The term, being 7 years unsecured or 25 years if the registered mortgage and 110% value tests are both met.
• The interest rate, expressed so it is always at least the benchmark rate for each income year rather than a fixed number that could fall below it.
• An express requirement to repay, with the minimum yearly repayment obligation and a 30 June payment date.
• Security details if the 25 year term is being used, including the registered mortgage particulars.
• Signatures and dates from all parties, dated before lodgment day.

One practical tip. A written agreement can be drafted to cover loans made to the same shareholder or associate across several future income years. That is usually a better arrangement than scrambling to paper a new document every year, and it removes the single most common cause of failure, which is simply forgetting.

Loans to Associates: The Part Owners Consistently Miss

Division 7A does not only catch loans to shareholders. It catches loans to associates of shareholders, which includes spouses, children, other relatives, related trusts, partnerships and other companies in the group. A loan from your company to your family trust is squarely within the rules even though the trust never owned a share.

This is the most common blind spot we see in established groups. The company lends working capital to the family trust that runs the operating business. The company pays out a loan the trust had with its bank as part of a debt consolidation. The company covers a private expense for the owner’s adult child. None of these feel like a dividend to the owner, and all of them can be one.

The reach is wider still. Division 7A also picks up loans routed through interposed entities, and payments where the shareholder or associate has an obligation to repay. The test the ATO applies is whether a reasonable person would conclude the loan was made because the borrower was a shareholder or an associate of one. Our article on the top five Division 7A loan traps covers the patterns we see most often, and how to avoid a deemed dividend sets out the strategies that work.

This Is Not the Same Question as an Unpaid Present Entitlement

Everything above concerns money actually drawn out of a private company. A bare unpaid present entitlement owed by a trust to a corporate beneficiary is a different question, and the answer changed in 2026. Do not apply this article’s rules to a UPE, and do not assume an old position still holds.

In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that a UPE owed by a trust to a corporate beneficiary is not a Division 7A loan where the company simply does nothing about it. The Commissioner lost. The judgment and the full case record sit on the High Court’s file for matter M47/2025.

The published guidance has not fully caught up, and the distinction matters if you are relying on a ruling. In its Decision Impact Statement, published 26 June 2026, the ATO said it will withdraw Taxation Determination TD 2022/11. As at 30 September 2026 that withdrawal has not happened. TD 2022/11 is still listed on the ATO Legal Database under its original number, and its status line records only that the ruling is being reviewed as a result of a recent court decision. No withdrawal notice has issued. Check its current status on the Legal Database before you rely on it in either direction.

Three things did not change, and they matter. A UPE that has already been converted into a complying section 109N loan remains a loan and must keep being serviced. Subdivision EA still applies where the trust pays or lends to a shareholder of the corporate beneficiary while the UPE is outstanding. And section 100A still applies to reimbursement agreements. We have written this up in full in our article on bucket companies. Nothing in Bendel touches money you have actually taken out of a trading company. That is still a straight Division 7A loan and it still needs an agreement.

How to Get This Right Before Your Next Lodgment Day

The work is straightforward if you start early. Identify every loan and payment to shareholders and associates for the year, confirm the company’s lodgment day, decide for each loan whether to repay it or document it, execute the agreement before that date, and diarise the first minimum yearly repayment for the following 30 June.

Where this becomes advisory work rather than compliance is the decision underneath the paperwork. A 7 year loan at 8.77% on a meaningful balance is a real cash commitment out of after tax money, every year, for seven years. Often the better answer is a combination: a dividend or bonus to clear part of the balance, a bucket company to hold future profits at the company rate, and a complying loan for the remainder. That is a structuring conversation, not a document.

If you are reading this because your accountant has told you that you need a Division 7A loan agreement, the useful next question is not “where do I get the template”. It is “how did the balance get there, and what stops it happening again next year”. That is the conversation we have with clients as part of our tax planning work.

Frequently Asked Questions

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The main benefits of a family trust are the flexibility to decide each year which beneficiaries receive income, a layer of asset protection because assets are not held in your personal name, access to the 50% CGT discount for capital gains on assets held more than 12 months, and the ability to cap tax by distributing to a bucket company. Each comes with real conditions.

What you will not usually find on the first page of Google is the other half of that sentence. A family trust brings annual compliance cost, a hard 30 June deadline, losses that cannot leave the structure, land tax that is charged more harshly, a section 100A exposure with no standard time limit, and a vesting date that will eventually arrive. None of that makes a trust a bad idea. It makes it a decision rather than a default.

I am Mina Baselyous, a CPA, Chartered Tax Advisor and Registered Tax Agent in Melbourne. This article covers the genuine advantages of a family trust and the traps we actually see bite established business owners. More than one million trusts lodged a trust tax return in Australia in the 2023-24 income year, so the structure is common. Being common is not the same as being right for you.

That figure is 1,062,162 trust tax returns, from ATO Taxation statistics 2023-24, published 17 June 2026.

Benefit 1: You Decide Each Year Who Receives the Income

This is the headline advantage. A discretionary trust lets the trustee decide, each income year, how to split the trust’s income among a class of beneficiaries. Income is then taxed in each beneficiary’s hands at their own marginal rate. If the family has members on different rates, the same profit can carry a materially lower total tax bill.

The word to sit with is “each year”. A company’s share structure locks in who gets what until you change it. A trust does not. Business income is up one year and down the next, one spouse goes part time, an adult child starts university and stops earning. A trust lets the distribution follow the facts rather than a decision made at setup.

Three limits matter. Distributions to beneficiaries under 18 are taxed at penalty rates above a very small threshold, so distributing to young children does not work. Everyone who receives a distribution must genuinely be entitled to it, which brings section 100A into play. And you can only distribute to beneficiaries who are actually within the class defined by your trust deed, which is a question of reading the deed rather than assuming. Our guide to family trust distributions goes through the mechanics.

Benefit 2: The Assets Are Not in Your Personal Name

Assets held by a trust are legally owned by the trustee on behalf of the beneficiaries. No beneficiary of a discretionary trust owns a defined share of anything, only a right to be considered. That separation is what gives a family trust its asset protection value if you are personally exposed through a business, a guarantee or a professional role.

Be honest about what this does and does not do. It is not a shield against your own conduct, it will not defeat a claim over assets transferred to defeat a known creditor, and family law courts can and do treat trust assets as property of the marriage where the parties effectively control the trust. What it does well is separate business risk from family wealth in the ordinary case.

The protection is also only as good as who the trustee is. If you are the individual trustee, you are personally liable for the trust’s debts and your personal assets are exposed. That is why we almost always recommend a company as trustee, and why a corporate trustee is usually money well spent rather than an optional extra.

Benefit 3: The 50% CGT Discount, and the 1 July 2027 Date You Need to Know

An Australian trust can currently discount a capital gain by 50% where the asset was held at least 12 months, and that discounted gain can be distributed to individual beneficiaries. A company cannot use the discount at all. This is the single biggest reason growth assets are often held in a trust rather than a company. It changes for capital gains accruing from 1 July 2027.

First, the mechanism, because it is routinely described too loosely. The discount does not simply “flow through”. Where a trust makes a discount capital gain and distributes it, the beneficiary grosses the gain back up and then applies the CGT discount only if they qualify in their own right. The ATO’s CGT discount guidance, last updated 29 June 2026, confirms Australian trusts can discount a capital gain by 50%. Note too that where a trustee is taxed at the top marginal rate on trust net income, the trustee is not entitled to the discount on that gain.

Now the change, and it is significant. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received assent on 26 June 2026 and is in force. For CGT events happening on or after 1 July 2027, the 50% discount for individuals, trusts and partnerships is replaced by cost base indexation. The ATO’s own new legislation page, last updated 29 June 2026, states that “these measures are now law”.

Two details are worth stating precisely, because they are easy to get wrong. The reforms apply only to gains that accrue after 1 July 2027, with transitional rules that preserve the existing treatment of gains built up before that date. And the accompanying 30% minimum tax rate on capital gains applies to individuals, not at the trustee level. Trust gains are caught where they are attributed to an individual beneficiary, not by a separate trustee charge.

The Act also preserves a 50% discount for gains on a new residential dwelling, including through a trust. The detailed requirements for what counts as a new residential dwelling are to be set by the Minister in a legislative instrument, and I could not find that instrument as at 30 September 2026, so treat the new build concession as real in principle and unsettled in detail. Confirm the current position with your adviser before relying on it.

Benefit 4: You Can Cap the Rate With a Bucket Company

A family trust can distribute income to a company beneficiary, which pays tax at the company rate rather than a marginal rate of up to 47%. That caps the tax on profits the family does not need to draw this year, and keeps the capital working. The saving is a deferral, not a permanent exemption, but on a good year the cash flow difference is substantial.

This is the strategy that most often justifies a trust for a profitable business. Distribute enough to family members to use their lower brackets, then park the balance in a bucket company at the company rate instead of pushing a spouse into the top bracket. Later, when incomes are lower, the company can pay franked dividends and the franking credits come back.

Two live issues sit underneath it. The entitlement has to actually be dealt with, and the tax treatment of an unpaid present entitlement owed to a corporate beneficiary changed in 2026 following the High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18. And where the bucket company is itself held inside the family trust, the franking credit rules add a layer most owners are not expecting. We cover both in our guides to bucket companies and to a company held in a family trust and the 45 day rule.

Benefit 5: The Structure Outlives You

A family trust does not die when you do. Assets inside it are not part of your estate, so they do not pass under your will and are generally harder to challenge. Control passes through the appointor and the trustee company’s shares, which means succession can be managed deliberately rather than litigated. For a family business this is often as valuable as the tax outcome.

The catch is that this only works if the deed and the control positions have been set up and maintained with succession in mind. In practice we regularly see deeds where the appointor is a single named individual with no succession clause, or a trustee company whose shareholding has never been reviewed. The structure is doing nothing for succession at that point. It is just sitting there. If you want the mechanics of those roles, our guide to the key considerations for running a family trust walks through the deed, the appointor, the settlor and the resolution minute.

What a Family Trust Actually Costs to Run

A family trust is a separate reporting entity. It needs its own tax file number, its own set of financial statements, its own trust tax return, and a trustee resolution documented every year before 30 June. If you use a corporate trustee, that company carries its own ASIC annual review fee and its own registers. None of this is optional and none of it is trivial.

Setup covers the deed, the trustee company, and in Victoria the deed may need to be stamped. The recurring cost is the annual accounts and return, the trustee company’s ASIC fee, and the distribution minutes. Add the adviser time to work out the distribution properly, which is where the value actually is, and a trust is a real line item in the budget every year for as long as it exists.

Our rule of thumb from advising Melbourne business owners is simple. If the annual tax saving does not comfortably exceed the annual running cost with room to spare, a trust is a structure you are paying to maintain rather than a strategy. Where it earns its keep is on businesses with genuine profit, multiple adult family members, and growth assets. For a comparison of where a trust sits against the alternatives, see our guide to trusts in Australia.

The Traps Nobody Mentions

Five issues cause almost all the trouble we see with family trusts: section 100A reimbursement agreements, losses trapped in the trust, the 30 June resolution deadline, the vesting date, and state land tax surcharges. None are obscure. All of them are routinely left out of the marketing material, and each one is capable of costing more than the trust ever saved.

Trap 1: Section 100A and PCG 2022/2

Section 100A attacks reimbursement agreements: arrangements where one beneficiary is made presently entitled to income but someone else gets the benefit, entered into outside ordinary family or commercial dealing. Where it applies, the trustee is taxed at the top marginal rate on that income, and there is no standard amendment time limit, so the Commissioner can reach back indefinitely.

The classic pattern is distributing to an adult child on a low tax rate while the cash stays with the parents. The ATO’s PCG 2022/2 sets out three risk zones: white for arrangements in years ending before 1 July 2014, green for low risk arrangements, and red for high risk arrangements where the ATO says it may proceed to audit. There is no blue zone in the final Guideline, despite what a lot of older commentary still says.

One current caveat. The ATO’s companion ruling TR 2022/4 now carries a banner stating it is being reviewed as a result of the Bendel decision. The guidance is on foot but it is moving, so this is not a settled area to freewheel in. Our detailed article on section 100A and trust reimbursement agreements works through the zones.

Trap 2: Losses are trapped inside the trust

A trust cannot distribute a tax loss. If your trust makes a loss, the loss stays in the trust and carries forward until the trust has income to absorb it. The ATO’s guidance on claiming a tax loss, last updated 4 March 2025, is blunt about it: if the trust terminates before the losses can be offset, they are lost.

Recouping those losses later is then governed by the trust loss rules in Schedule 2F. This is one of the main reasons to make a family trust election. A valid family trust election exempts the trust from the trust loss tests, with the exception of the income injection test. The trade off is that distributions outside the defined family group attract family trust distribution tax at the top rate plus Medicare, so the election narrows who you can pay. Our guide to the family trust election and interposed entity election covers the decision.

Trap 3: The 30 June resolution deadline

If you make beneficiaries entitled to trust income by resolution, the resolution must be made by 30 June to be effective for that year. Miss it and the default clause in your deed decides, or the trustee is assessed at the top marginal rate on the undistributed income. This is the most avoidable and most common failure with family trusts.

The ATO’s trustee resolutions checklist adds two points worth knowing. If your deed requires the resolution earlier than 30 June, the deed wins and you must comply with it. And while the resolution must be made by 30 June, the ATO will accept records created after 30 June as evidence that a resolution was validly made by that date. A separate rule applies to capital gains, where specific entitlement must be recorded within two months of year end. We set out the practical drill in our article on trust distribution minutes.

Trap 4: The vesting date

Every family trust deed has a vesting date, the day the trust must end and the assets pass absolutely to the takers on vesting. It is typically 80 years from the date the deed was made, because state perpetuity law sets the outer limit. When a trust vests, the tax consequences can include a CGT event and stamp duty. It is a deadline hiding in plain sight.

The ATO’s ruling on trust vesting, TR 2018/6, remains current. Its central practical message is that you cannot simply ignore a vesting date once it has passed and carry on as before. Extending the vesting date is sometimes possible, but only before it arrives and only if the deed and state law allow it.

The perpetuity period is state law, not federal, so check the state whose law governs your deed. I have verified the 80 year period for New South Wales. South Australia is different: it has abolished the rule against perpetuities, so no vesting date is required, though after 80 years the Supreme Court may on application order that the interests vest. If your deed was drawn in the 1990s, the vesting date is closer than it feels.

Trap 5: Land tax is harsher on trusts

If your trust holds property, land tax is assessed more aggressively than it is for an individual. In Victoria, land held on trust is generally assessed at a surcharge rate, and the trust threshold is $25,000 of taxable value compared with $50,000 for a general owner. The surcharge applies up to $3,000,000, above which trust and general rates converge.

The figures are worth seeing side by side. On the State Revenue Office Victoria current land tax rates, which apply for the 2024 to 2033 land tax years, a general owner pays nothing below $50,000, a flat $500 from $50,000, a flat $975 from $100,000, and only starts paying a marginal 0.3% above $300,000. A trust starts at $25,000, pays $82 plus 0.375% above $25,000, and steps up through 0.675% above $250,000, 0.975% above $600,000 and 1.275% above $1,000,000. At $3,000,000 and over both scales meet at $31,650 plus 2.65% of the excess, so the surcharge bites hardest in the middle of the range rather than at the top.

There is a second layer. Victoria’s absentee owner surcharge applies to absentee trusts, including absentee discretionary trusts, and the SRO confirms the absentee owner surcharge rate is 4% from the 2024 land tax year, up from 2% for the 2020 to 2023 years. Those four percentage points sit on top of the scale that would otherwise apply. A trust with a foreign beneficiary in the class, or a foreign controller, can be caught by absentee and foreign purchaser surcharges in Victoria and in other states, sometimes without the family realising the deed’s beneficiary class is that wide. If you hold property in a trust, this deserves a specific look rather than an assumption.

What Is Coming: The Proposed 30% Minimum Tax on Discretionary Trusts

The Government announced on 12 May 2026, as part of the 2026-27 Federal Budget, that it will introduce a 30% minimum tax on discretionary trusts from 1 July 2028. This measure is not yet law. It would apply at the trustee level, with non corporate beneficiaries able to claim a non refundable credit for the tax the trustee has paid.

Keep this separate from the capital gains change discussed earlier. They are two different measures with two different start dates and two different statuses. The capital gains reform is law and starts 1 July 2027. The discretionary trust minimum tax is an announcement and is proposed for 1 July 2028. The ATO’s page on the measure, last updated 3 September 2026 and re-checked on 30 September 2026, says in terms: “This measure is not yet law.”

What should you do about an announcement? Not much yet, and certainly not unwind a working structure on the strength of a Budget paper. What it does argue for is not adding new complexity you would regret, and diarising a structural review. We are tracking it in our article on the proposed 30% minimum tax on family trusts. Confirm the current status with your adviser, because this one is moving.

The Honest Bottom Line: A Trust Changes Who Pays, Not How Much

A family trust does not reduce tax by itself. Every dollar of trust income is taxed in someone’s hands. What a trust does is give you a choice about whose hands, and that choice is only worth something if there is genuinely someone in the family on a lower rate, or a company beneficiary to cap the rate. Without that, you are paying for flexibility you cannot use.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the family trusts that disappoint people are the ones set up because someone said everyone should have one, with no thought about who the distributions were actually going to go to.

The right test is not “is a family trust good”. It is whether, for your business, your family and your assets, the flexibility and protection are worth the cost and the obligations. That is a structuring conversation, and it is the one we have with owners through our business structuring services and in building trust distribution strategies that stand up to scrutiny.

Frequently Asked Questions

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An unpaid present entitlement, or UPE, is trust income a trustee has made a beneficiary legally entitled to but has not actually paid across. The beneficiary is taxed on it in the year the entitlement arises, whether or not the cash moves. The trust records it as a liability and the beneficiary records it as an asset.

If your accountant has ever said “we will just leave it as a UPE” and turned the page, you are not alone. It is one of the most consequential numbers in a family trust structure and one of the least explained. The balance grows quietly, and most owners have never been told what it represents or what their options are.

Mina Baselyous is a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent, and Pinnacle Accounting & Advisory works with Melbourne business owners whose trust and company group has been running long enough for these balances to matter. This article explains what a UPE is, how it arises, how it is recorded, what it does to the beneficiary’s tax position, and how to decide whether to pay it out.

The High Court has changed how this is treated: see what Bendel means for an unpaid present entitlement owed to a bucket company.

What an Unpaid Present Entitlement Actually Is

A UPE is the gap between a legal entitlement and a payment. The trustee resolves that a beneficiary is presently entitled to a share of the trust’s income for the year. That resolution creates an enforceable obligation on the trustee to pay. Until the trustee actually pays, the amount remains unpaid, and that outstanding obligation is the unpaid present entitlement.

Two words are doing all the work. “Present entitlement” means the beneficiary has a current right to demand the money, not a hope that the trustee might exercise its discretion in their favour one day. “Unpaid” means the trustee has not satisfied that right. The ATO’s trust entitlements guidance, updated 2 July 2026, puts it the same way.

The consequence is that tax follows entitlement, not payment. Under section 97 of the Income Tax Assessment Act 1936, a beneficiary presently entitled to a share of trust income at 30 June is assessed on their share of the trust’s net income for that year. Whether the cash arrives in July, in five years, or never, the tax bill lands in the year the entitlement arose. That single rule is why UPEs exist at all.

How a UPE Arises in an Ordinary Family Trust

A UPE arises whenever the trustee resolves to distribute income but the cash stays where it is. Nothing unusual has to happen. The trustee signs a distribution resolution before 30 June, the accounts record the entitlement, and the money remains in the trust’s bank account funding stock, wages, equipment and the overdraft, because that is where the business needs it.

The sequence usually runs like this. In June the trustee estimates the year’s income and signs trust distribution minutes, perhaps $180,000 to the bucket company and $40,000 each to two adult beneficiaries. In October the accountant prepares the accounts and the returns, and the beneficiaries include their shares. The bank balance never moved, because the trust never had $260,000 of spare cash sitting idle. It had trading stock, debtors and a plant schedule.

This is not an error. It is the ordinary operation of a discretionary trust. Trust income for tax purposes is an accounting figure, rarely the same thing as cash in the account on 30 June. The 2022-23 income year saw 1,022,229 trusts lodge a tax return in Australia, according to ATO Taxation statistics 2022-23 published on 27 June 2025, and a large share of them will have created a UPE that year without anyone treating it as an event.

How a UPE Appears in the Financial Statements

A UPE appears twice, on opposite sides of two balance sheets. In the trust it is a liability, because the trustee owes the money. In the beneficiary’s accounts it is an asset, because the beneficiary has a right to receive it. The same number recorded from both ends is what makes it easy to misread when you only ever see one set of accounts.

In the trust’s accounts

Look in the liabilities section of the trust’s statement of financial position. The line is usually labelled “Beneficiary entitlements”, “Distributions payable”, “Beneficiary accounts” or simply the beneficiary’s name. It sits below the trade creditors and is often the largest single liability in the statement. That is consistent with the ATO’s trust entitlements guidance, which says the main trust would reflect its obligation to repay within the liability section of its balance sheet.

Reviewing incoming client files, the problem we see is not the classification but the labelling: entitlements from six different years buried in one undifferentiated total, with no way to tell which beneficiary, which year, or what was ever done about it.

In the beneficiary’s accounts

Where the beneficiary is a company, the mirror entry is a receivable from the trust, frequently the only substantial asset the company owns. A bucket company with $900,000 of net assets often has almost all of it sitting there.

Where the beneficiary is an individual, there are usually no formal financial statements at all, which is precisely the problem. The entitlement appears only in the trust’s ledger. The beneficiary may have paid tax on income they have never seen and may not know they are owed anything.

Why UPE Balances Accumulate

UPE balances grow because each year adds a new entitlement while the cash stays in the business, and nothing automatically clears the prior year first. Ten years of distributing to the same bucket company, with the working capital never released, produces a balance that can exceed the value of the trading business itself.

Three things drive it. The cash is genuinely deployed, in stock, in debtors, in fit-out, in the truck fleet, so paying the entitlement out would mean borrowing to replace it. The tax outcome of distributing to a corporate beneficiary is attractive enough that owners keep doing it without anyone revisiting the balance. And most often, nobody has ever raised it. The number is on page four of a document the owner signs once a year.

“The conversation I have most often is not about whether a UPE is allowed,” says Mina Baselyous, CPA, CTA and Registered Tax Agent. “It is showing an owner a balance sheet they have signed nine times and asking what the $1.4 million liability is. Nine times out of ten they have never been told. That is an information problem, and it becomes a tax problem the moment somebody makes a decision without knowing the number is there.”

What a UPE Means for the Beneficiary’s Tax Position

The beneficiary is taxed on the entitlement in the year it arises, at their own rate, whether or not the money is ever paid. Paying the UPE out later is not a second taxable event, because the tax has already been paid. The practical consequences are very different depending on whether the beneficiary is a company or a person.

Where the beneficiary is a bucket company

The company pays tax on the distribution at its own company rate for that income year, which is either 25% or 30% depending on whether it passes the base rate entity test. A bucket company whose only income is a trust distribution referable to rent or interest is receiving passive income, and that affects the rate. Our guide to the company tax rate in Australia works through when a company lands on each.

Paying that tax generates franking credits. When the company eventually pays a dividend, those credits come with it, and if the shareholder is the family trust itself the 45 day holding rule and the family trust election become live issues. This is the point people miss: the company tax is not lost, it is deferred and credited, and the UPE keeps the cash working in the meantime. The broader strategy is in our guide to bucket companies.

Where the beneficiary is an individual

A UPE owed to an individual is a genuinely different question, and most explanations online do not separate the two. Division 7A is a set of rules about private companies, so it has nothing to say about an entitlement owed to a person. No deemed dividend, no benchmark interest rate, no complying loan agreement, no lodgement day deadline.

What applies instead is section 100A, and it applies with real force. The ATO’s compliance guideline PCG 2022/2 and Taxpayer Alert TA 2022/1 are squarely aimed at arrangements where a trust makes an adult child presently entitled to income, the child pays tax at a low marginal rate, and the parents retain and enjoy the money. Where a reimbursement agreement is made out, the entitlement is treated as never having existed and the trustee is taxed at the top marginal rate instead, with no time limit on how far back the Commissioner can go. Our explainer on section 100A covers the zones and the evidence that matters.

The practical test we apply is simple. If an adult beneficiary has been made presently entitled to $60,000 and could not tell you they were owed it, could not access it, and did not decide to leave it in the trust, that is an arrangement worth reviewing carefully before the next set of minutes is signed.

The Rules That Apply to a UPE Right Now

As at September 2026, a UPE a corporate beneficiary simply leaves outstanding is not a Division 7A loan. Subdivision EA and section 100A still apply, a UPE already converted to a complying loan is still a loan, and money actually drawn out of a company by a shareholder is still a straight Division 7A loan. Here is each of those in turn.

Division 7A after the Bendel decision

In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court held that a private company beneficiary which does nothing about its unpaid entitlement has not provided financial accommodation under paragraph 109D(3)(b), so no loan arises. The Commissioner lost, and the ATO accepted the outcome in its Decision Impact Statement, published 26 June 2026. For the full analysis of what that decision did and did not change, read our companion article on Bendel, Division 7A and your bucket company UPE.

On the guidance, the sequence matters and it is routinely reported incorrectly. Taxation Ruling TR 2010/3 and Practice Statement PS LA 2010/4 were withdrawn with effect from 1 July 2022 and replaced by Taxation Determination TD 2022/11. That withdrawal was the ATO’s own refresh of its position and had nothing to do with Bendel, which was decided four years later. The ATO has since said it will withdraw TD 2022/11 as a result of the decision. We could not locate an actual withdrawal notice as at late September 2026, so treat the determination as still published but overtaken in practice, and check its status before relying on it.

Subdivision EA: what happens to the money afterwards

Subdivision EA is untouched. Where a private company has an unpaid present entitlement and the trust then pays, lends to, or forgives a debt of a shareholder of that company or an associate, a deemed dividend can still arise. This catches the arrangement most family groups actually run: the entitlement sits still, but the trust pays school fees or a car or a renovation for someone in the family.

Put simply, the entitlement sitting still is safe. The money moving is not. If a deemed dividend does arise, it is capped by the company’s distributable surplus for the year, which makes that calculation worth understanding before you plan, not after.

A UPE already converted to a complying loan stays a loan

If your adviser papered a past UPE into a seven year complying loan under section 109N, that is a loan as a matter of fact and it remains one. It must keep being serviced, with a minimum yearly repayment actually paid rather than journalled and interest at or above the benchmark rate. The Division 7A benchmark interest rate for the income year ending 30 June 2027 is 8.77%, based on the Reserve Bank indicator lending rate published on 5 June 2026. Stopping mid-year creates a shortfall, and the shortfall is a deemed unfranked dividend. The wider framework sits in our complete guide to Division 7A for Australian business owners.

Should You Pay the UPE Out or Leave It?

There is no universal answer, and anyone who gives you one without looking at your balance sheet is guessing. The decision turns on where the cash actually is, what the beneficiary is, what the group intends to do next, and whether the entitlement is genuinely passive. What follows is the framework we use.

• Can the trust actually afford it? If paying the entitlement means drawing down an overdraft to fund a bookkeeping entry, that is a real cost against a benefit you need to be able to name.
• What would the company do with the cash? Money paid across to a bucket company sits in the company. Getting it to a shareholder from there is a dividend or a loan, and both have their own consequences.
• Is anything moving? If the trust is paying personal expenses for shareholders of the corporate beneficiary or their associates, Subdivision EA is in play and the answer changes.
• Is the beneficiary an individual who has never seen the money? That is a section 100A review, and it is the one with no amendment time limit.
• Is a sale, a restructure or a succession coming? A large intercompany receivable and a matching trust liability complicate every one of those. Deal with it before the transaction, not during it.
• Are the records good enough to answer any of this? Deed, resolutions, ledger and any agreement ever signed over the entitlement. Without those four, you cannot characterise the balance at all.

Doing nothing is a legitimate answer. It is only a bad answer when it is made by default rather than chosen. The broader structural questions, including whether the distribution pattern still suits the group, belong in your annual trust distribution strategy and, where the group has outgrown its original shape, in a proper review of the trust structure itself.

How to Get on Top of Your UPE Balances

Start by breaking the single balance into its parts. Every UPE review we run begins the same way: split the total by beneficiary and income year, then characterise each slice as a bare entitlement, a converted loan or a sub-trust arrangement, using the deed, the resolutions, the ledger and any signed agreement.

Most balances we see have never been split that way, and the character of the amount is what every rule in this article turns on. That work belongs in a structured annual review alongside your tax planning, and where the structure has outgrown itself, in a considered look at how the group is put together. It is not a June problem. It is a whole of year one.

Frequently Asked Questions

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A bucket company is a private company named as a beneficiary of a discretionary trust, used to cap tax on surplus trust income at the company rate of 25% or 30% rather than an individual’s top marginal rate of 47%. In 2026-27 it defers and smooths tax, it does not permanently avoid it.

If you are searching for this term, you almost certainly already have the problem it solves: a family trust earning more than you can sensibly distribute to people sitting below the top bracket. The real question is whether yours is built so the saving is durable, and whether you understand what you are actually buying.

I am Mina Baselyous, a Certified Practising Accountant, Chartered Tax Advisor and Registered Tax Agent, and I build these structures for Melbourne business owners most weeks of the year. What follows is the whole picture, including the top-up tax nobody mentions in the pitch and the cases where the honest answer is no.

For the post-Bendel position, read does your bucket company UPE still need a loan agreement.

What a Bucket Company Actually Is

A bucket company is an ordinary private company named as a beneficiary of a discretionary trust so the trustee can distribute surplus income to it. Nothing in the tax law uses the phrase. The ATO calls it a corporate beneficiary. The company does not trade, does not employ anyone, and exists to hold profit at the company rate.

The name comes from the picture: income the family cannot absorb at low rates gets tipped into a bucket instead of landing on someone already paying 47 cents. Two things must be true before it works at all. The deed has to permit a company to be a beneficiary, which older deeds sometimes do not, and the trustee has to resolve to make the distribution before 30 June. Neither can be fixed once the year has closed.

Be clear about what it is not. It is not a cheaper way to get money into your hands. It is a place to park profit you do not need this year while you choose when and to whom it eventually flows. For where it sits in a wider structure, see our guide to the types of trusts used in Australia and our overview of holding companies for tax and asset protection.

The Arithmetic: Why Owners Use One

The saving is the gap between the company rate and the individual top rate in the year the income is earned. For 2026-27 that gap is 22 points: a base rate entity pays 25%, while every dollar an individual earns above $190,000 is taxed at 45% plus the 2% Medicare levy. On $170,000 of surplus trust income, that is $79,900 of tax against $42,500.

Take a pattern we see constantly. An engineering business in Melbourne’s south east runs through a discretionary trust. For 2026-27 the trust’s net income is $610,000. The trustee distributes $190,000 to each of the two working owners, filling them to the top of the 37% band, and $60,000 across two adult children. That leaves $170,000 with nowhere sensible to go.

2026-27, on the final $170,000	To an owner already on $190,000	To a bucket company (base rate entity)
Rate applied	45% plus 2% Medicare levy	25%
Tax payable	$79,900	$42,500
Cash retained after tax	$90,100	$127,500
Difference in year one		$37,400

That $37,400 is where most articles stop, and it is the number most often misunderstood, because much of it is timing rather than a permanent win. Our post on how a bucket company saves tax works the headline saving through in more detail, and family trust versus bucket company compares the two entities side by side.

25% or 30%: What Decides Your Bucket Company Tax Rate

A bucket company pays 25% if it is a base rate entity and 30% if it is not. Section 23AA of the Income Tax Rates Act 1986 sets two tests, and the company must pass both in the year concerned: no more than 80% of its assessable income is base rate entity passive income, and its aggregated turnover for that year is under $50 million.

The character of the trust income traces through

This decides most cases, and it is where a lot of published advice is loose. The company itself does nothing, so on its own it has neither trading income nor passive income. What it has is a trust distribution. Paragraph 23AB(1)(g) of the same Act says an amount included in a beneficiary’s assessable income is base rate entity passive income to the extent it is referable, directly or indirectly, to something already passive in the trust’s hands.

The tracing only runs one way. Rent, interest, dividends, franking credits, royalties and net capital gains keep their passive character passing through the trust. Trading profit is not on the list, so it arrives as ordinary assessable income that is not passive. The practical result: a distribution from a trading trust normally leaves the company at 25%, while a company whose only income is a distribution from a rental or investment trust is 100% passive and sits at 30%.

The 80% threshold is generous, so mixed cases usually land on the right side. The ATO’s own example has a cafe company with $500,000 of trading income and $200,000 of rent traced through a trust: the rent is 28.6% of assessable income, so the company stays a base rate entity at 25%. The full test is on the ATO’s changes to company tax rates page (updated 4 September 2026), and our company tax rate guide carries six worked base rate entity examples.

The franking rate trap most owners never hear about

The rate you pay and the rate you can frank at are worked out differently. Tax is assessed on the current year, but the corporate tax rate for imputation purposes assumes turnover, assessable income and passive income match the previous year. Pay 30% this year and frank at 25% next, and five cents in every dollar of company tax is lost to the family. In practice, says Mina Baselyous, the mistake we see most is a bucket company that quietly accumulates investments until the passive percentage crosses the line, and nobody notices until the franking account will not support the dividend.

Do You Physically Pay the Cash, or Leave a UPE?

This is the central practical decision and it drives everything else. The trustee resolves to distribute, but the trust may or may not actually transfer the money. If it does not, the company holds an unpaid present entitlement: a real debt owed by the trust to the company, sitting on both balance sheets, while the cash keeps funding the trading business.

Paying the cash across is clean. The company holds its own money and section 100A exposure is lowest, because the beneficiary genuinely receives what it was given. The cost is that the business loses the use of the funds, which is often the whole reason the profit existed.

Leaving the entitlement outstanding keeps the cash working. Until June 2026 that carried a Division 7A problem, because the ATO treated an entitlement the company did nothing about as financial accommodation, and therefore a loan. That is no longer the law. The entitlement is still a genuine liability that must be documented properly, and money leaking out of the trust to the wrong people while it is outstanding still creates a deemed dividend.

What Bendel Changed, and What It Did Not

In Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, the High Court dismissed the Commissioner’s appeal. A private company that simply does nothing about its entitlement to trust income does not provide financial accommodation under section 109D(3)(b), so a bare unpaid present entitlement is not a Division 7A loan and does not by itself produce a deemed dividend.

The ATO published its Decision Impact Statement on 26 June 2026 and accepted that outcome. Two points of housekeeping are worth stating precisely, because commentary has run them together. Taxation Ruling TR 2010/3 was withdrawn with effect from 1 July 2022, long before the case, when TD 2022/11 superseded it. And TD 2022/11 itself has not been withdrawn: the ATO has said in the Decision Impact Statement that it will withdraw the determination, but as at September 2026 TD 2022/11 is still listed on the ATO Legal Database and marked as under review as a result of the decision, with no withdrawal notice issued. Treat it as on foot but overtaken in practice by the ATO view in the Decision Impact Statement, and check its current status before relying on it.

Three things Bendel does not do. It does not unwind an entitlement already put on complying section 109N loan terms, which remains a loan and must keep being serviced. It does not touch money an owner actually draws out of the company, which is still a plain section 109D loan. And it does not narrow section 100A. Our full breakdown sits in Bendel, Division 7A and the unpaid present entitlement, with the wider rules in our Division 7A guide and the deemed dividend ceiling in distributable surplus.

What Still Bites: Subdivision EA and Section 100A

Two provisions now do the work the old UPE position used to do, and both survive Bendel untouched. Subdivision EA catches the trust while a corporate beneficiary’s entitlement is outstanding. Section 100A catches the arrangement itself, and has no time limit on amendment.

Subdivision EA applies where the trust pays an amount to, lends to, or forgives a debt of a shareholder of the corporate beneficiary or an associate, while the entitlement remains unpaid. In a normal family group the shareholder is you and the associate is your spouse, your trust or your other company. So the trust keeping the cash is fine. The trust keeping the cash and then paying your home loan is a deemed dividend.

Section 100A keeps experienced advisers careful. Where a beneficiary is made presently entitled under a reimbursement agreement and someone else enjoys the economic benefit, the entitlement is disregarded and the trustee is taxed at the top marginal rate. A company that keeps its entitlement in its own right is ordinarily fine. One whose entitlement is routinely applied for the parents’ benefit is the fact pattern the provision was written for. See our guide to section 100A reimbursement agreements and why trust distribution minutes matter.

The Top-Up Tax: Deferral Plus Smoothing, Not a Free 22 Points

The 25% is not the end of it. When the company eventually pays a franked dividend, the shareholder grosses it back up by the franking credit, pays tax at their own marginal rate, and offsets the credit. If that shareholder is on the top rate, the total tax across both entities is identical to distributing directly. The 22 points were borrowed, not won.

Run the same $170,000 forward. The company pays $42,500 and holds $127,500. Years later it pays that out fully franked with $42,500 of credits, so the shareholder declares $170,000 grossed up. At 47% that is $79,900 less the credit, leaving $37,400 to pay. Add the company’s $42,500 and you are back at $79,900 exactly. Nothing saved. Everything deferred.

Now change one variable. Say the shares sit in a family trust and the dividend is streamed to two adult beneficiaries with no other income, $85,000 grossed up each. Each pays $16,020 of tax plus $1,700 of Medicare levy against $21,250 of credits, so each gets a $3,530 refund. Total tax falls to $35,440, against $79,900 had the trust distributed to a top-rate individual.

That $44,460 is the real prize, and notice where it came from: not the 25% rate, but the choice of year and recipient at extraction. A bucket company buys the use of $37,400 of deferred tax as working capital, plus the option to release profit into a lower-rate year or across more beneficiaries. With no extraction plan you have bought the first and none of the second. See retained earnings explained and trust distribution strategies.

Who Should Own the Shares in the Bucket Company

Shareholding is decided once and is expensive to change, because moving shares is a CGT event. The common answers are the individual owners, a second family trust, or the existing trust. A trust as shareholder gives the most flexibility at extraction, which is exactly where the permanent saving lives. It also brings the franking credit rules into play.

Where a trust holds the shares, beneficiaries generally need to satisfy the holding period rule to be qualified persons entitled to the credits, which usually means the trust has made a family trust election. The ATO’s imputation guidance sets out the qualified person tests, and we cover it in full in holding a company inside a family trust. Read it before you sign the incorporation forms, not after. Separately, retained profit is a pot of money sitting behind whoever owns the shares, and you want it as far from trading risk as the structure sensibly allows. That is a business structuring question, and the reason we rarely use the trading company itself as the corporate beneficiary.

When a Bucket Company Is the Wrong Answer

A bucket company is wrong more often than the marketing suggests. It is wrong with no trust, because there is nothing to distribute from. It is wrong if you need every dollar personally each year, because the top-up falls due immediately. And it is wrong if nobody will maintain it.

• Your genuine surplus is modest. Below roughly $80,000 a year the saving struggles to justify a second tax return, an ASIC annual review and the advisory time to keep entitlements and resolutions clean.
• The trust’s income is mostly rent, interest or dividends. It traces through as passive, the company sits at 30%, and the gap narrows to 17 points.
• The trust income is mostly a capital gain. Individuals and trusts access the CGT discount, companies do not, so a discounted gain sent to a bucket company is taxed on the full amount. Very often the worse outcome.
• You intend to draw the money back out informally. That is a section 109D loan, and the complying loan rules follow you for seven years. Bendel changed nothing here.
• Your deed does not permit corporate beneficiaries and you will not vary it. A careless variation can resettle the trust, a far bigger problem than the tax you were saving.

How to Set One Up Properly

This is a structuring decision that has to be finished before 30 June, not a form lodged afterwards. Order matters: the deed check can change everything, and the resolution is the one step with a hard deadline. Allow a few weeks, not a few days.

1. Read the trust deed first. Confirm a company can be a beneficiary and that the eligible class covers one not yet incorporated. If not, have a lawyer draft the variation.
2. Decide the shareholding before you register, and consider the family trust election at the same time. Changing it later triggers CGT.
3. Register the company with ASIC, obtain a TFN and, where relevant, an ABN, and get director identification numbers.
4. Model the rate before you commit. Run the expected distribution through the section 23AA tests, and check the imputation rate for the year you plan to pay dividends.
5. Pass the trustee resolution before 30 June, naming the company and the amount or formula. Sign it, date it, keep it. This is what the ATO looks at first.
6. Decide the cash. Pay the entitlement across, or record it properly as an unpaid present entitlement, and make sure nothing then flows to a shareholder or associate that would trigger Subdivision EA.
7. Diarise it annually. The rate test, the resolution, the entitlement balance and the franking account all need revisiting. This is the part that quietly fails.

Done properly, a bucket company is one of the most durable planning tools available to an Australian family business. Done casually, it is a second entity that costs money, creates Division 7A and section 100A exposure, and delivers a saving the family can never efficiently extract. See our tax planning services or book a consultation with Mina to work through your own numbers before the year closes.

Frequently Asked Questions

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Retained earnings is the total profit your company has kept since it started, after tax and after dividends. It is an equity figure on the balance sheet, not a bank account. The cash it represents has usually been spent on debtors, stock, equipment and loan repayments, which is why the number is large and the bank balance is not.

This is the single most common misunderstanding we deal with. An owner sees $363,900 of retained earnings on their balance sheet and reads it as money waiting for them. It is not. It is a record of profits already earned and already spent on something else.

I am Mina Baselyous, a Certified Practising Accountant (CPA) and Chartered Tax Advisor (CTA) in Melbourne. This article explains what the figure actually represents, traces exactly where the money went, and sets out the legal test a company has to pass before it can pay any of it out.

What Retained Earnings Actually Is

Retained earnings sits in the equity section of the balance sheet, underneath share capital. It is the running total of every dollar of after-tax profit the company has ever made, less every dollar it has paid out to shareholders as a dividend. It is a historical record, not a fund.

The confusion is understandable, because the word earnings sounds like money. Think of it instead as a score. It tells you how much value the business has generated and kept over its life. What the business did with that value, whether it turned into cash, machinery, stock or unpaid customer invoices, is shown on the other side of the balance sheet entirely.

You may also see it called accumulated profits, retained profits or, if it is negative, accumulated losses. They all mean the same thing. If you are new to this report, read our guide to reading a balance sheet first, because retained earnings only makes sense in the context of the whole statement.

The Formula and the Roll Forward

Opening retained earnings, plus profit after tax for the year, less dividends declared, equals closing retained earnings. That is the whole formula. Every year it rolls forward, which is why a business that has traded for fifteen years carries fifteen years of decisions in one line.

Using the same Melbourne trade and services company from the balance sheet and cash flow guides:

Retained earnings roll forward, year ended 30 June 2027	Amount
Retained earnings at 1 July 2026	$274,900
Net profit before tax	$180,000
Less income tax at 25 per cent	($45,000)
Net profit after tax	$135,000
Less dividends declared	($46,000)
Retained earnings at 30 June 2027	$363,900

The 25 per cent rate applies because this is a base rate entity. As set out in the ATO’s company tax rates, for 2021-22 and later income years a company pays 25 per cent if its aggregated turnover is under $50 million and no more than 80 per cent of its assessable income is base rate entity passive income. Every other company pays 30 per cent.

So Where Did the Money Actually Go?

The company has $363,900 of retained earnings and $42,000 in the bank. The missing $321,900 has not vanished. It is sitting on the asset side of the balance sheet, converted into things the business needed, and partly offset by what the business owes. Here is the trace.

Where the retained profits are, at 30 June 2027	Amount
Cash at bank	$42,000
Owed by customers (trade debtors)	$420,000
Sitting on shelves (stock)	$210,000
Plant and equipment (written down)	$320,000
Total assets	$992,000
Less total liabilities	($628,000)
Net assets, being share capital plus retained earnings	$364,000

That is the answer to the question. The profit is real and the business genuinely kept it. It is simply held as customer invoices, stock and equipment rather than as cash. Nearly two thirds of it, $630,000 of debtors and stock, is working capital that could be released with better process rather than more sales, which we cover in our guide to working capital.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), once an owner sees this table the conversation changes permanently. They stop asking where the money went and start asking how to get less of it stuck in debtors and stock next year. That is the whole point of reading the reports together.

Can I Just Pay It Out? The Section 254T Test

No, not automatically. Section 254T of the Corporations Act 2001 says a company must not pay a dividend unless three conditions are all met: assets exceed liabilities immediately before the dividend is declared and the excess is sufficient to pay it, the payment is fair and reasonable to shareholders as a whole, and it does not materially prejudice the company’s ability to pay its creditors.

Note what that test is not. It is not a profits test, and it has not been one since 2010. A company with large retained earnings can still be prohibited from paying a dividend if the net assets test fails or if paying it would leave creditors exposed. The Act’s own note gives the obvious example: a dividend materially prejudices creditors if the company would become insolvent as a result.

There is a practical limit on top of the legal one. Our example company has $364,000 of net assets and passes the first test comfortably, but only $42,000 of cash. Declaring a $300,000 dividend would be legally arguable and commercially reckless. Directors who ignore that distinction can face personal exposure under the insolvent trading provisions, which is the same territory we covered in our article on director penalty notices.

Three Different Limits, and They Are Not the Same Number

Before you pay a dividend, three separate constraints apply and they rarely agree. Retained earnings tells you what profit has been accumulated. The franking account tells you how much tax has actually been paid and therefore how much of the dividend can be franked. Cash tells you what you can physically transfer. You need all three.

• Retained earnings. The accounting measure of accumulated profit, and the starting point for the section 254T net assets test.
• The franking account balance. Built up from company tax actually paid. Pay a dividend larger than your franking account supports and it comes out partly or wholly unfranked, taxed in the shareholder’s hands with no credit. The ATO explains the mechanics in its guidance on allocating franking credits.
• Cash. The only one that actually constrains the bank transfer. A dividend declared but not paid becomes a loan owing to the shareholder, which has its own consequences.

There is a fourth trap. If you simply take money out without declaring a dividend or paying a wage, you have created a loan from the company to a shareholder, and that is Division 7A territory. Left unaddressed it becomes a deemed unfranked dividend, which is the worst of all available outcomes. Our guide to paying yourself from your company tax-effectively sets out the legitimate routes.

Negative Retained Earnings

If the figure is negative, the company has accumulated more losses than profits over its life. This is common in early years and after a bad trading period, and it is not automatically fatal. What it does mean is that the section 254T net assets test becomes much harder to satisfy, so dividends are usually off the table until the position recovers.

It also matters for tax. Carried forward tax losses are a separate concept from accumulated accounting losses, and using them in a later year depends on satisfying continuity of ownership or the business continuity test. If your shareholding has changed, get advice before assuming the losses are still available.

What Established Owners Actually Do With Retained Profits

Leaving years of accumulated profit sitting inside a trading company is a decision, and usually not a deliberate one. Those profits are exposed to every risk the trading business carries: a customer dispute, a workplace claim, a bad debt, an insurance gap. The strategic question is not just how to extract them, but where they should sit.

• Pay franked dividends deliberately. Planned across years rather than in one lump, so the shareholder’s marginal rate is managed rather than spiked.
• Use a corporate beneficiary. Where a trust is in the group, a bucket company can cap the tax on retained profits at the company rate rather than the top marginal rate.
• Separate the profits from the trading risk. A holding company lets surplus profits be paid up out of the operating entity so they are not exposed to its liabilities.
• Fund growth or debt reduction consciously. Retaining profits to buy equipment or pay down loans is a legitimate strategy, but it should be a choice with a plan, not a default.

Which of these is right depends entirely on your structure, your risk profile and your timeframe, and getting it wrong is expensive to unwind. It belongs in a tax planning conversation in April or May, not in the week before 30 June.

What to Do Next

Find the retained earnings figure on your latest balance sheet and compare it to your cash at bank. If there is a large gap, build the trace table above from your own numbers so you can see exactly which assets your accumulated profits turned into. That single exercise resolves most of the confusion.

Then ask the two questions that follow: how much can legally and safely come out, and where should the rest sit. Read this alongside our guide to the cash flow statement, which shows the same story as a movement rather than a balance, and consider whether a monthly reporting rhythm through a Virtual CFO engagement would have surfaced this earlier.

Frequently Asked Questions

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Interest earned in a savings account is assessable income and taxed at your marginal rate. Interest saved by an offset account is not income at all, so it is never taxed. In 2026-27 a savings account would need to pay between 8.12% and 10.42% to match a 5.52% offset, depending on what you earn.

Most people compare the two on the headline rate. That comparison is wrong before it starts, because the two numbers are not the same kind of number. One is a rate you are taxed on. The other is a rate you are not. At the top marginal rate the gap between them is close to double.

Mina Baselyous is a Chartered Tax Advisor (CTA), Certified Practising Accountant (CPA) and Registered Tax Agent. Below is the arithmetic at four income levels, plus a second effect that almost nobody models and that can cost more than the interest difference itself.

Why One Is Taxed and the Other Is Not

A savings account pays you interest. That interest is income, it goes in your tax return, and it is taxed at your marginal rate. An offset account pays you nothing. It reduces the balance your lender charges interest on, so you simply pay less interest. There is no receipt, so there is nothing to assess.

That is the whole mechanism, and it is worth stating plainly because the language hides it. People talk about an offset account “earning” 5.52%. It does not earn anything. It avoids an expense. Avoided expenses are not income, and Australia does not tax you on money you did not spend.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the clients who get this wrong are usually the disciplined savers. They have built a solid cash balance, they are proud of the interest it earns, and nobody has ever shown them what that interest costs them after tax.

What a Savings Account Would Have to Pay to Match Your Offset

To match an offset, a savings account has to pay enough to cover the tax and still leave you the same amount. The formula is the offset rate divided by one minus your marginal rate. Against a 5.52% offset, that means 8.12% at a $100,000 income and 10.42% once you are on the top rate.

The 5.52% figure is the average outstanding variable rate for owner-occupiers reported by the Reserve Bank of Australia as at the July 2026 data release. Marginal rates below include the 2% Medicare levy and use the ATO resident tax rates for 2026-27.

Taxable income	Marginal rate	Savings rate needed to match a 5.52% offset
$100,000	32%	8.12%
$150,000	39%	9.05%
$200,000	47%	10.42%
$250,000	47%	10.42%

No at-call savings account in Australia is paying 10.42%. That is the point. For anyone with a mortgage and a top marginal rate, the offset wins by a margin no deposit product can realistically close.

Notice too that $200,000 and $250,000 give the identical answer. The top marginal rate starts at $190,000, so the advantage stops growing there. It does not keep scaling with income, which is worth knowing before anyone tells you it does.

The Dollar Difference on $100,000

On $100,000 of cash, the offset saves $5,520 of mortgage interest and none of it is taxed. A savings account at 4.50% earns $4,500 before tax and between $2,385 and $3,060 after it. The annual difference runs from $2,460 to $3,135 depending on your income.

The 4.50% savings rate below is an assumption for illustration, not a quoted product rate. Substitute whatever your own account actually pays. The structure of the answer does not change, only the size of it.

Taxable income	Offset saves	Savings interest	Tax on it	Kept after tax	Offset ahead by
$100,000	$5,520	$4,500	$1,440	$3,060	$2,460
$150,000	$5,520	$4,500	$1,755	$2,745	$2,775
$200,000	$5,520	$4,500	$2,115	$2,385	$3,135
$250,000	$5,520	$4,500	$2,115	$2,385	$3,135

Over ten years, and without compounding, the top-rate difference is more than $31,000. That is on a cash balance many established business owners hold as a matter of course.

The Second Effect Almost Nobody Models

Savings interest does not just get taxed. It lifts your income, and several tax thresholds are cliffs rather than slopes. Crossing one can cost you more than the interest was worth. Offset savings never do this, because they never appear in your income at all.

Two examples make the point.

Medicare levy surcharge

A single person on $100,000 with no private hospital cover sits under the surcharge threshold, which starts at $105,001 for 2026-27 according to the ATO surcharge thresholds. Put $150,000 in a savings account at 4.50% and the $6,750 of interest lifts income to $106,750. The surcharge now applies at 1% of the whole amount, which is $1,068.

The same $150,000 in an offset produces no income, so income stays at $100,000 and the surcharge is nil. Adding the interest gap to the surcharge, the total annual difference is about $4,758 on that one decision.

Division 293

Division 293 adds 15% to concessional super contributions once combined income and contributions exceed $250,000, a threshold that has applied since 2017-18 per the ATO. Someone on $215,000 making the full $32,500 concessional contribution for 2026-27 sits at $247,500 and pays none of it.

Add $250,000 of savings at 4.50%, and $11,250 of interest pushes the total to $258,750. The excess is $8,750, so Division 293 tax of $1,312 now applies. It was triggered entirely by where the cash was parked. In an offset, the same money produces no income and the threshold is never crossed.

When the Offset Advantage Shrinks

The full advantage applies to a loan on your main residence, where the interest was never deductible. On an investment loan it is smaller, because the offset reduces an expense you were claiming. You still come out ahead, but only by the after-tax margin rather than the whole rate.

This is the single most common error we correct. An owner with both a home loan and an investment loan puts the cash against the investment loan because the balance is larger, and quietly gives up the better outcome. If you hold both, the offset almost always belongs against the non-deductible debt first.

Related reading: our guide to investment property ownership structures and tax, and tax planning for property investors. If the cash you are thinking of moving sits inside a company, read borrowing from your company to fund your offset account first, because Division 7A applies before any of this does.

How We Use This With Clients

We map where the family’s cash actually sits, then work out the after-tax return on each pool. The question is never which account pays the best headline rate. It is which dollar is working hardest once tax, thresholds and deductibility are all accounted for.

In our experience working with Melbourne business owners, the money is rarely in one place. There is cash in the trading company, a term deposit somebody opened years ago, a redraw facility nobody uses and an offset sitting half empty. Moving it is usually simple. Knowing which move is worth making, and which one triggers a tax consequence on the way, is the part worth paying for. You can read more about our tax planning work.

Frequently Asked Questions

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The capital gains tax 6 year rule lets you keep treating a former home as your main residence for up to six years after you move out, even while it earns rent. If you sell inside that window the gain is usually fully exempt. The catch is that you cannot treat any other property as your main residence for the same period.

That last sentence is where most of the money is won or lost, and it is the part almost nobody explains properly. Plenty of articles will tell you the six year rule exists. Very few will tell you what it actually costs to use it when you have bought somewhere else to live, or that there are now two separate valuation dates that decide your final tax bill.

I am Mina Baselyous, a Chartered Tax Advisor (CTA), Certified Practising Accountant (CPA) and Registered Tax Agent in Melbourne. This is one of the questions we field most often from business owners who are moving house and keeping the old place. Below is how the rule really works, three worked examples with real numbers, and the two dates you need a valuation on.

What the 6 year rule actually is

The 6 year rule is the absence rule in section 118-145 of the Income Tax Assessment Act 1997. When a dwelling stops being your main residence, you can choose to keep treating it as your main residence anyway. If it earns income such as rent, that choice is capped at six years for each absence. If it earns nothing, the choice runs indefinitely.

The Australian Taxation Office states the position plainly in its guidance on treating a former home as your main residence, last updated 22 June 2026: the property continues to be exempt from CGT as though you still lived in it, and you cannot treat any other property as your main residence during that time, apart from up to six months when you are moving house.

Three features of the rule are worth knowing before you go further.

• It is a choice, not an automatic entitlement. You make it in the tax return for the year the sale contract is signed, not when you move out. That means you can run the numbers years later and pick the better outcome.
• The six years applies to each absence separately. If you move back in and genuinely re-establish the property as your home, a fresh six year period becomes available on the next absence. There is no lifetime cap on the number of periods.
• Vacant time does not count. The six year limit only bites while the property is producing income. Leave it empty and the clock stops.

The condition most people fail before they start

You must have genuinely established the property as your main residence first. The absence rule extends an exemption you already had. It cannot create one you never had. If you bought a property and rented it out immediately, section 118-145 is unavailable for that dwelling permanently, and no amount of moving in later fixes it.

Whether a dwelling was genuinely your main residence is a question of fact. The ATO looks at whether you and your family lived there and kept your belongings there, whether it was your mail address, whether you were on the electoral roll at that address, and whether utilities were connected in your name. Length of stay matters, and so does your intention when you moved in.

In our experience the failure is almost never deliberate. It is a client who moved in for a few weeks between settlement and a renovation, assumed that was enough, and kept no evidence of it. Eight years later there is nothing to point to. Keep the connection notices, the redirection confirmation and the insurance certificate from the period you lived there, because they are the only proof that survives.

Can you use the 6 year rule if you buy another home?

Yes. Owning and living in a second home does not disqualify you from the absence rule. What it does is force a choice, because you can only have one main residence at a time. If you claim the old home for a period, the new home is not exempt for that same period, and a slice of its eventual gain becomes taxable.

This is the single most misunderstood part of the rule, so it is worth being precise about why the answer is yes. Section 118-145(4) says you cannot treat any other dwelling as your main residence while you apply the absence rule. Parliament would not need a rule prohibiting a second main residence unless the absence choice were available to people who have one. The subsection assumes the second home exists and regulates the consequence. It does not block the choice.

The ATO’s own worked example confirms it. In Example 1 on the guidance page above, a taxpayer buys a house in Brisbane, moves to Perth and rents the Brisbane house out, then buys a new house in Perth and moves into it, and later sells Brisbane. The ATO accepts that he can treat the Brisbane house as his main residence from the day he moved out until the day he bought the Perth house, and claims a partial exemption on that basis. He is then subject to CGT on Brisbane for the period after the Perth purchase, because he chose not to extend the claim.

So the real question is never “can I use it”. It is “which property should carry the exemption, and what does the other one cost me”. That is a dollar comparison, and it is worth doing properly.

Worked example one: selling inside six years

When the old home sells inside the six year window and no competing claim is made on the new home, the result is a full exemption. No apportionment, no valuation arithmetic, no tax.

Daniel buys a house in Altona in 2019 for $720,000 and lives in it as his main residence. In September 2026 he moves into a new home and rents Altona out. He sells Altona in March 2031 for $1,250,000, which is four and a half years into the absence.

• The absence began September 2026, so the six year limit runs to September 2032.
• The March 2031 sale falls inside that window.
• Daniel chooses the absence rule for Altona in his 2030-31 return. The entire gain of roughly $530,000 is disregarded.
• He still reports the CGT event and claims the main residence exemption. The reporting obligation does not disappear just because the tax does.
• The cost: his new home cannot be his main residence from September 2026 to March 2031, so those years become non-main-residence days when he eventually sells it.

If Daniel had rented rather than bought his new home, there would be no cost at all. That is the cleanest version of this strategy and the one we steer clients toward when the timing allows it.

Worked example two: going past six years

Exceeding six years does not destroy the exemption. It converts it into a partial exemption, and it triggers a rule that usually helps you more than the lost years hurt: the home first used to produce income rule in section 118-192.

That rule deems you to have acquired the dwelling on the day it first earned income, at its market value on that day. Both halves matter. The cost base resets, and so does the acquisition date, which shortens the ownership period used in the apportionment formula.

Sarah bought in 2015 for $600,000 and lived there until September 2026, when she moved into a new home and rented the old one out. Its market value in September 2026 was $950,000. She sells in September 2034 for $1,400,000 with $35,000 of agent and legal costs.

Deemed acquisition	September 2026 at $950,000
Deemed ownership period	Sept 2026 to Sept 2034 = 8 years
Exempt under the absence rule	Sept 2026 to Sept 2032 = 6 years
Non-main-residence days	Sept 2032 to Sept 2034 = 2 years
Capital gain	$1,400,000 less ($950,000 + $35,000) = $415,000
Assessable proportion	2 divided by 8 = 25%
Assessable gain before any discount	$103,750

Notice what never appears in that calculation: the $600,000 she actually paid in 2015, and the eleven years she actually owned it. Both are wiped out by the section 118-192 reset. Eleven years of growth from $600,000 to $950,000 is simply not taxed. The reset is doing more work for Sarah than the six year rule itself.

Because the sale happens after 1 July 2027, that $103,750 is then split again under the new CGT rules. More on that below.

Worked example three: which home should carry the exemption

When you buy a second home rather than rent one, the six year rule stops being a free win and becomes a trade. The exemption is not created, it is moved. Whichever property you do not claim will carry the tax, and the two are rarely worth the same.

Take Sarah again. She keeps the old home and also buys a new home in September 2026 for $1,100,000, intending to stay there for decades. She now has two paths.

Path A: claim the old home for the six years

The old home is exempt from September 2026 to September 2032, producing the 25% assessable outcome above. The new home cannot be her main residence for those six years. If she sells it in 2050 after 24 years of ownership, six tainted years out of 24 means a quarter of the entire gain on her long-term family home is assessable, measured from the original $1,100,000 with no reset to soften it.

Path B: claim the new home from the day she moves in

The new home is fully exempt from September 2026 onward. The old home is exempt only up to September 2026, and because it starts earning income on that date, section 118-192 still resets its cost base to $950,000. Everything before September 2026 drops out. Only the growth after that date is assessable.

The asymmetry that usually decides it

Here is the structural point worth carrying into any conversation about this. The old home gets a market value reset. The new home does not, and never will, because section 118-192 only applies to a dwelling that starts producing income, and a home you live in never does.

So the cost of Path B is confined to the old home’s growth after September 2026. The cost of Path A is six tainted years spread across the whole life of the new home, applied to its full gain from the original purchase price. Where the old home is sold reasonably soon and the new home is a long-term keeper, Path B very often wins despite the instinct to protect the six year rule.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is treating the six year rule as free money. It is a transfer, not a gift. The exemption has to sit somewhere, and the only question worth asking is which property it is worth more on.

The two valuation dates that decide your tax bill

There are now two dates on which you need evidence of your property’s market value, and missing either one costs real money. The first is the day the property first earns income, which fixes your cost base under section 118-192. The second is 1 July 2027, which divides your gain between the old CGT rules and the new ones.

Valuation one is the more urgent of the two, because the trigger date is whenever you first rent the property and there is no second chance. A formal valuation is best. A written agent appraisal with comparable sales is the minimum. An opinion obtained in 2034 about what a property was worth in 2026 is worth very little if the ATO asks.

What changes from 1 July 2027

The 50% CGT discount is being replaced for individuals, trusts and partnerships by cost base indexation plus a 30% minimum tax rate on capital gains. The ATO confirms these measures are now law and apply from 1 July 2027, and that the reforms only apply to gains that accrue after that date.

The mechanics come from the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received assent on 26 June 2026. For anyone who owns a property before 1 July 2027 and sells after it, the gain divides into two parts at the property’s market value on that date. Growth up to 1 July 2027 keeps the 50% discount. Growth after it is taxed on an indexed cost base with a 30% minimum rate.

For the six year rule this does not change who qualifies or how the apportionment works. It changes what happens to the assessable slice afterwards. Taking Sarah’s $103,750 from example two, the sequence becomes:

1. Work out the gain from the section 118-192 deemed cost base.
2. Apportion it for non-main-residence days to get the assessable slice.
3. Split that slice at the property’s 1 July 2027 market value.
4. Apply the 50% discount to the pre-2027 part and indexation plus the 30% minimum rate to the post-2027 part.

The practical consequence is that the longer you hold past 1 July 2027, the larger the share of your gain that sits in the new regime. For a property already earning rent, the 1 July 2027 valuation is not optional housekeeping. It is the number that decides how much of your gain keeps the discount.

When the 6 year rule does not help you

Four situations defeat or limit the rule, and three of them are fixable if you know about them early enough. The one that is not fixable is foreign residency at the time of sale, which removes the main residence exemption entirely regardless of how long you lived in the property.

• You were a foreign resident when the contract was signed. Under section 118-110(3), the main residence exemption is denied to foreign residents unless a narrow life events test is met. The absence rule does not survive it. Residency at the contract date is what counts, so the timing of a sale relative to a return to Australia can be decisive.
• The land exceeds two hectares. The exemption covers the dwelling and up to two hectares of adjacent land used primarily for private purposes. On a semi-rural block the excess is taxable no matter which path you choose, and the area you select should be decided deliberately rather than by default.
• Part of the home earned income before you moved out. If you ran a business from a room or rented part of the house while living there, the absence rule cannot be applied to that part, either before or after you leave. That proportion of the gain stays assessable.
• You never established it as your main residence. Covered above, and permanent.

One more that sits outside the income tax rules but hits the same decision: state land tax. A property that stops being your principal place of residence generally loses the land tax exemption from the following assessment year. For a Victorian property of any size that can be a meaningful annual cost, and it sometimes changes the hold-versus-sell answer on its own. Model it before you commit to keeping the old place.

What to do before you move out

The decision itself can wait until you sell, but the evidence cannot. Everything below has to be done at the time, and none of it can be reconstructed later.

1. Get a written valuation dated as close as possible to the first day of the tenancy. This is the single highest-value action on the list, and it applies whichever path you eventually take.
2. Diarise a 1 July 2027 valuation if you will still own the property then.
3. Keep proof that the property was genuinely your home before you left: utilities, electoral roll, mail, insurance.
4. Check the land size if the property is on a large block, and decide how the two hectares will be measured.
5. Model both properties before you buy the second one, not after. The purchase price of the new home is a fixed input to the comparison, and it is the one decision you cannot revisit.

For business owners the analysis usually runs wider than the two properties. Where the old home is held in one name, where the cash from a sale is heading, and whether a restructure is on the horizon all interact with this choice. That is the conversation worth having before the tenant moves in, not in the year you sell.

If you are weighing up a move and want the numbers on both properties before you commit, our tax planning work is built for exactly this kind of decision. It also pays to understand how the 50% CGT discount rule applies to your situation, and how capital gains tax works more broadly for Australian business owners.

Frequently Asked Questions

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For most NDIS therapy providers, GST-free treatment comes from section 38-10 of the GST Act, not the NDIS rules. Occupational therapy, physiotherapy, psychology and speech pathology are listed there and are GST-free. Music therapy, art therapy and exercise physiology are not listed, so they are usually taxable even when funded in a participant’s plan.

This is one of the most expensive misunderstandings in the disability services sector, and it almost always runs the same way. A therapist is told their work is an approved NDIS support, they see the funding land in a participant’s plan, and they conclude that their invoices must be GST-free. Two or three years later, an ATO review asks a question nobody has asked before, and the answer costs them one eleventh of everything they have billed.

This guide walks through the actual law: the four conditions in section 38-38, why the NDIS Determination does not cover clinic-based therapy, and the section 38-10 route that decides the outcome for almost every therapy business. Written by Mina Baselyous, Chartered Tax Advisor (CTA), CPA and Registered Tax Agent, who advises NDIS provider businesses across Melbourne.

Why NDIS therapy providers get GST wrong

The error is a category error. NDIS funding approval and GST treatment are two separate decisions, made by two separate agencies, under two separate sets of rules. The NDIA decides what it will pay for. The ATO decides whether GST applies. A support can be fully funded, properly documented and completely legitimate, and still be a taxable supply.

In our experience working with NDIS provider businesses, the providers most at risk are the ones doing everything else right. They have signed service agreements, clean plan documentation and careful records. None of that touches the question the ATO actually asks, which is whether the service is a kind of supply the law has made GST-free.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), the mistake we see most is a provider assuming that because the NDIA funded it, the ATO must treat it as GST-free. Those are two different questions, and only one of them is answered by the plan.

The four conditions in section 38-38 of the GST Act

Section 38-38 of the GST Act makes a supply to an NDIS participant GST-free only where all four conditions are met. Miss any one of them and the supply is taxable. The first three are documentation. The fourth is the one that decides most therapy cases, and it has nothing to do with the participant at all.

• The participant has an NDIS plan in effect.
• The supply is of reasonable and necessary supports specified in the statement of supports in that plan.
• There is a written agreement between you and the participant, or another person, identifying the participant and stating that the supply is of those supports.
• The supply is of a kind determined by the Disability Services Minister.

That fourth condition points to the A New Tax System (Goods and Services Tax) (GST-free Supply, National Disability Insurance Scheme Supports) Determination 2021. The Determination applies to supplies made from 1 July 2021 up to and including 30 June 2027, and it contains two tables. Most providers have never read either of them.

Why Table 2 does not cover clinic-based therapy

Table 1 of the Determination lists nine kinds of supply that are GST-free on their own. Therapy is not one of them. Table 2 does include therapeutic supports, but only where the supply is also covered by one of three other determinations, all of which are tied to specific care settings. Clinic, school, home and community delivery falls outside them.

Table 1 covers specialist disability accommodation and accommodation or tenancy assistance, assistance in coordinating or managing life stages and transitions, household tasks, assistance with and training in travel and transport, interpreting and translation, assistance to access and maintain education and employment, assistive equipment for recreation, early intervention supports for early childhood, and management of funding for supports in a participant’s plan.

Table 2 covers assistance with daily personal activities, specialised assessment and development of daily living and life skills, assistive equipment for general tasks and leisure, behavioural support and therapeutic supports, and home modifications. Behavioural support and therapeutic supports is item 4, and it is the one every therapist points to.

The catch sits in the wording of the Determination. A Table 2 supply is GST-free only if it is also covered by Schedule 1 to the GST-free Supply (Care) Determination 2017, section 6 of the Residential Care (Government Funded Supplier) Determination 2015, or section 6 or 7 of the GST-free Supply (Health Services) Determination 2017. The Care Determination is a list of home and community care items such as home help, personal care, respite, community nursing and counselling, tied to keeping a targeted person living at home. The Residential Care Determination requires a residential care setting. The Health Services Determination covers two very narrow situations only, being a resident under treatment at a psychiatric hostel, and substance abuse prevention and control among Aboriginal and Torres Strait Islander people.

The ATO works this through with a published example. A participant named Bernie has fortnightly exercise physiology specified in his plan, delivered at a clinic, with a written agreement in place. The first three conditions are satisfied. The ATO’s conclusion is that the fourth is not, because the supply of exercise physiology services is not covered by the NDIS Determination. See the ATO guidance on GST and the National Disability Insurance Scheme.

Music therapy delivered in a clinic, a school, a participant’s home or the community sits in exactly the same position as Bernie’s exercise physiology. So does art therapy. So does most counselling delivered outside a home care or residential care program.

The route that actually works: listed health services under section 38-10

Section 38-10 of the GST Act makes a health service GST-free where three limbs are met: the service is one of the kinds listed in the table in that section, the supplier is a recognised professional in relation to that listed service, and the service would generally be accepted in that profession as necessary for the appropriate treatment of the recipient. This is the route that decides most therapy invoices, whether or not the client is an NDIS participant.

The table lists 21 services: Aboriginal or Torres Strait Islander health, acupuncture, audiology and audiometry, chiropody, chiropractic, dental, dietary, herbal medicine, naturopathy, nursing, occupational therapy, optometry, osteopathy, paramedical, pharmacy, psychology, physiotherapy, podiatry, speech pathology, speech therapy, and social work.

Two things about that list matter enormously. First, it is closed. The ATO’s position on other health services is that the service must be one of the listed services and cannot just be similar to one of them. Its own worked example is remedial massage, which resembles physiotherapy, is delivered by qualified practitioners, and is still taxable because it is not on the list.

Second, being a recognised professional has a defined meaning. It requires registration under a state or territory law, or membership of a professional association with uniform national registration requirements that is genuinely representative of the profession. Holding a qualification, or belonging to a small association, does not automatically satisfy it.

Where music therapy, art therapy and counselling land

Music therapy is not in the section 38-10 table, and it is not psychology or speech pathology. It is not rescued by the NDIS Determination in an ordinary delivery setting. On the law as it currently stands, a registered music therapist who is registered for GST should generally be charging GST on their services, including services to NDIS participants.

The same analysis applies to art therapy and, in most delivery settings, to counselling provided by someone who is not a psychologist or social worker. Exercise physiology is the ATO’s own example of the outcome.

There are narrower situations worth testing on the facts rather than assuming away. Table 1 item 8 covers early intervention supports for early childhood, which is arguable where the participant is an early childhood participant and the therapy is genuinely funded and delivered as early intervention support. Therapy supplied as part of GST-free hospital treatment, or inside a government funded residential care facility, can also qualify. And a sole trader whose turnover sits below the GST registration threshold and who is not registered has nothing to charge in the first place.

One more point that catches people out. The GST registration turnover threshold is $75,000, or $150,000 for a non-profit body, as at September 2026. GST-free supplies still count towards that threshold. A therapist billing $90,000 of genuinely GST-free work is required to register, even though the registration changes nothing about what they charge. Our guide to GST registration in Australia covers the mechanics.

What to do if you have been treating taxable therapy as GST-free

The exposure is one eleventh of everything you have invoiced on the wrong basis, because the GST is treated as included in the price you already charged. On $400,000 of therapy fees billed over three years, that is roughly $36,000 of GST, before any general interest charge. The offset is that you can claim back the GST credits on your business purchases for those periods, which you may not have been claiming.

Work through it in this order, with your accountant, before you change anything on an invoice.

• Separate your revenue by service type and delivery setting, not by whether the client is an NDIS participant. The setting and the service are what drive the answer.
• Quantify the exposure on the taxable streams, and quantify the input tax credits available to offset it.
• Check how your fees sit against the NDIS Pricing Arrangements and Price Limits, so you know whether GST comes out of your existing price or can be added on top. This determines the commercial impact, and it is a separate question from the tax one.
• Decide on voluntary disclosure. Coming to the ATO before it comes to you materially reduces penalties.
• Fix the go-forward position first, so the problem stops growing while the historical question is resolved.

If your books are not currently split by service type, that is the first job. You cannot quantify an exposure you cannot see, and our post on GST cash versus accruals accounting is worth reading alongside this one, because the method you use changes which periods the correction lands in.

How to get certainty before the ATO asks

Where the position is genuinely arguable, apply to the ATO for a private ruling. A private ruling is binding on the Commissioner for the arrangement it describes, which means you stop carrying the risk personally, and it is the only way to get certainty on a point the ATO has not published guidance about.

A good application sets out the delivery setting, the participant cohort, the exact plan wording, the service agreement, and the professional registration held. A weak one asks whether music therapy is GST-free and gets an unhelpful answer. This is advisory work, not compliance work, and it is worth doing properly.

For the broader picture across an NDIS business, including SDA, PAYG withholding and the contractor rules, see our main guide on GST, SDA, PAYG and contractor rules for NDIS providers. If the GST question is really a symptom of a structure that has outgrown itself, our tax planning work is where that conversation starts.

A note on how current this is. As at September 2026 we could not find any court or tribunal decision changing the operation of section 38-38, and the Determination remains in force as a March 2025 compilation. Tax rules change, so confirm the position against the primary sources linked above, or with us, before you act on it.

Frequently Asked Questions

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After Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, an unpaid present entitlement a corporate beneficiary simply leaves outstanding is not a Division 7A loan. Money a shareholder actually draws out of a trading company still is. Subdivision EA and section 100A are untouched. If those drawings are headed for a home loan offset account, the timing rules are set out in borrowing from your company to fund your offset account.

Somewhere between the golf course and the accountant’s waiting room, a sentence started doing the rounds among Melbourne business owners: “Division 7A is dead.” It is not. What died was one specific ATO position about one specific arrangement. Almost every owner who has repeated that sentence to us since June has drawn the wrong practical conclusion from it, and a few of them were about to make an expensive mistake.

This article sorts the two halves apart. Mina Baselyous is a Certified Practising Accountant (CPA), Chartered Tax Advisor (CTA) and Registered Tax Agent, and Pinnacle Accounting & Advisory has spent the months since the decision working through client structures line by line. What follows is what we are actually telling owners with a family trust and a bucket company, sourced to the High Court and the ATO rather than to the bloke at the barbecue.

What the High Court Actually Decided in Bendel

The High Court held that a private company beneficiary which does nothing about its unpaid entitlement to trust income does not make a loan under subsection 109D(3). Providing financial accommodation requires the company to do something that transfers, supplies or grants value. Mere inactivity is not enough. The Commissioner’s appeal was dismissed.

The facts were the ordinary family trust arrangement thousands of Australian businesses run. A discretionary trust resolved to set aside income for a corporate beneficiary. The company never called for the money. The Commissioner assessed the difference as a deemed dividend on the basis that leaving the entitlement outstanding was the “provision of financial accommodation” under paragraph 109D(3)(b).

The majority rejected that reading. According to the ATO’s own Decision Impact Statement published on 26 June 2026, the Court held that the provision of financial accommodation involves some bilateral activity, that there is no provision of financial accommodation when a private company does nothing, and that simply acquiescing to the retention of funds is not a transaction which in substance effects a loan. The Court also leaned on the structure of Division 7A itself: Parliament wrote Subdivision EA specifically to deal with unpaid present entitlements, which would have been unnecessary if the ordinary definition of loan already caught them.

The judgment was handed down on 10 June 2026 and the full reasons are published by the High Court of Australia. It was a majority decision, not a unanimous one: two judges would have found that financial accommodation had been provided.

Why “Division 7A Is Dead” Is the Wrong Conclusion

Bendel decided one question: whether a passive unpaid present entitlement is a loan under section 109D. It did not touch Subdivision EA, section 100A, the treatment of actual drawings, the distributable surplus calculation, or loans already converted to complying terms. Division 7A remains fully operative in every one of those areas.

The ATO said as much in the same breath as it accepted the loss. Its Decision Impact Statement notes that a private company beneficiary’s inaction may be insufficient to spare potential implications under other taxation laws, including Subdivision EA and section 100A, and the ATO repeated the point in its business bulletin of 1 July 2026.

In our experience the owners most at risk right now are not the ones who ignored the news. They are the ones who heard it, relaxed, and stopped asking their accountant about the company card, the personal expenses paid from the business account, and the money that went across to fund a deposit last November. None of that was ever a UPE issue. All of it is still a straight Division 7A loan issue.

Your Bucket Company UPE: What Changes and What Does Not

A UPE your bucket company has simply left sitting is not a Division 7A loan, and the ATO has confirmed it will not treat it as one. But a UPE you already converted to a complying section 109N loan remains a loan, and must keep being serviced. The distinction turns entirely on what was done, not on what the entitlement was called.

A UPE Left Outstanding Is Not a Loan

The Decision Impact Statement is direct on this. Where a private company beneficiary has not taken any relevant action in respect of its UPE, the Commissioner will not treat it as a loan for the purposes of section 109D, and that holds whether or not the amount is held on a separate trust. The ATO also confirms that entitlements set aside on sub-trusts under the old Practice Statement will not be loans either.

If you have been assessed on the basis that a bare UPE was a loan, the ATO has opened the door to amendments and objections, and says it will consider extension of time requests where the objection arises as a result of this decision. That is worth a conversation, not a wait-and-see.

A UPE Already Converted to a Complying Loan Is Still a Loan

This is the single most misunderstood point of the whole decision, and it is the one we spend the most time on in client meetings. Bendel does not unwind anything. If, at some point in the last decade, your adviser papered the UPE into a seven year complying loan agreement under section 109N, that is a loan as a matter of fact and it stays a loan.

The ATO puts it plainly in the Decision Impact Statement: UPEs that have been made subject to complying loan terms are, as a matter of fact, loans, and will continue to be treated consistently as loans. It goes further, and this is the part that surprises people. Where the entitlement has already been satisfied or converted into a loan, it has ceased to be a UPE, and the decision does not reinstate it as a mere UPE. The ATO specifically says the entitlement will not be treated as remaining unpaid merely because the conversion was done on a mistaken understanding of the law.

Read that twice, because the practical consequence is blunt. You converted because the ATO told you to. The ATO was wrong. You still have to service the loan.

That means the minimum yearly repayment still has to be made, and the interest still has to be paid, not merely journalled. The Division 7A benchmark interest rate for the income year ended 30 June 2026 was 8.37% per annum, published by the ATO and based on the Reserve Bank indicator lending rate of 6 June 2025. Confirm the rate for the current income year before you calculate anything, because it is reset annually. Miss the repayment and the shortfall is a deemed unfranked dividend taxed at your marginal rate, with no franking credit to soften it. Our guide to how Division 7A loan repayments work and what happens if you miss them walks through the arithmetic.

One narrower point worth knowing if you run a sub-trust: the ATO has said that varying the terms of an investment agreement between a sub-trust and the main trust, for example changing the interest rate or the term, will not of itself turn the arrangement into a loan, though it depends on the nature and effect of the variation. Do not treat that as a licence to start rewriting documents without advice.

What to Do With a UPE Sitting on Your Balance Sheet Now

Start by working out which kind you have, because the label in the accounts is not reliable. We open every one of these reviews with the same four documents: the trust deed, the trustee resolutions, the accounting records, and any loan or investment agreement that was ever signed over the entitlement. The ATO’s Decision Impact Statement lists exactly those four as the things that determine the character of the amount.

What we find, more often than owners expect, is that the paperwork and the ledger tell different stories. A trust that has been quietly paying interest on a “converted” loan for six years, where no agreement can actually be produced, is in a very different position from one where the deed is in the drawer and the agreement is signed. Both look identical on a balance sheet.

If you have been paying interest on a converted loan, do not stop paying it on the strength of a headline. Stopping mid-year on a genuinely complying loan creates a minimum yearly repayment shortfall, and that shortfall is a deemed dividend in your hands. Get the arrangement characterised first, then decide.

One thing Bendel did not change is the rate your bucket company pays. That is still decided each year by the base rate entity test, and a distribution referable to the trust’s rent or interest is passive income in the company’s hands. Our guide to the company tax rate in Australia works through six examples showing when a bucket company lands on 25% and when it lands on 30%.

Subdivision EA Still Bites

Subdivision EA is untouched by Bendel. Where a private company has an unpaid present entitlement and the trust pays, lends to, or forgives a debt of a shareholder of that company or an associate of a shareholder, a deemed dividend can still arise. The High Court in fact observed that these facts broadly corresponded with the circumstances Subdivision EA is addressed to.

This is the provision that catches the arrangement most Melbourne family groups actually run. The trust distributes to the bucket company, the cash never moves, and then the trust pays for something personal, school fees, a car, a renovation, on behalf of a shareholder or their spouse. The UPE is not a loan. The payment out of the trust can still be a deemed dividend. The ATO confirms in the Decision Impact Statement that where a private company beneficiary has a UPE and the trust, including any relevant separate trust, pays, makes a loan to, or forgives a debt of a shareholder or associate of a shareholder, it may have cause to consider Subdivision EA.

Put simply: Bendel protects the entitlement sitting still. It does nothing for money that moves.

Section 100A Still Bites, and It Has No Time Limit

Section 100A applies where a trust entitlement arises out of a reimbursement agreement, broadly an arrangement entered into outside the course of ordinary family or commercial dealing under which someone other than the beneficiary gets the benefit and someone’s tax liability is reduced. Where it applies, the trustee is taxed at the top marginal rate, and there is no amendment time limit.

The ATO flagged this in the Decision Impact Statement as one of the provisions a passive corporate beneficiary does not escape. It is a materially worse outcome than Division 7A. A Division 7A deemed dividend is assessed to the shareholder at their marginal rate. A section 100A assessment puts the trustee on the top marginal rate with no franking and, critically, no limit on how far back the Commissioner can reach.

“The clients who worry me after Bendel are the ones who now think a distribution to a bucket company is consequence free,” says Mina Baselyous, CPA, CTA and Registered Tax Agent. “Section 100A does not care that the entitlement is not a loan. It cares about who ends up with the benefit, and whether the arrangement looks like ordinary family dealing. That question did not change on 10 June.”

Money Drawn Out of the Trading Company Was Never Safe

Cash a shareholder or an associate actually takes out of a private company is a loan under section 109D and always has been. Bendel changes nothing here. There is no inactivity to argue about: the company has transferred value. Without a complying loan agreement signed in time, the amount is a deemed unfranked dividend in the recipient’s hands.

This is the half of the headline that gets forgotten. The Bendel argument was only ever available because the company did nothing. Once money leaves the company bank account and lands with a shareholder, their spouse, their family trust or another related entity, you are squarely inside Division 7A as it has always operated, and the ATO’s guidance on loans by private companies applies unchanged.

The mechanics have not moved either. The loan agreement must be in writing and executed by the earlier of the company’s lodgement due date and its actual lodgement date. The term is capped at seven years unsecured, or 25 years where secured by a registered mortgage over real property. Interest must be charged at or above the benchmark rate. The minimum yearly repayment must be actually paid by 30 June, not accrued. Our rundown of the most common Division 7A loan traps covers where owners come unstuck.

In practice, the drawings problem is a bookkeeping problem before it is a tax problem. We regularly review a set of accounts where the shareholder loan account has crept up by tens of thousands across a year in small personal transactions nobody categorised. Nothing about Bendel helps with that.

Why the Distributable Surplus Calculation Still Matters

A Division 7A deemed dividend is capped at the company’s distributable surplus for the income year. Because Bendel removes bare UPEs from the section 109D net but leaves drawings, Subdivision EA and debt forgiveness inside it, the distributable surplus calculation is now doing more of the work in a typical family group, not less.

The calculation is the ceiling on your exposure. If the deemed dividends arising in a year exceed the distributable surplus, the excess is not assessed. That makes it the number worth knowing before you plan the year, not after you get the assessment. It also means the composition of the company’s balance sheet, its net assets, non-commercial loans, paid up share value and repayments of non-commercial loans, has direct consequences for how much of a mistake actually costs you. We set out the mechanics and worked examples in our guide to Division 7A distributable surplus for Melbourne business owners.

One caution we give every client: distributable surplus is a year by year figure, and a company that has none this year may have a large one next year. It is a cap, not a shield.

Where the ATO Guidance Stands Right Now

Taxation Ruling TR 2010/3 and Practice Statement PS LA 2010/4 were both withdrawn with effect from 1 July 2022, well before Bendel, and were replaced by Taxation Determination TD 2022/11. The ATO has said it will withdraw TD 2022/11 as a consequence of the decision, and is reviewing a further set of rulings and guidelines.

It is worth being precise about the sequence, because the two events get run together. The withdrawal notice for TR 2010/3 is dated 30 June 2022 and withdrew the ruling with effect from 1 July 2022. That had nothing to do with Bendel. It was part of the ATO’s own refresh of its UPE position, and TD 2022/11 was issued to cover entitlements arising on or after 1 July 2022. Entities could continue to rely on TR 2010/3 and PS LA 2010/4 for entitlements conferred on or before 30 June 2022.

Be precise about TD 2022/11 as well. The ATO has said in its Decision Impact Statement that it will withdraw the determination. As at September 2026, though, TD 2022/11 is still listed on the ATO Legal Database and marked as under review as a result of the decision, with no withdrawal notice issued. Treat it as on foot but overtaken in practice by the ATO view in the Decision Impact Statement, and check its current status before relying on it. The ATO has also said it will review TR 2022/4, TR 2015/4, TD 2015/20, TD 2011/15, PCG 2022/2 and PCG 2017/13.

Where the ATO does withdraw a public ruling, it continues to apply to schemes that had begun to be carried out before the withdrawal, where that is favourable to the taxpayer.

What Melbourne Business Owners Should Do Now

Characterise every entitlement and loan in the group before you change anything. Keep servicing genuinely complying loans. Review whether any trust payments to shareholders or associates expose you to Subdivision EA. Test your distributions against section 100A. Then, and only then, look at whether an amendment or objection is worth lodging for prior years.

• Map the group. Every trust, every company, every entitlement, every loan account, with the deed, resolutions and agreements sitting beside the ledger.
• Split UPEs from loans. Bare UPEs are outside section 109D. Converted loans are not. The accounts alone will not tell you which is which.
• Do not stop servicing a complying loan. A mid-stream stop creates a shortfall and a deemed dividend.
• Trace the money. Anything that moved from the trust to a shareholder or associate while a UPE was outstanding needs a Subdivision EA review.
• Pressure test the distributions. Section 100A has no time limit, which makes it the longest tail risk in the structure.
• Clean up drawings. Shareholder loan accounts in the trading company need agreements, interest and repayments, exactly as before.
• Then consider amendments. If prior year assessments treated a bare UPE as a loan, the ATO has invited objections and will consider extensions of time.

This is the kind of work that belongs in a structured annual review rather than a panic in June. It sits alongside proper tax planning and a considered look at whether the structure itself is still the right one for where the business is now. A decision this significant is a good reason to open the bonnet on the whole group, not just the one balance.

Frequently Asked Questions

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