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.
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.
Do you know what your trust’s beneficiary entitlements balance actually represents?
At Pinnacle, we help Melbourne business owners break a single UPE balance back into its years, beneficiaries and characters, then decide what to do with each one. Book a consultation with Mina to find out where you stand.
Book a ConsultationThe 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
What is an unpaid present entitlement in simple terms?
An unpaid present entitlement is trust income a trustee has resolved to give a beneficiary but has not actually paid to them. The beneficiary has a legal right to demand the money, the trustee still holds it, and the beneficiary is taxed on the amount in the year the entitlement arose regardless of whether the cash ever moves.
Where does a UPE show up in a trust’s financial statements?
It shows up in the liabilities section of the trust’s balance sheet, usually labelled beneficiary entitlements, distributions payable or beneficiary accounts. The matching entry in a corporate beneficiary’s accounts is an asset, a receivable from the trust. In a bucket company it is often the only significant asset on the balance sheet.
Do I have to pay out a UPE to my bucket company?
Not as a matter of Division 7A alone. Following Commissioner of Taxation v Bendel [2026] HCA 18, decided 10 June 2026, a company beneficiary that simply leaves its entitlement outstanding has not made a loan under section 109D. Subdivision EA and section 100A still apply, so the answer depends on what else is happening in the group.
Is a UPE owed to an individual treated the same as one owed to a company?
No, and this is where most explanations go wrong. Division 7A only concerns private companies, so it does not apply to an entitlement owed to a person. The live risk for an individual beneficiary is section 100A, particularly where an adult child is made entitled to income that the parents retain and use.
Why does our UPE balance keep getting bigger every year?
Because each year’s distribution adds a new entitlement while the cash stays invested in the business, and nothing automatically clears the prior year first. The money is usually sitting in stock, debtors and equipment rather than in the bank, so the liability grows even though the trust is operating exactly as intended.
Has TD 2022/11 been withdrawn?
The ATO has said it will withdraw TD 2022/11 as a result of the Bendel 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 by the ATO’s Decision Impact Statement, and check its status on the ATO Legal Database before relying on it.
General Advice Disclaimer: The information in this article is general in nature and does not constitute personal financial, tax, or legal advice. It has been prepared without taking into account your personal objectives, financial situation, or needs. Before acting on anything in this article, consider its appropriateness to your circumstances and seek advice from a registered tax adviser or CPA. Liability limited by a scheme approved under Professional Standards Legislation.
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