A Perfect Storm for Trusts? Bendel, Cameron and the 2026 Proposed Budget Reforms

Recent months have seen a number of significant developments affecting trusts and their beneficiaries. Most notably, the High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18 (Bendel) has provided long-awaited clarification regarding the treatment of unpaid present entitlements (UPEs) under Division 7A. The decision in Cameron v Commissioner of Taxation [2026] FCA 609 (Cameron) highlights the potentially adverse consequences faced by taxpayers who structured their affairs in accordance with the ATO’s 2010 position. At the same time the 2026-27 Federal Budget reforms, if implemented as announced, will fundamentally alter the taxation of discretionary trusts, the operation of the CGT discount regime and treatment of pre-CGT assets.

This article examines the implications of the Bendel case and the Cameron case, and explores several key issues arising from the Government’s proposed trust and capital gains tax reforms.

The High Court Decision in Bendel

On 10 June 2026, the High Court delivered its judgment on the Bendel case. In a 5-2 majority, the High Court ruled that a company’s failure or inaction to call for payment of a UPE owed to it by a trust is not, of itself a loan for Division 7A purposes. The High Court confirmed that the extended definition of ‘loan’ in section 109A(3) which includes ‘a provision of credit or any other form of financial accommodation’ incorporates the concept of repayment, and therefore requires more than a mere obligation to make a payment.  The majority reasoned that the essential characteristic of a loan is an obligation or promise to repay and this requires an initial transfer of value or property by the company to occur. Accordingly, a mere inaction, or acquiescence to the retention of funds by a trustee, does constitute a transaction which in substance effects a loan.

While the decision is welcome news for taxpayers, it does not eliminate the potential application of other integrity provisions including Subdivision EA, or EB of Division 7A and section 100A (refer our article Bendel’s High Court Decision – Taxpayer wins, but what’s next?).

Cameron – The Cost of Following Administrative Guidance

While the Bendel case provides long-awaited certainty that a UPE is not, without more, a loan for Division 7A purposes, Cameron’s case highlights the practical difficulties faced by taxpayers who structured their affairs in accordance with the Commissioner’s administrative position.

For more than a decade, trustees commonly sought to address Division 7A consequences by either converting UPEs owing to corporate beneficiaries into a complying Division 7A loan, or implementing sub-trust arrangements in accordance with the Commissioner’s published guidance in PSLA 2010/4 (now withdrawn) and subsequently TD 2022/11. Under those arrangements, funds representing the UPE could be invested through a seven-year or ten-year interest only loan or applied to acquire specific income producing asset.

The taxpayer in this case, the Cameron Family Trust structured the UPE it owed to a corporate beneficiary for income years FY2013 to FY2015 and FY2018 to FY2020 in accordance with PSLA 2010/4 by way of a series of seven-year interest bearing sub-trust arrangements. For each of these years, the trust claimed a tax deduction for the interest incurred under those sub-trust loans. The Federal Court ruled that the interest deductions were not available, finding that there was no nexus between the borrowed funds and the derivation of income. The taxpayer had merely converted the liability to pay the UPEs it owed to the corporate beneficiary (which was not bearing interest) to a non-current interest bearing liability.

The decision raises a fundamental fairness question. For many years taxpayers structured their Division 7A affairs in accordance with the Commissioner’s published position that a UPE constitutes a Division 7A loan. Cameron’s case indicates that where the monies are left in the trust (say to provide working capital for it’s income – generating activities) then any interest paid by the trust on such loan is not deductible.  Combined with the recent High Court decision in Bendel’s case confirming that the Commissioner’s interpretation was erroneous, taxpayers may therefore question why they should be exposed to adverse tax consequences for adopting arrangements that were specifically designed to comply with the Commissioner’s interpretation of the law.

It should also be noted that Cameron’s case also addressed the operation of family trust distribution tax provisions, particularly whether the trust had a valid and effective family trust election in force. Those issues are beyond the scope of this article.

2026-27 Federal Budget – Taxing Discretionary Trusts

The Federal Budget proposal to tax discretionary trusts at a minimum 30% tax rate from 1 July 2028 could limit the practical benefits arising from the Bendel decision as the tax advantages traditionally associated with distributing trust income to corporate trustees are likely to be substantially reduced.

Under the proposed regime, trustee will pay the minimum tax directly. Individual beneficiaries will receive non-refundable tax credit for the tax paid by the trustee while corporate beneficiaries will be denied any tax credit entitlement. For individual beneficiaries, the non-refundable nature of the tax paid by the trustee can result in a reduction in their after-tax distribution where their marginal tax rate is below 30%.

According to the Budget papers, trustees receiving franked dividends will be required to apply the attached franking credits towards satisfying the minimum tax payable. This is of particular significance where discretionary trusts are used as investment vehicles to hold share portfolios. The economic benefit of franking credits (which are ordinarily refundable) if received by a discretionary trust will effectively be converted to non-refundable credits under the proposed measure. The implications to corporate beneficiaries are potentially more severe given companies will be denied any tax credit entitlement for the tax paid by the trustee. The result is that franked distributions received by a discretionary trust if distributed to a corporate beneficiary will be subject to an effective taxed rate of 51%. When the same income is repatriated to shareholders, the combined tax rate could be as high as 62.9%.

To date no draft legislation has been released for this measure.

CGT Discount Reform – Capital loss ordering rules

On 28 May 2026, the Federal Government introduced Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 to implement various Budget measures including CGT discount reforms. A particular significant feature of the CGT discount reform is the mandatory capital loss ordering rule.

Under the proposed regime, taxpayers must first apply any capital losses against the oldest capital gains, and only after those older gains are completely ‘wiped out’, can any remaining capital losses be applied to more recent capital gains. This restriction effectively removes the ability to allocate capital losses to capital gains subject to different tax treatments in a way to maximise their benefit, a practice that has long been permitted under existing rules.

For taxpayers with gains that straddle both the CGT discount and the proposed cost-base indexation system, the ordering rule may produce higher overall tax liabilities. Capital losses will first be absorbed against pre-July 2027 gross capital gains before any 50% CGT discount can be applied, potentially leaving post-July indexed capital gains being fully exposed to tax.  This will end the ability to specifically apply losses to chosen gains to help manage the overall CGT liability.

Pre-CGT Assets and CGT Event K6 Liability

The Budget reforms will also fundamentally alter the tax treatment of pre-CGT assets. Under the proposed amendments, pre-CGT status of assets are removed by deeming them to have been sold on 30 June 2027 and reacquired on 1 July 2027 for market value. Although, capital gains arising from the deemed sale on 30 June 2027 are disregarded (under the pre-existing rules), an important exception applies to pre-CGT shares or trust interests. Where the underlying company or trust (in which the pre-CGT shares or trust interests are held), satisfies the 75% market value test, the deemed disposal on 30 June 2027 will trigger CGT event K6. Whilst the event K6 capital gain is triggered on deemed disposal date, a taxpayer’s liability for that gain is deferred until the eventual sale of the relevant share or trust interest. The reform creates uncertainty where the taxpayer dies before the disposal occurs. Division 128 ITAA 1997 provides rollover relief when assets of a deceased pass to a legal personal representative or beneficiary on death. However, it remains  unclear whether the deferred event K6 liability attaches to the asset and is effectively inherited by the estate or beneficiary or whether the liability crystallises on death such that the deceased or their estate is liable.

Where to from here…

The High Court’s decision in Bendel’s case reinforces the importance of statutory interpretation as enacted by Parliament.  There are real risks to taxpayers if the ATO has an erroneous administrative construction as that may leave taxpayers exposed to adverse consequences notwithstanding their compliance, as appears to have been the situation in Cameron’s case. The Government’s proposed Budget reforms to discretionary trust taxation and CGT discount further add to the uncertainty. With legislative developments continuing to be unfold, taxpayers and advisers will need to monitor developments closely.

—– –