How to Build a Div 7A when the borrower is a Family Trust

 

Need a Division 7A when the Family Trust lends money to a bucket company?

You distribute Family Trust income to your children and spouse. As much as you can. But you run out of family members on low marginal tax rates. The Family Trust then distributes the remaining Family Trust income to the ‘bucket’ company.

But the Family Trust has no actual money to pay the beneficiaries (including the company) the income.

This is the case for most Family Trusts. The Family Trust is actually ‘borrowing’ money from your children, spouse and the bucket company. These could be called ‘loans’. But such unpaid moneys are correctly called “Unpaid Present Entitlements” (UPE). But for the sake of simplicity, we will call them a “loan” from the bucket company to the Family Trust.

In effect the Family Trust now owes that money to the ‘bucket’ company. The company is lending the (unpaid distribution) as a loan to the Family Trust.

Therefore, you must build a Division 7A Loan Agreement.

Tax advantages of a Family Trust distributing to a bucket company.Div 7A Loan Agreement where the borrower is the Family Trust
But be careful of Div 7A

A corporate beneficiary is a company. It receives a distribution from a discretionary trust.

The company declares its trust income. The bucket company pays tax at a constant tax rate of 30% (or less).

This 30% tax rate is less than the highest marginal tax rate of a human. A human pays tax of up to 47%. Therefore, the distribution to the company saves 17% tax.

The use of a bucket company may help protect the wealth of humans who are exposed to business risk.

A Discretionary Trust is an ‘assoicate’ for Division 7A

A Division 7A Loan protects loans from your company to a shareholder or ‘associate’.

Your Family Trust is an ‘associate’. Your Family Trust must have its own Div 7A Deed. Mum, Dad and the children each need their own person Div 7A Loan Deed. So to, the Family Trust must also have its personal Division 7A Loan Agreement.

An example of where a family trust needs a Division 7A Loan Deed

Kenneth Nominees Pty Ltd is trustee of the Ken & Julie Smith Family Trust ABN 8383738373837. (It is not being used as a bucket company.) It only acts as a Corporate Trustee of that family trust.

Bucketto Pty Ltd is a beneficiary of the Ken & Julie Smith Family Trust. Buketto Pty Ltd is a bucket company.

The Appointor of the Ken & Julie Smith Family Trust directs Kenneth Nominees Pty Ltd (as the trustee) to sign a Distribution Minute.

The Distribution Minute distributes all family trust income to Buketto Pty Ltd.

Sadly there is no actual cash to make good on the distribution. So the Family Trust owes this money to Buketto. But the proper name is a UPE.

To comply with Division 7A, the Family Trust must build a Division 7A Deed:

Lender: Bucketto Pty Ltd

Borrower: Kenneth Nominees Pty Ltd is trustee of the Ken & Julie Smith Family Trust ABN 8383738373837

But a company lending to another company does not need a Division 7A Loan?

That is correct. A company (in its own right) can lend money to another company (in its own right). This is without getting involved with Division 7A. In that instance, no Division 7A Deed is required.

But in the above example, Kenneth Nominees Pty Ltd is not itself borrowing any money. Instead, Kenneth Nominees is acting in the capacity of trustee of a family trust. It is the family trust that is borrowing the money from Bucketto Pty Ltd. Therefore, a Dision 7A Loand Deed is required.

How to build a Div 7A Loan when the family trust is borrowing money from the company?

This is how to build a Div 7A when the borrower is a Family Trust:

  • Lender: the company lending the moneyDiv 7A when the borrower is a Family Trust
  • Borrower: the Trustee of the Family Trust borrowing the money

1. Example when the Trustee of the Family Trust is a company:

  • Lender: Generous Pty Ltd (this is the company lending the money)
  • Borrower: Abacus Pty Ltd as trustee of the Smith Family Trust

2. For Example when the Trustee is a single human

  • Lender: Generous Pty Ltd (this is the company lending the money)
  • Borrower: Colin James Smith as trustee of the Smith Family Trust

3. Example when the Family Trust’s Trustee is two humans

  • Lender: Generous Pty Ltd (this is the company lending the money)
  • Borrower One: Jake Chen James as trustee of the Smith Family Trust
  • Borrower Two: Mary Chow James as trustee of the Smith Family Trust

Why build a Div 7A when the borrower is a Family Trust?

By building a Div 7A, the loans by the company to the Family Trust are not classified as dividends and do not suffer penalty interest rates. These rules are set out in Division 7A of the Income Tax Assessment Act 1936 (Cth).

A Div 7A Loan Deed requires that the Family Trust (borrower) repays 1/7th of the loan each year, as well as interest rate set by the ATO.

Why did the government make this law about Div 7A when the borrower is a Family Trust?

Companies pay a low flat tax rate of 30% or less. In contrast, mum and dad pay up to 47% in tax. Therefore, in the good old days (before Div7A) mum and dad would:

  • have the company earn the income and pay the low tax rate
  • the company then lends mum and dad the money
  • Mum and Dad buy a boat, have a holiday or whatever with the money
  • Mum and Dad never bother to pay back the debt
  • therefore, Mum and Dad never bother to pay the difference between the low company tax rate and the higher tax rate that Mum and Dad would of have to have paid if they had earned the money
  • there was an indefinite tax deferral.

The government got sick and tired of this. It introduced Div 7A. Now, Mum and Dad need a proper commercial loan deed. This is called a ‘Div 7A Loan Deed‘. Plus Mum and Dad have to pay back the money that the company lent them.

ATO starts applying Div 7A to bucket companies – ATO TR 2010/3

The ATO issued TR 2010/3 in June 2010. The ATO’s long-standing position changes on bucket company UPEs and Division 7A. Now under TR 2010/3 the UPE is allowed to subsist. But it is treated as a loan. And the loan is now subject to Division 7A.

In recognition of the change of fashion, the ATO quarantinedsUPEs in existence before 15 December 2009.

The effect of TR 2010/3? There is no longer an indefinite tax deferral. This is for distributions made to bucket companies after 15 December 2009.

But these pre-2009 ‘loans’ can go out of date. This is how to refresh them without converting them into the Div 7A regime.

What is the purpose of Div 7A when the borrower is a Family Trust?

Div 7A ‘ensures that private companies will no longer be able to make tax-free distributions of profits to shareholders (and their associates) in the form of payment or loans’: Explanatory Memorandum to Act No 47 of 1998. Further:

‘It ensures that all advances, loans and other credits by private companies to shareholders (and their associates), are treated as assessable dividends. This is to the extent that there are realised or unrealised profits in the company. In addition, debts owed by shareholders (or associates) which are forgiven by private companies are treated as dividends.’

What does Division 7A have to do with Family Trusts?

Family Trusts earn money each year. The Family Trust hunts down beneficiaries with the lowest marginal tax rate. Often the Family Trust distributes to a company. This is because the company pays a low fixed rate of tax.

The Family Trust then ‘distributes’ income to the company beneficiary. However, as is commonly the case no money actually changes hands. The Family Trust merely has an obligation to pay the money to the company. This is called a ‘present entitlement’ and is enough to have the company pay the tax (at its low tax rate). This obligation used to be called a ‘loan’ from the company back to the Family Trust. But now we call them a much fancier name: ‘Unpaid Present Entitlement’ (UPE).

You need to build a Div 7A Deed between the company (as Lender) and the trustee of the family trust (as Borrower).

Why not just use the name of the Family Trust as the Borrower?

Trusts only operate through a trustee. The Borrower is the ‘Trustee’ of the Family Trust.

What if the Trustee of the Family Trust also borrows money in her own right?

Let us say Mum is the trustee of the Family Trust. The Family Trust borrows money. Mum also borrows money from the company to buy a new necklace. You need two separate Div 7A Deeds. You need a separate Div 7A when the borrower is a Family Trust. Then you need a separate Div 7A for Mum, as well.

Does the Legal Consolidated Div7A allow the paying of the annual Div7A loan by setting off a company dividend?

Division 7A, found in Part III Income Tax Assessment Act 1936 (Cth) (ITAA36), serves as an integrity regime. It is designed to prevent shareholders and their associates from accessing a private company’s profits taxed only at the low company rate. There is an ongoing compliance obligation to make a minimum annual repayment for a complying Div 7A loan.

Div 7A loan repayments typically do not involve direct monetary transfers but, instead, rely on offsetting against a company-declared dividend. This strategy creates mutually opposing obligations when the borrower is also a shareholder, facilitating a cashless repayment process. 

To meet the minimum annual Div 7A loan repayment there is a common practice of meeting the obligation by offsetting it against a company-declared dividend. Legal Consolidated allows for the satisfaction of the annual minimum payment without money moving among the parties. But your accountant needs to be careful. This strategy creates mutually opposing obligations when the borrower is also a shareholder, facilitating a cashless repayment process. Not all round-robin payments are effective. Also, make sure your accountant prepares and gets you to sign the Trust Distribution Minute signed early.

Most Div 7A loan repayments are made by way of set-off against a dividend declared by the company. As well as the above make sure that the dividend is validly declared.

Family Trust Div 7A: “corporate beneficiary” vs “bucket company”

A company that you have an interest in usually automatically becomes a beneficiary of a Family Trust. Such a company has two common nicknames:

  • corporate beneficiary
  • bucket company

Both expressions mean the same thing.

What do I get when building a Division 7A?

Build the Div 7A online. You get:

  • Our law firm’s signed letter of advice on our law firm’s letterhead confirming our law firm authored the Div 7A Deed
  • Minutes
  • Division 7A Loan Deed for a Family Trust

Why is it better to prepare my Div 7A with the Family Trust as a borrower on our law firm’s website?

You are dealing directly with a law firm’s website, therefore you:

  • we are responsible for the Div 7A Loan for a Family Trust
  • free legal advice to help you build the Family Trust Div 7A Agreement
  • hints and videos for every question as you build the Div 7A
  • see a full sample of Div 7A before you start building
  • law firm letter confirming we authored the document
  • legal professional privilege
 

Bendel: the accountant who beat the ATO on bucket company UPEs

Federal Commissioner of Taxation v Bendel [2026] HCA 18

Mr Bendel controlled a small accounting practice. His Family Trust distributed income to a bucket company. But the cash did not move. The amount sat unpaid. Accountants call this an unpaid present entitlement, or UPE.

The ATO said the unpaid amount was a Division 7A loan. The High Court said it was not. That is a big win for taxpayers. It is also a big warning. The win depended on the trust deed, the wording of the resolutions and the way the UPE was handled.

Bendel’s Family Trust Distribution MinutesHigh Court Bendel case protects Div 7A Loans and Trust Minutes

The trustee did not simply write, “we owe the company money”. As provided in Legal Consolidated Minutes, the trustee resolved to “set aside” income for the bucket company. Under the Family Trust deed, those amounts were held in a separate trust for the company.

That wording mattered. The bucket company did not demand payment. The trustee did not admit a debt. There was no simple debtor and creditor relationship. There was no ordinary loan. The ATO argued that the company provided the trustee with “financial accommodation” by doing nothing. The High Court rejected that.

Doing nothing is not a loan.

Bendel helps with your minutes

Many Family Trusts distribute income to a bucket company. Often, the trust does not have spare cash to pay the company immediately. Before Bendel, the ATO treated many UPEs as Division 7A loans. That caused years of extra paperwork, complying loan agreements, minimum yearly repayments and tax risk.

Bendel says a UPE is not automatically a Division 7A loan merely because it remains unpaid. But the minute must be right. The trust deed must support it. The accounting records must not accidentally turn the UPE into a debt. The parties must not later treat the amount as a loan.

This is why Legal Consolidated’s Family Trust Distribution Minutes are carefully built. They do not use lazy wording. They help the trustee record what is being done. They help the accountant identify whether the trustee is setting aside income, paying income, applying income or creating a loan. Those are different things. The tax consequences are different.

The simple Bendel rule for UPEs

A UPE is not automatically a Division 7A loan. But a UPE can still lead to Division 7A trouble if you mishandle it. Ask these questions:

  • Does the Family Trust deed allow income to be set aside?
  • Does the minute actually set aside the income?
  • Does the minute create a separate trust?
  • Has the company demanded payment?
  • Has the trustee admitted that it owes a debt?
  • Has the UPE been converted into a loan?
  • Has money moved to a shareholder or associate?
  • Has the trustee paid private expenses?
  • Does Subdivision EA apply?

If you cannot answer these questions, stop. Do not guess. Get the paperwork right before 30 June.

Why Legal Consolidated Family Trust Distribution Minutes built this way

A Family Trust Distribution Minute is not a tax note. It is the legal record of the trustee’s decisions before 30 June. 

  • Bad minutes create tax risk. They may use the wrong beneficiary. They may ignore the trust deed. They may pretend the trustee knew the exact income before 30 June. They may accidentally call a UPE a loan. They may give the ATO the words it needs.
  • Good minutes protect the accountant. Good minutes protect the client. Good minutes make the trustee’s decision clear.

Legal Consolidated’s Family Trust Distribution Minute helps the trustee work through the decision properly. Press START FOR FREE. Read the hints. Watch the training videos. Telephone the law firm if you want help checking the answers.

Does Bendel mean you never need a Div 7A Loan Agreement?

No. You still need a Div 7A Loan Agreement for a real company loan.

For example, you may still need a Div 7A Loan Agreement where:

  • the bucket company actually lends money to the Family Trust;
  • the trustee converts the UPE into a loan;
  • the company provides real financial accommodation;
  • the trustee pays money to a shareholder or associate;
  • the trustee pays private expenses;
  • the accountant chooses to document the arrangement as a complying Division 7A loan.

Bendel protects good paperwork. It does not protect sloppy paperwork.

If there is a real loan, build the Div 7A Loan Agreement

If there is a real loan from the bucket company to the Family Trust, build a Div 7A Loan Agreement. The borrower is not the Family Trust by itself. A trust acts through its trustee. For example:

  • Lender: Bucketto Pty Ltd
  • Borrower: Kenneth Nominees Pty Ltd as trustee for the Ken & Julie Smith Family Trust

Press START FOR FREE. Read the hints and training videos. Telephone Legal Consolidated to check your answers before you lock and build.