Bendel May Be More Interesting Than It Appears – Clarifying Present Entitlement

Interesting Aspect of Bendel – Trust Law Analysis

The part of Bendel that receives the most reporting is its analysis of the history and purpose of Division 7A and what is intended to constitute a loan based on statutory interpretation principles. In my view those arguments were neither persuasive (one way or the other) nor interesting. This is because legislation is ripe for legislative amendment, whereas the nature of trust rights and relationships endures and develops. In my view, the interesting part of Bendel was its trust law analysis at first instance.

At first instance[1] after considering the analysis of Div 6 as set out in Carter[2] and present entitlement that is created under s97 it was noted that it was not a deemed present entitlement that is the source of the beneficiaries’ rights deriving from distributions of trust income. Instead, the rights flow from trust law:

Courts have frequently been called upon to determine whether a beneficiary is presently entitled to a share of the income of the trust estate. Carter’s case is an example. It is said that the s 97 condition is satisfied if, but only if: (a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment

[…]

These comments were part of a formulation of a question as to when the s 97 threshold condition is to be tested, and whether events post that time could change taxable facts or assessment outcomes. These comments were not an analysis of the nature of rights created when trust income is distributed. 

In understanding the nature of distribution of income, we are brought back to the distribution of capital in Fischer v Nemeske[3] and in particular Gageler J:

Gageler J’s analysis in Fischer v Nemeske [54] is more to the point.  His honour was addressing the nature of entitlements created when discretionary vesting powers were exercised.  There he said: 96. Once it is accepted – as it was in In re Baron Vestey’s Settlement (121) and in Commissioner of Inland Revenue (NZ) v Ward (122), that a trustee can ‘apply’ trust property to the advancement of a specified beneficiary by resolving to allocate trust property unconditionally and irrevocably to the benefit of that beneficiary, it is difficult to see any reason in principle why such an unconditional and irrevocable allocation of trust property must take the form of an alteration of the beneficial ownership of one or more specific trust assets.

The taxpayer in Bendel argued that the income was held on a separate trust, and therefore s109D(3) did not apply. In my view that the income is held on a separate trust is difficult to maintain for a number of reasons.

[1] Bendel & Anor v Commissioner of Taxation [2023] AATA 3074

[2] Commissioner of Taxation v Carter [2022] HCA 10.

[3] Fischer v Nemeske Pty Ltd [2016] HCA 11; 257 CLR 615

Background Cases – Ward

In Commissioner of Inland Revenue v Ward[1] three members of the New Zealand Court of Appeal divided on what amounts to a sufficient “application” of trust income. Each judgment bears directly on whether a “set-aside” creates a separate sub-trust or merely effects an equitable allocation of income.

North P rejected the view that the trustee must create a new trust or make any immediate payment. His Honour observed that “the trustee’s declaration was carried into effect in the books of the trust but the appropriate entries were not made until after 31 March 1963. No part of the income credited to the four children was, however, paid to them until some years later when the amounts standing to their credit in the books of the trust were paid into separate Post Office accounts.” The single question, he said, was whether those steps were “sufficient to enable her successfully to contend that her children were deemed to be entitled in possession to the receipt of the amount paid to them or applied for their benefit during the income year. North P declined to equate “apply” with “pay”: “as nothing was paid out of the trust the income had been retained in the trust and not applied”. Nevertheless, he concluded that the trustee’s declaration “did have the effect of immediately vesting a specific portion of the income … in her four children … although not immediately paid out to them, [it] became their absolute property”. Application was achieved by vesting, not by the creation of any new fund.

McCarthy J agreed that timing was crucial—the application had to be effective before the close of the income year—but accepted that a properly executed resolution could itself suffice: “the power to ‘pay or apply’ is sufficiently exercised by a resolution of the trustees allocating money … to a beneficiary”. He expressly rejected the debtor–creditor characterisation: “it is misleading to speak of the debtor-creditor relationship. The rights of the beneficiaries here do not arise out of debt or contract. They arise out of the trusts created by the deed” (at 394). For McCarthy J, the resolution itself constituted application and created an equitable right, not a debt or a sub-trust of segregated property.

Turner J, by contrast, accepted a concession in argument that the memorandum could be an “application” only if it operated “(a) to create a debtor-creditor relationship … or (b) as a declaration of trust …”. Since there was no contract, statute or judgment to create a debt, that left only the possibility of a new trust, which failed for lack of certainty of subject matter: “It is necessary … to be able to point with exactitude to the assets made subject to the new trust …”. The memorandum was therefore merely “a record of the intention of the trustee to apply, at some time in the future, perhaps when liquid funds were sufficient, the income referred to in it”.

Taken together, Ward establishes two competing models. North P and McCarthy J treat an unconditional resolution as immediate application by equitable vesting, requiring no segregation of assets. Turner J insists that a separate trust or debt is essential, and that this demands certainty of property. It is precisely this divide that re-emerges in Bendel when the Court asks whether a “set-aside” of income creates a sub-trust or merely an equitable obligation to pay.

If North P and McCarthy J are right, then the act of “application” does not give rise to any new corpus or resettlement; the beneficiary’s interest is a vested equitable right in part of the year’s income. On that view, the taxpayer’s claim in Bendel that the income was held on a separate trust cannot stand. Only if Turner J’s stricter approach were adopted, requiring identification of assets set aside, could a true sub-trust arise.

[1] Commissioner of Inland Revenue (NZ) v Ward 69 ATC 6450

Background Cases – Vestey and Pilkington

The next step is to consider In re Baron Vestey’s Settlement; Lloyds Bank Ltd v O’Meara [1951] Ch 209 and Pilkington v Inland Revenue Commissioners [1964] AC 612, which supplied the models against which Ward was argued.

In Vestey, the trustees held cash in hand and, by resolution, allocated defined shares of that money to individual beneficiaries. The Court of Appeal held that this amounted to an application of income: a binding appropriation of existing money, effective immediately to vest that portion in the beneficiaries. There was no new trust or segregation beyond the allocation; the beneficiaries’ rights arose directly from the trustees’ act of application. This was the precedent that North P and McCarthy J treated as decisive in Ward. Turner J, however, distinguished Vestey because “the trustees there dealt with cash in hand”, an element absent from Ward, where there was no identifiable sum and the income remained in mixed assets.

Pilkington, by contrast, concerned the power of advancement of capital. There the House of Lords treated a resettlement of part of the corpus as a valid “application” of capital, even though the asset left the original trust fund. As North P later explained, that reasoning is confined to capital: “it is of the very essence of the exercise of the power that the capital sum so advanced ceases to form part of the trust property … but I do not regard Pilkington’s case as any authority for the view that in the case of income … the same considerations apply.” Income can be “applied” by allocation or vesting without any resettlement of property.

Bendel at Full Federal Court

On appeal the Commissioner argued that there is an action for money had and received. The Court held:

the equitable relationship of trustee and beneficiary can be overlayed with the legal relationship of debtor and creditor. As Gageler J said in Fischer v Nemeske Pty Ltd:

 

 

a trustee who admits to having an unconditional obligation to pay a specified amount of money to a beneficiary can thereby become liable to an action at law for the recovery of that amount as money had and received to the benefit of the beneficiary, so as to overlay the equitable relationship of trustee and beneficiary with the legal relationship of debtor and creditor. That has been settled since at least the middle of the nineteenth century

there existed a debtor-creditor relationship between the trustee and Gleewin Investments, based on the decision in Chianti Pty Ltd v Leume Pty Ltd

because Gleewin Investments was presently entitled to those distributed amounts, its interest in those amounts was not subject to any contingency or condition which might defeat its entitlement. Its interest was vested in interest and vested in possession and there remained nothing for the trustee to execute except payment to Gleewin Investments.

However, s 109D(3) requires more than the existence of a debtor-creditor relationship. It requires an obligation to repay and not merely an obligation to pay.

 In my view the ratio of Fischer is to be found across the other three judgments, and that those are to be preferred. That is, there must be some trust created and asset separated for there to be an entitlement to that asset, and Gageler J thought that that could be done without separating that asset from the remainder of the trust fund. If the taxpayer in Bendel was able to show on the facts that an amount had been set aside (like in Pilkington) and that there was accordingly a separate trust for those amounts, rather than assist in bringing the taxpayer out of s109D(3) it would in my view be fatal. That is, all five Justices in Fischer considered that such a separation of assets would support an action for money had and received and thus would be a debt enforceable at law.

On appeal, instead of a trust law approach to resolving this, the Full Federal Court[1] held that there was a necessity to repay in order for there to be a loan within s109D(3). It also appears that it was an agreed fact that present entitlement existed:

16    It not being disputed that in the income years ended 30 June 2013 to 30 June 2017, Gleewin Investments was presently entitled to a share of the net income of the 2005 Trust, it necessarily followed that it was common ground that Gleewin Investments had a vested interest in and present legal right to demand and receive payment of that share

Without the benefit of knowing the Commissioner’s reasoning for such a concession, it does seem to me that this a point that could have carried the matter to a different outcome, particularly given that on the facts presented at first instance there were a number of unpaid debts of the trust for PAYG and tax debts so presumably it is both trading and incurring liabilities. That is, there may not have been present entitlement in the first place, except for deemed present entitlement. This may be a far worse consequence than deemed dividends under Division 7A.

[1] Commissioner of Taxation v Bendel [2025] FCAFC 15

Bendal and High Court Transcript 14 October 2025

The discussion of Ward and Vestey explains that “application” of income gives rise to an equitable entitlement, not a legal debt. The trustee remains subject to fiduciary duties until the beneficiary collapses the trust. In the hearing on 14^th October 2025 the Solicitor-General relied on this Court’s decision in Carter to argue that a trustee’s resolution, once reflected in the accounts, gives rise to a debtor–creditor relationship. The bench immediately challenged that assumption. The following exchange captures the Court’s focus on whether an accounting entry and resolution can convert a trust obligation into a legal debt.

MR DONAGHUE: I think, your Honour, by reason of this Court’s judgment in Carter in certain circumstances where you have both the resolution and then reflection in the accounts of the company of the entitlement of the beneficiary of that distribution, then the – as I understand it, this Court’s authority is that there is a debtor‑creditor relationship in that situation and I understand that to underpin the common ground in the Full Court below.

STEWARD J: I think it requires an unconditional present obligation to pay that converts over to a debtor‑creditor relationship.

MR DONAGHUE: Which has been conceded to exist.

EDELMAN J: No, that would only arise once the Saunders v Vautier power is exercised.

MR DONAGHUE: I understand why your Honours are asking me these questions, but these questions – and they are important for the resolution of the appeal, but it is difficult for me to answer them with the way that I have agreed with Mr Wheelahan to divide the argument.

GORDON J: I think my concern – and I speak only for myself, Mr Solicitor – is that the premise from which your argument is proceeding I am not yet convinced of. That is, that there is a debtor‑creditor relationship. I accept that there is a concession made to that effect, but I do not actually know what it means in the context of a trust.

It may be that your argument does not rely on that premise, I do not know, but to the extent that it does then, for my part, I am not at all certain. I say that for this reason. Where I have a trustee who has set aside an amount under a trust deed for a beneficiary, then so far as I understand the law of trusts, that does not create a debtor‑creditor relationship at law in the way that I understood the concession was made.

As I understood it, what it does is it leaves in the hands of the trustee subject to his or her or its obligations as trustee both in terms of investment powers and the like. As a result of that, until the beneficiary takes some step either exercising the power under Saunders v Vautier or something else to collapse that arrangement – that is, to remove the obligations imposed on the trustee – there is no, to pick up the language used by Justice Steward, unconditional present obligation to pay. So, I raise that only because for me that – if that is the premise of the argument then that is – I need to tell you upfront that is of concern to me.

The questions from the bench frame the core problem in Bendel. Steward J recognised that a debtor–creditor relationship requires an unconditional obligation to pay. Edelman J rejected that such an obligation could arise without the exercise of a Saunders v Vautier power. Gordon J made the point explicitly. A trustee who has “set aside” income for a beneficiary remains a trustee, not a debtor, until the beneficiary calls for payment or collapses the trust. This is the same distinction drawn by McCarthy J in Ward and by Gageler J in Fischer: an equitable obligation to apply income does not become a legal debt until the equitable relationship has been brought to an end.

Steward J noted that nothing had been done to separate the money or record it distinctly in the accounts. His question introduced the factual premise for the next line of argument. The Solicitor-General accepted that those were the facts and recognised that the issue had become whether, on those facts, a separate trust or debtor–creditor relationship could exist.

STEWARD J: I have seen the findings of fact, that nothing was done to physically separate the money and nothing was done in the accounts, but there is still an anterior question about how the trust deed operates.

MR DONAGHUE: Yes. Well, your Honours, if that is the ambit of the question – is there a debtor‑creditor relationship and was a separate trust established – if they are the factual matters that your Honours ‑ ‑ ‑

EDELMAN J: It may be, Mr Solicitor, that the parties are just talking about different things and the questions from the Court are just concerned with a different issue. At least at paragraph 91 of the Full Court’s reasons, they refer to Fischer v Nemeske, which I think is picking up the point that Justice Gummow made in Roxborough v Rothmans, that a debtor‑creditor relationship arises and there is a claim for money had and received that arises once a Saunders v Vautier power has been exercised.

At that point in time, the trust is in effect collapsed and the trustee is then in a position as a debtor and liable for an action for money had and received to pay money to the beneficiary, but that is not this case.

MR DONAGHUE: No.

GORDON J: This goes back to the questions I asked you at the outset, Mr Solicitor. If we take what is set out in 91 and what Justice Edelman put to you, then the question is: what happened here? They are the very questions I understand Mr Wheelahan is going to be directed at.

If you have a setting aside and not the distribution of the funds in the way which has been described by the trust deed, and one has no positive step having been taken by the beneficiary, unless there is a calling for it and the collapsing of the trust in the way Justice Edelman put to you, then there is no action for money had and received and no debtor‑creditor relationship at law. That is the issue that in effect gives rise to whether or not 92 is right.

 

 

Edelman J’s reference to Fischer v Nemeske and Roxborough v Rothmans tied the discussion back to the established law that a claim for money had and received arises only once a Saunders v Vautier power is exercised and the trust is effectively collapsed. Gordon J agreed, confirming that without such a step there is neither an action for money had and received nor a debtor–creditor relationship at law. The bench was refining the same distinction drawn in Ward: the difference between an equitable obligation to apply income and a legal debt enforceable at law.

Edelman J tested how the existence of a trustee’s indemnity affects a beneficiary’s ability to demand payment. The discussion soon broadened to the meaning of “present entitlement” and whether the funds could ever have been the subject of a separate trust. The exchange between the bench and Mr Wheelahan KC shows the judges drawing a sharp distinction between the language of tax and the concepts of equity.

EDELMAN J: That would prevent a distribution. You could not exercise a Saunders v Vautier claim while there is a trustee’s indemnity outstanding.

MR WHEELAHAN: Your Honour, I do not see this as a Saunders v Vautier claim. It is a present entitlement that Gleewin Investments can call for those funds that have been ‑ ‑ ‑

STEWARD J: No, Mr Wheelahan, “present entitlement” is the language of the Tax Act. In equity, though, to call for it he would have to do a Saunders v Vautier call for the trust to be wound up and the income paid.

MR WHEELAHAN: Yes – no, I understand the point.

EDELMAN J: We have moved from all the submissions about common law that the Solicitor‑General made, now we are moving into equity.

MR WHEELAHAN: Yes. So, if the amounts were held on a sub‑trust solely for the benefit of Gleewin Investments, then Gleewin Investments could have exercised the Saunders v Vautier right and collapsed that and been paid the amounts, but that is not what occurred here. The amounts were instead intermingled, if I can use that word, with general trust funds and used for general trust purposes, and ‑ ‑ ‑

GORDON J: That is consistent with the powers of the trustee. That is, that they were authorised to invest them and they chose an investment. The difficulty I have had – and I raised this at the outset with the Solicitor – is where you have the setting aside by resolution of an amount for a beneficiary – and that is all that has happened here ‑ ‑ ‑

MR WHEELAHAN: Yes.

GORDON J: ‑ ‑ ‑ then, absent – and here, it is invested, and you have a trustee’s right of indemnity – until that beneficiary calls for the exercise of the Saunders v Vautier power, there is nothing more – there is nothing there for the beneficiary.

They do not have control of the amount, they do not have the ability to call for it, unless they have exercised their power under Saunders v Vautier. So, I understood the way it was going to be put was we can accept that there was a setting aside only, but there is some other thing here which gives rise to the Saunders v Vautier power having been exercised. Do you not have to go that far?

MR WHEELAHAN: Your Honour, if the amounts had been set aside in a separate sub‑trust solely for the benefit of Gleewin Investments, then those investments that the trustee was making would also be for the benefit of Gleewin Investments. So, any income derived on those investments would be a part of that sub‑trust.

STEWARD J: But why is there not a separate trust by operation of law? It does not require you to actually physically separate the money in a different place or to account for it differently. If the trust deed says upon the setting aside of the funds, there shall be a separate trust.

EDELMAN J: It is not a sub‑trust at all, it is a new trust.

Gordon J’s questions suggest scepticism that a mere resolution “setting aside” income could confer control or ownership on the beneficiary. Her reasoning indicates that, until the Saunders v Vautier power is exercised, the trustee remains authorised to invest the funds. This line of questioning parallels McCarthy J’s view in Ward that an allocation of income leaves the trustee’s fiduciary obligations intact, even if the amount has been identified for the beneficiary.

There is a further fungibility question in Bendel which traces back to the AAT’s reasoning. The Tribunal had accepted that the trustee could create enforceable rights to a monetary amount “out of the Trust Funds” without altering the beneficial ownership of any specific asset. It stressed that “income is not property” and that any property created by a distribution resolution “is the property of the beneficiary, namely the right to be paid.” The AAT then cited The Law of Trusts to note that “where the subject matter of a trust is a defined part of fungible property … an issue may arise as to whether that subject matter is sufficiently certain to constitute trust property.” On the facts, the Tribunal held that no asset or property had been identified, and therefore no separate trust existed; only an equitable obligation to account remained.

Against that background, Steward J raised the issue of fungible assets during the High Court hearing:

STEWARD J: Mr Wheelahan, there are plenty of cases that say, in the case of fungible assets, you can easily have a trust impressed upon an existing pool of fungible assets. And Ward, the case you referred us to, stands for that proposition – it was the dissenting judge who said you could not do it.

MR WHEELAHAN: Yes, that is right.

STEWARD J: There are lots of authorities in Australia that say you can. There is a case called White where a man wrote to his de facto partner: of the 1.2 million shares I hold in a publicly listed company, I hold 220,000 of them on trust for you. That was held to be a valid trust.

 

Steward J’s intervention tests the Tribunal’s conclusion that the absence of identifiable property prevents a sub-trust. By referring to Ward and White, his Honour implied that a trust can attach to a defined share of a larger fungible mass—such as a portion of money or shares—without physical segregation. The remark suggests that certainty of subject matter may be satisfied by clear declaration, not segregation. This contrasts with Turner J’s strict view in Ward that a new trust fails without “designation of the trust property.” The dialogue therefore raises whether the AAT’s narrow understanding of “identifiable property” is sustainable, or whether Australian law now treats a declaration over fungible assets as sufficient to constitute a new trust, even where the assets remain commingled.

Conclusion

The deeper issue in Bendel is not only whether income is “applied” but what constitutes “present entitlement.” The questioning in the High Court suggests that a present entitlement may not exist unless the beneficiary has an immediate right to call for payment. A further step, making that call to wind up the trust, as per Saunders v Vautier would be necessary in order to create a debt. If that view prevails, the taxpayer would succeed. A beneficiary without an immediate right to demand payment, and who has not demanded payment would not have a debt and Division 7A would cease to apply to most unpaid present entitlements. However, the clarification that present entitlement requires an immediate ability to call for payment,[1] which would be impeded by such things as the trustee’s right of indemnity[2]  would be significant.[3] Trustees could no longer rely on resolutions alone to create present entitlement before 30 June, because the trustee’s right of indemnity would delay any immediate payment. What appears at first to be a favourable outcome for taxpayers may, in practice, make it harder to establish present entitlement within the income year, exposing trusts to higher assessments where resolutions are not matched by liquidity. The matter has been adjourned for further argument, but it appears that the High Court is interested in these issues that reach much further than Division 7A and UPEs. Bendel may therefore redefine not only the reach of Division 7A but the very mechanics of how Australian trusts create and recognise income entitlements.

[1] Which should not be surprising, considering  the test in FCT v Whiting (1943) 68 CLR 199  “The words “presently entitled to a share of the income” refer to a right to income “presently” existing—i.e., a right of such a kind that a beneficiary may demand payment of the income from the trustee”

[2] See Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 where it is explained that until the trustee’s right of indemnity is satisfied, the trustee holds a beneficial interest in the trust assets. The indemnity takes priority over the claims of the beneficiaries.

[3] But entirely consistent with Whiting “A beneficiary who has a vested right to income (as in this case) but who may never receive any payment by reason of such right, is entitled to income, but cannot be said to be “presently entitled” as distinct from merely “entitled.” Indeed, it is difficult to see how he can be entitled at all to income which must be applied in satisfaction of some prior claim.”