Unpaid Present Entitlements and Division 7A in Family Law Settlements 

An unpaid present entitlement in an Australian family law settlement may need to be identified and valued where one party controls a family trust or has effective access to its funds. The more complicated issue is often how that entitlement can be realised or restructured without creating unintended tax consequences. 

For business owners and high-net-worth individuals in Victoria, a UPE arising from a family trust can become significant when separation requires trust funds to be brought into the settlement. If a private company is connected with the structure, accessing those funds may engage Division 7A of the Income Tax Assessment Act 1936 (Cth) and potentially result in a Division 7A deemed dividend. 

Accordingly, trust cash flow, loan agreements, valuing the entitlement and potential tax leakage when funds are distributed should be examined before settlement terms are finalised. In proceedings under s 79 of the Family Law Act 1975 (Cth), trust interests and practical control may also be relevant, as illustrated by Kennon v Spry (2008) 238 CLR 366. 

How Are Unpaid Present Entitlements and Division 7A Treated in a Family Law Property Settlement? 

The legal analysis operates across two regimes. Under s 79 of the Family Law Act 1975 (Cth), the Court may alter the property interests of parties to a marriage where it is just and equitable to do so. The first task is therefore to identify the parties’ existing legal and equitable interests. A UPE arising from a family trust may be relevant to that exercise depending on the terms of the trust, the identity of the beneficiary, the nature of the entitlement and the degree of control exercised over the structure. 

The High Court’s decision in Kennon v Spry (2008) 238 CLR 366 demonstrates why legal ownership alone does not determine the treatment of trust structures in family law. The Court examined the parties’ rights, the trust deed, and the practical powers available to the controlling party when determining how trust assets could be dealt with in property proceedings. The decision does not mean that every family trust asset or entitlement automatically forms part of the property pool. It does, however, make control and the substantive rights attached to the structure important considerations. 

A separate question arises under Division 7A of the Income Tax Assessment Act 1936 (Cth). Division 7A can treat certain payments, loans and forgiven debts involving private companies, shareholders, or their associates as dividends for tax purposes. Section 109D is particularly relevant to loans. 

Importantly, the High Court in Commissioner of Taxation v Bendel [2026] HCA 18 rejected the proposition that an unpaid present entitlement is necessarily a “loan” under s 109D merely because the corporate beneficiary does not demand immediate payment. Whether a Division 7A deemed dividend arises therefore depends on the legal character of the arrangement and what subsequently happens to the funds. 

In a family law settlement, this distinction matters. Valuing the entitlement is only one part of the exercise. Any proposal to pay, assign, forgive or restructure the UPE should also be tested against Division 7A before settlement orders or agreements require funds to move. 

How Do Courts Assess Unpaid Present Entitlements in Family Law Settlements? 

When an unpaid present entitlement arises within a family trust, the Court looks beyond the accounting label. The key questions are what legal right the beneficiary holds, who controls the relevant entities, whether the entitlement can realistically be recovered, and what tax consequences may arise if it is realised as part of the settlement. 

Is a UPE treated as property in the family law asset pool? 

The starting point is the legal character of the entitlement. A beneficiary who is presently entitled to trust income may hold an enforceable right in relation to that amount, depending on the trust deed, trustee resolutions, and surrounding arrangements. 

Where a spouse holds the entitlement personally, it may be relevant when identifying that spouse’s property interests. If the entitlement belongs to a related company or another entity, the analysis is more complex. The Court may need to consider ownership, control, and the spouse’s capacity to benefit from the wider structure. 

As Kennon v Spry (2008) 238 CLR 366 demonstrates, practical control and the rights available within a trust structure can be significant, particularly when assessing trusts in family law matters. 

What evidence is relevant when valuing a UPE? 

Valuing the entitlement requires more than adopting the figure recorded in the trust accounts. Relevant material may include the trust deed, trustee resolutions, financial statements, tax returns, beneficiary accounts, general ledgers, bank records, and associated loan agreements. 

The enquiry should also address recoverability. A substantial UPE may have a different practical value if the trust lacks the liquidity to satisfy it without selling assets, refinancing debt, or moving funds from another entity. For business families, trust cash flow can therefore be as important as the accounting balance. 

Does control of the trust affect how the entitlement is treated? 

Control can be highly relevant, but it does not automatically make all trust property matrimonial property. The Court may examine who is trustee, who controls a corporate trustee, who holds appointment or removal powers, the history of distributions and whether one spouse can materially influence the application of trust assets. 

The significance of those matters depends on the trust deed and the surrounding facts. 

Should Division 7A tax consequences be factored into the settlement? 

Potential tax consequences should be considered where the settlement requires a UPE to be paid, restructured, or converted into cash. Following Commissioner of Taxation v Bendel [2026] HCA 18, a UPE is not automatically a loan for s 109D purposes. 

Settlement design should therefore distinguish between the recorded value of the entitlement and the net amount available after any Division 7A deemed dividend exposure or other tax leakage when funds are distributed. 

What Practical Disputes Arise When a Family Law Settlement Involves a UPE? 

Disputes involving unpaid present entitlements often arise because the accounting value of the entitlement, the cash available within the trust and the tax cost of extracting that cash are not the same thing. In business families, those differences can materially affect negotiations and the structure of final settlement terms. 

One recurring issue is a substantial UPE recorded in the accounts where the underlying funds have already been used elsewhere in the business or investment structure. The trust may hold property, shares, or operating assets rather than cash. This can create a dispute where one party says the entitlement should be taken at face value, while the other argues that satisfying it would require refinancing, asset sales, or movement of funds through related entities. In that setting, trust cash flow and practical recoverability become central to valuing the entitlement. 

Another common issue arises where a trust owes a UPE to a private company, but the proposed property settlement requires cash to be extracted from the structure. The commercial objective may be straightforward, such as funding a cash payment to the other spouse, but the tax consequences may be materially different. If the proposed payment, loan, or restructuring engages Division 7A, the parties may face a Division 7A deemed dividend or other tax leakage when funds are distributed. Existing loan agreements and prior transactions should therefore be reviewed before settlement terms assume that the recorded amount can simply be withdrawn. 

Control can also become contested. One party may rely on formal trustee appointments or shareholdings, while the other points to the historical operation of the trust, including who directed distributions, controlled the corporate trustee, or determined how funds were applied. 

These disputes show why a UPE arising from a family trust cannot be assessed in isolation. A settlement that identifies the entitlement but overlooks liquidity, control and tax consequences may appear balanced on paper while producing a materially different economic outcome when implemented. 

What Should Be Reviewed Before Pursuing or Defending a Family Law Claim Involving a UPE? 

Before positions are taken on the treatment of an unpaid present entitlement, the underlying structure should be mapped carefully. That means identifying the beneficiary, trustee, corporate trustee, shareholders, appointor, related companies, and any entities through which funds have moved. For a business owner navigating family law, the legal ownership of the entitlement is only one part of the analysis. Control, recoverability, and the practical source of settlement funds can be equally important. 

The documentary record should be assembled early. Trust deeds and amendments, trustee resolutions, financial statements, tax returns, beneficiary ledgers, bank records, loan agreements, and historical distributions can materially affect both valuing the entitlement and understanding how the structure has operated in practice. Inconsistent accounting treatment or incomplete records can make negotiations more difficult and may complicate expert valuation evidence. 

Settlement proposals should also be tested against implementation risk before terms are agreed. If funds must be extracted from a trust or related private company, advisers should assess trust cash flow, existing Division 7A arrangements and whether the proposed steps could create a Division 7A deemed dividend or other tax leakage when funds are distributed. These issues are part of the wider tax implications in seven-figure family law settlements. 

Where the structure is complex, family law, commercial and tax advice should be coordinated rather than obtained in isolation. The strategic objective is to understand the net economic effect of each settlement pathway before orders or financial agreements lock the parties into a transaction that is difficult, costly, or tax-inefficient to implement. 

Frequently Asked Questions 

How Should a UPE Be Addressed Before a Family Law Settlement Is Finalised? 

An unpaid present entitlement can affect both the value attributed to a family trust structure and the amount available to fund a property settlement. For business owners and high-net-worth individuals, the key is to assess the entitlement alongside trust cash flow, control of related entities, existing loan agreements, and any potential Division 7A deemed dividend exposure before settlement terms are fixed. 

Where family and commercial structures overlap, coordinated advice can help identify potential tax leakage when funds are distributed and ensure the settlement reflects the entitlement’s net economic value. 

For advice on complex property matters involving trusts, companies and business interests, visit our family law and commercial law services pages, or book a consultation. 

This article is general information only and not legal advice. For advice specific to your circumstances, please contact our team.