Section 100A and Trust Distributions — When the ATO Looks Beyond the Resolution

Sally Preston

Trust distributions are a familiar part of many Australian family and business structures. They allow income to be allocated across beneficiaries, support family wealth planning and provide flexibility for business groups. However, the tax treatment of a trust distribution does not depend only on the wording of the trustee resolution or the name of the beneficiary who is made presently entitled.

Section 100A of the Income Tax Assessment Act 1936 is an anti-avoidance rule that can apply where a beneficiary is made presently entitled to trust income, but the economic benefit of that income is provided to someone else under a reimbursement agreement. If it applies, the trustee may be taxed at the top marginal tax rate.

The ATO’s focus in this area means trustees, accountants and advisers need to look at the practical effect of the arrangement. If the beneficiary is taxed on the distribution but does not actually receive or enjoy the economic benefit, there may be a section 100A issue. This is especially important for family groups that have historically distributed income to adult children, corporate beneficiaries, loss entities or other low-tax beneficiaries while retaining the funds within the group.

Key message: A trust distribution should be supported by more than a resolution. Trustees should be able to explain who was made entitled, who actually received or benefited from the funds, why the arrangement was entered into, and whether the dealing is an ordinary family or commercial dealing.

What does section 100A target?

Section 100A is directed at arrangements where trust income is appointed to one beneficiary, but another person receives the practical benefit of that income, and the arrangement has a tax reduction purpose. It is particularly relevant for discretionary trusts where income is distributed across family members, companies or trusts.

Where section 100A applies, the beneficiary is treated as not being presently entitled to that income. The trustee can then be assessed on the relevant amount at the top marginal tax rate. This can turn what appeared to be a tax-effective distribution into a costly outcome.

The concept of a reimbursement agreement is broad. It can involve a formal agreement, an informal understanding, a family arrangement or a sequence of steps that produces the relevant outcome. It does not require a written contract. This is why evidence of the commercial or family reasons for the distribution can be just as important as the resolution itself.

The ATO’s guidance in Practical Compliance Guideline PCG 2022/2 sets out a risk framework for section 100A arrangements, including lower-risk and higher-risk examples. The guideline is being reviewed following the High Court’s 2026 decision in Bendel, so trustees should not assume that older distribution practices will automatically remain low risk.

Why this matters for family trusts

Many family trusts have been used for legitimate business, investment and succession planning purposes. Section 100A does not prevent trustees from making genuine distributions to family members. The risk arises where the distribution is disconnected from the real economic benefit, or where the beneficiary’s tax position is being used to produce a lower tax outcome for another person.

For example, it may be appropriate for an adult child to receive a distribution where they are genuinely intended to benefit from the income. The position is more difficult where the child is made presently entitled but the funds are paid back to the parents, used to reduce family debt, applied to expenses the parents would otherwise have paid, or never made practically available to the child.

The same issue can arise with corporate beneficiaries. A distribution to a company may be commercially sensible where profits are retained for working capital, investment or asset protection purposes. However, the arrangement should be properly documented and considered alongside Division 7A, unpaid present entitlement management and the broader commercial reasons for retaining funds in the group.

Common risk areas

·       Distributions to adult children where the funds are retained by, returned to, or used for the benefit of parents.

·       Distributions to beneficiaries with lower tax rates, losses or tax attributes where another person receives the economic benefit.

·       Arrangements involving gifts, loans, set-offs or circular cash movements.

·       Distributions where the beneficiary is taxed on more than they actually receive.

·       Unpaid present entitlements involving corporate beneficiaries, related trusts or family group entities.

Common misconceptions

A common misconception is that section 100A only applies to aggressive or artificial schemes. In practice, the provision can be relevant to ordinary-looking family arrangements if the legal entitlement and the economic benefit do not align. Another misconception is that the arrangement is safe because it has been done for many years. Repetition does not, by itself, make an arrangement an ordinary family or commercial dealing.

It is also important not to treat the ATO’s risk framework as a substitute for legal analysis. A lower-risk profile may affect the likelihood of ATO review, but the underlying statutory question still needs to be considered. Conversely, an arrangement that sits outside a low-risk example is not automatically ineffective, but it may require stronger evidence and a clearer explanation.

Example: adult child distribution

A family trust distributes income to an adult child because the child has a lower marginal tax rate. If the child receives the funds and uses them for their own purposes, the risk profile may be very different from an arrangement where the funds are returned to the parents or used to meet family expenses that the parents would otherwise have paid.

The tax issue is not simply who is named in the distribution resolution. The practical question is who benefited from the income, whether there was an agreement or understanding about that benefit, and whether the arrangement has a tax reduction purpose.

Example: corporate beneficiary and retained funds

A family trust distributes income to a related company. The company is taxed on the distribution at the company tax rate, but the funds remain within the family group and are later used in the trust business. This may be a legitimate commercial arrangement if properly managed, but advisers should consider whether the entitlement has been dealt with consistently with the documentation, whether Division 7A issues arise, and whether there is evidence of the commercial purpose for retaining funds.

Questions trustees should ask before 30 June

·       Who is intended to benefit economically from each distribution?

·       Will the beneficiary receive the funds, or will the funds be retained, loaned, gifted, set off or otherwise redirected?

·       Is there a commercial or family explanation for the arrangement beyond tax savings?

·       Does the trust deed permit the proposed distribution and any streaming of income or capital gains?

·       Are unpaid present entitlements being properly recorded and managed?

·       Would the arrangement still make sense if all parties were taxed at the same rate?

Practical steps for trustees

Trustees should review distribution strategies before 30 June, not after year end. The review should consider the trust deed, income definition, streaming provisions, beneficiary entitlements, cashflow, unpaid entitlements and the commercial or family reasons for the arrangement.

Good records are essential. Trustees should keep copies of resolutions, working papers, beneficiary confirmations, bank records, loan agreements, dividend records, correspondence and notes explaining why the arrangement was implemented.

Section 100A does not mean that all family trust distributions are problematic. However, trustees should be able to demonstrate that the distribution reflects a genuine family or commercial dealing and that the beneficiary’s entitlement has not been used merely as a tax planning mechanism for someone else.

For advisers: section 100A is now part of annual trust housekeeping

Section 100A should not be considered only when a dispute arises. It should form part of the annual distribution planning process. Advisers should identify higher-risk distributions early, consider whether alternative arrangements are more appropriate, and ensure the file contains enough evidence to explain the trustee’s decision if it is later reviewed.

Need help?

Smart Solutions Tax Advisory can assist with section 100A risk reviews, annual trust distribution planning, unpaid present entitlement reviews, trustee documentation and private ruling applications where appropriate.

Disclaimer: This article contains general information only. It is not tax advice, legal advice or financial advice and should not be relied on as a substitute for advice based on your specific circumstances. You should obtain professional advice before making trust distribution decisions or implementing any tax planning strategy.

Useful links

ATO 100A - Trust taxation – reimbursement agreement | Australian Taxation Office

ATO — PCG 2022/2: Section 100A reimbursement agreements: PCG 2022/2 | Legal database

ATO — TR 2022/4: Section 100A reimbursement agreements: TR 2022/4 | Legal database