ATO releases guidance on Section 100A: What this means for your trust distributions

Newly released guidelines by the Australian Taxation Office (ATO) have clarified the ATO’s position on situations where family trusts distribute to family members, but don’t tangibly pass on that distribution on to them.

This specifically relates to section 100A - an anti-avoidance provision designed to stop arrangements where a trust distribution is made to a beneficiary, but the economic benefit of the distribution is effectively transferred to a person other than the beneficiary. When this occurs the ATO can disregard the distribution, and the trustee is assessed on that income at the top marginal rate.

A practical example of this would be a family trust distributing to an adult child, which creates an unpaid entitlement to the adult child. The child then enters into an arrangement to gift the unpaid entitlement to the parents which extinguishes the unpaid entitlement. Importantly, ‘ordinary family or commercial’ dealings are excepted.

So examining where your circumstances fit into the guidelines is paramount.

The ATO released three items with respect to section 100A:

  • A draft Taxation Ruling TR 2022/D1
  • A draft Practical Compliance Guideline PCG 2022/D1
  • A Taxpayer Alert TA 2022/1

These 3 documents outline the circumstances when the ATO will not accept that a distribution is effective, which includes when there is a tax reduction purpose and it is not an ordinary family dealing.

When making distributions we need to examine whether we have records to demonstrate that our transactions are something that would ordinarily occur in a family setting, or in the course of usual commercial actions.

They have also laid out a risk framework in a traffic light style format to determine whether your situation is high, medium or low risk. Your C&N advisor will be able to review and discuss where you fall in this risk matrix.

Historically, the trust may have recorded a reduction in the child’s entitlement in the trust by expenses paid by parents for the children.

The ATO have not approved that this recording of expenses fits within the guidelines at this stage, and so unfortunately does not alleviate their concerns around the beneficiary receiving the economic benefit of the trust distribution.

We recommend that all private groups operating with a trust review their transactions and arrangements in line with the framework set out in the draft ruling and draft PCG.

If you require further assistance or wish to discuss any concerns or questions in relation to your particular circumstances, contact us.

Contact us

The information in this publication contains general advice only. It has been prepared without taking your personal objectives, financial situation or needs into account. You should consider whether the information contained within this publication is appropriate for you. Where we refer to a financial product you should obtain the relevant Product Disclosure Statement or offer document and consider it before making any decision about whether to acquire the product.