How Recent Trust Changes Could Impact You: An Update on Section 100A

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Here’s how the finalised Section 100A rulings will change the way your Trust income works…

The hugely anticipated changes to Trust Distributions (Section 100A) have been finalised. These changes will have a big impact on the way trusts in Australia distribute income and how they are taxed.

What is Section 100A?

Section 100A is an integrity provision of the Income Tax Assessment Act (1936) aimed at situations where the income of a trust is allocated to a beneficiary, but the economic benefit (most likely cash benefit) of the distribution is provided to another party.

When Section 100A applies, the trustee is taxed on the income at penalty rates (47%) instead of the presently entitled beneficiary being assessed. 

How Section 100A works:

  • The following three requirements need to be met for Section 100A to apply:
    1. The present entitlement must relate to a reimbursement agreement.
    2. The reimbursement agreement must provide for a benefit to be provided to a person other than the beneficiary who is presently entitled to the trust income (trust distribution); and
    3. A purpose of one or more of the parties to the agreement must be that a person would be liable to pay less income tax for a year of income. For example, a distribution of trust income to an adult child who has a lower tax rate than their parents.
  • The new rules don’t apply if the agreement has been entered into in the course of ordinary family or commercial dealing. The ATO have provided examples of what they will consider “ordinary family or commercial dealings” in their Section 100A Practical Compliance Guide (PCG).
  • The ATO have developed the following compliance approach for arrangements to which Section 100A may apply, categorising arrangements as “White Zone”, “Green Zone” or “Red Zone”. 

Examples of low risk arrangements:

  • The present entitlement is physically paid or applied for the beneficiary’s benefit within a two-year period, although this is subject to some exclusions. 
  • The funds are paid to a joint bank account that the beneficiary holds with their spouse and the funds are used to meet household expenditure.
  • The funds are retained by the trustee and certain conditions are met, including that the funds are used as working capital in a business carried on by the trust and the beneficiary controls the trustee.
  • Arrangements that are treated as ordinary family or commercial dealings in Tax Ruling 2022/4.

Examples of high risk arrangements include:

  • The beneficiary is a company or trust with losses and the beneficiary is not part of the same family group as the trust making the distribution.
  • A beneficiary company or trust returns the funds to the trustee (i.e., circular arrangements).
  • The beneficiary is issued units by the trustee of the trust (or a related trust) with the amount owed for the units being set-off against the entitlement.
  • Adult children are made presently entitled to income, but the funds are paid to a parent in relation to expenses incurred before the beneficiary turned 18. 

Getting further advice

For Aintree Group clients, your advisor will be in touch directly if these new regulations impact you and your Trust. However we highly recommend you book a Tax Planning meeting with your advisor to get on the front foot planning for these changes.

For our wider community, Shane McKenna will provide an update at our Tax Planning Seminar in May this year. To receive an invitation to this event, make sure you are subscribed to our mailing list. In the meantime, if you’re concerned about the impact of Section 100A and might like our tax and legal experts to review your Trust Deed and structures, you can let us know you’d like to chat more about it with our team here.

If you need additional advice or support, please get in touch with your Aintree Group advisor directly, or give our office a call on 03 9851 7999.