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

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

The ATO has finalised the anticipated changes to Trust Distributions (Section 100A).These changes will impact how Australian trusts distribute income and how they’re taxed.

What is Section 100A?

Section 100A is an integrity provision of the Income Tax Assessment Act (1936). Section 100A targets situations where a trust allocates income to a beneficiary but gives the economic benefit (usually cash) to another party.

When Section 100A applies, the tax authorities charge the trustee a penalty rate of 47% on the income instead of assessing the beneficiary who is entitled to it.

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 beneficiary and their spouse receive the funds in a joint bank account and use them to cover household expenses.
• The trustee retains the funds while meeting certain conditions. This includes using them as working capital in a trust-run business and ensuring the beneficiary controls the trustee.
• Tax Ruling 2022/4 treats these arrangements as ordinary family or commercial dealings.

Examples of high risk arrangements include:

• The beneficiary is a company or trust with losses. 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 trustee of the trust (or a related trust) issues units to the beneficiary and sets off the amount owed for the units against the entitlement.
• The trust makes adult children presently entitled to income. But, it pays the funds to a parent to cover expenses incurred before the beneficiary turned 18.

Getting further advice:

For Aintree Group clients, your adviser 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 adviser. Get on the front foot planning for these changes.

Need additional advice or support? Please get in touch with your Aintree Group adviser directly, or give our office a call on 03 9851 7999. 

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your accountant.