Trust Distributions – Section 100A Risk Framework

Section 100A Overview

Section 100A intends to impose a tax liability (at the highest marginal rate) on the trustee of a trust where a beneficiary is made presently entitled to trust income, but another person/entity enjoys the benefit of that trust income i.e. a trust records a distribution to one beneficiary, but that beneficiary does not actually receive a payment from the trust. And another beneficiary who has not been allocated a distribution, does receive a payment from the trust, either directly or via another beneficiary.

If the ATO considers that an arrangement like this has been entered into to obtain a tax benefit, they may seek to apply section 100A. This can include arrangements where a ‘Reimbursement Agreement’ is in place with the following qualities:  

• the Reimbursement Agreement provides for the payment of money, transfer of property or services to a person other than the beneficiary;
• the purpose of the Reimbursement Agreement is to lessen the income tax liability of a person;
• the Reimbursement Agreement is not entered into in the course of ordinary family or commercial dealings; and
• the present entitlement arises out of, in connection with, or as a result of, the Reimbursement Agreement.

The ATO has provided some scenarios that they deem to be at risk of further investigation when it comes to section 100A. They have set out three zones, that taxpayers can use to assess their risk, being white, green & red.

White Zone

The white zone covers arrangements that were in place and concluded prior to 1 July 2014. The ATO typically won’t commence new compliance activities on these scenarios, except in circumstances where the trust may already be under review for fraud or evasion.

Green Zone

The ATO generally will not dedicate compliance resources to consider the application of section 100A for arrangements that fall within the green zone. The types of arrangements that are likely to fall within the green zone can include, but are not limited to:

• the income to which the beneficiary made presently entitled is distributed to that beneficiary, including a bank account held jointly by that beneficiary
• where the trustee retains the trust income for less than two years and uses those funds in certain ways (for example, in the working capital of a business carried on by the trust)
• the beneficiary that is made presently entitled to trust income receives the benefit within 2 years, or
• where the arrangement satisfies the ‘ordinary family or commercial dealing’ exemption i.e. if the purpose of the arrangement is to achieve family or commercial objectives, not an artifical or contrived arrangement.

Red Zone

While arrangements that are in the red zone may not necessarily attract the application of section 100A, taxpayers with red zone arrangements should expect that the ATO to dedicate resources to consider these arrangements. These can include, but are not limited to:

• arrangements where the beneficiary that is presently entitled to the income lends or gifts some or all of their entitlement to another party, or
• where the trust income is returned to the trust by the beneficiary in the form in assessable income e.g. circular distributions between a trust a corporate beneficiary.

How Does This Impact You?

Given the recent attention the ATO is giving discretionary trusts, it is now more important than ever to review your circumstances and the potential risks around trust distributions. The above is a very broad overview of ATO guidelines and at times this can be quite subjective. We would always recommend that you speak to an experienced accountant or tax advisor to get advice that is specific to you before making any decision related to trust distributions.

If you would like some guidance, our team can delve into this more with you in a way that pertains to your situation. As Wollongong Accountants who service all over Australia, we are always available to assist you, so if you are in need of advice reach out and benefit from a talk with us.

Wishing you and your business every success!

*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*