Section 100A: What Corporate Beneficiaries Need to Know About Trust Distributions
Running a business through a family or discretionary trust can save tax and protect assets, yet many company owners worry that Section 100A of the Income Tax Assessment Act 1936 might undo their hard work overnight. If the Australian Taxation Office (ATO) decides a trust distribution falls foul of this anti-avoidance provision, the trustee can suddenly face the top marginal tax rate, reduce cash flow and leave everyone wondering what went wrong. This article explains the rule, showing why ordinary family arrangements are usually safe, and offers practical, low-risk steps so your corporate beneficiary receives trust income with confidence.
Getting Section 100A right matters because it determines whether a trust distribution will be taxed at lower marginal tax rates in the hands of the intended beneficiary or at the highest marginal tax rate in the hands of the trustee. Understanding the specific rules, risk zones and the ATO’s compliance approach will help business owners avoid unnecessary stress, devote fewer compliance resources to historical queries, and focus on growth instead.
Why Section 100A Matters for Corporate Beneficiaries
Even with the best intentions, trust distributions to a private company can raise red flags if the arrangement is not an ordinary family or commercial dealing. Under Section 100A, the ATO looks for four elements:
Present entitlement – the beneficiary is presently entitled to trust income for the income year.
Reimbursement agreement – there is an agreement, understanding or plan that someone other than the beneficiary will enjoy the money or other benefits.
Tax purpose – at least one party entered the arrangement mainly to secure a tax benefit.
Outside ordinary family or commercial dealing – the arrangement is not in the course of an ordinary family or commercial dealing.
If all four elements exist, the trust loses its deduction and the trustee pays tax on that part of the net income at the top marginal tax rate. Importantly, this can happen years after the financial year in question, once the ATO dedicates further analysis and compliance resources to the file.
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How a Reimbursement Agreement Works
A reimbursement agreement can be written or verbal. It simply needs to show that the corporate beneficiary does not keep the economic benefit. For example, a discretionary trust resolves to distribute $500,000 to a related company, but the company immediately lends the cash back to the trust on terms that postpone payment indefinitely. In that case, the ATO may argue the company never enjoyed the money and the arrangement lacks real and genuine consideration.
Consequences of Section 100A Applying
When Section 100A applies:
The corporate beneficiary is treated as never having been presently entitled.
The trustee is taxed on the relevant trust income at the highest marginal tax rate.
Any franked distributions that later flow back to the trust can be rendered ineffective.
The ATO can issue penalties if the trustee has not taken reasonable care in the tax return.
Identifying Higher-Risk Scenarios (Red Zone)
The ATO uses coloured risk zones to signal how much scrutiny it will apply. Red Zone arrangements attract the most attention because they often lack genuine consideration or move funds in circles. Below are the most common higher risk scenarios.
Circular Flow or “Washing Machine” Arrangements
Funds circulate between the trust and the company in successive years, so the company pays tax at the corporate rate, then franks and re-distributes the same amount back to the trust. Eventually the trust streams the franked dividends to adult children or family members on lower marginal rates. Because the company never retains working capital, the arrangement may fall outside an ordinary family or commercial dealing.
Loss Company Arrangements
A loss company becomes presently entitled to trust income, reducing the distributable income on paper, but the cash is applied for other benefits within the family group. Although the family saves tax in the short term, the ATO views the company’s involvement as having a dominant tax purpose.
Postponed or Unpaid Present Entitlements
A trustee may postpone payment of a corporate beneficiary’s share of trust entitlements for several years without charging interest or setting fixed terms. Demand payment clauses are ignored and the company loses practical access to the funds. If the ATO considers the delay unreasonable, it may label the arrangement higher risk.
Building Low-Risk Green Zone Arrangements
While Red Zone examples show what not to do, Green Zone arrangements provide a blueprint for low-risk practice. The ATO has said it will not usually devote compliance resources to these scenarios, provided the facts align with its guidance.
Genuine Working Capital Loans
It is common for a discretionary trust to retain some of a company’s distribution as short-term working capital. As long as:
The trustee documents a commercial loan agreement,
Interest is charged at a real-world rate, and
The principal is fully repaid within two years,
the arrangement is considered low risk. The company’s directors must show how the loan benefits the family group and that the funds are not simply cycling back through franked distributions.
Straightforward Cash Payments
The simplest approach is often safest: pay the distribution straight to the corporate beneficiary before the next financial year ends. The company keeps the cash to pay expenses, reduce debt or fund new investments. This clears up compliance issues and demonstrates the beneficiary receives the money in the course of ordinary family or commercial dealing.
Unit Subscription with Genuine Value
Sometimes the trust issues income units to the corporate beneficiary and applies the distribution towards the subscription price. Provided the units carry real rights to income and capital gains distributed in future, and the valuation is arm’s length, the ATO accepts the arrangement as a normal commercial dealing.
Practical Steps to Stay Compliant
Even well-structured strategies can unravel without consistent processes. Use the following checklist each income year to reduce risk and keep the ATO satisfied.
1. Review the Trust Deed
Make sure the trust deed authorises the intended distribution resolution. Check how distributable income and net income are defined, whether capital gains distributed can be streamed, and who may be presently entitled under the deed. Out-of-date wording can override the best-laid plans.
2. Document Every Distribution Resolution
Board minutes and trustee resolutions should spell out:
The amount and character of trust income, such as capital gains or franked distributions.
The beneficiary’s share and why that beneficiary is chosen.
Any loan or investment terms if the trustee will retain funds temporarily.
This evidence is vital if the ATO later devotes compliance resources to the arrangement.
3. Ensure Real and Genuine Consideration
Whether you are lending money back to the trust, subscribing for units, or purchasing assets, make sure the price, interest rate or terms reflect market reality. Genuine consideration means the company sacrifices something of value in exchange for the benefit it receives.
4. Track Unpaid Present Entitlements
If the company allows the trust to hold funds as working capital, keep a running balance and clear it within two financial years. Charging interest at a reasonable commercial rate reduces the risk even further.
5. Watch Out for Related Party Loans
Loans from the company to shareholders or associates can trigger other anti-avoidance provisions, especially Division 7A. Pay close attention to repayment terms so you do not create new compliance issues while solving Section 100A.
6. Monitor Risk Zones Each Year
The ATO updates its guidance as new cases arise, such as the recent Victorian Supreme Court decision that emphasised factual evidence in determining whether an arrangement was entered for tax purposes. Revisit your structure annually to confirm it still sits comfortably in the Green Zone and that no new red flags have appeared.
7. Seek Professional Advice Early
Tax law moves quickly, and no article can cover every twist in Section 100A. Accountants and lawyers who work daily with discretionary trusts can identify higher risk features, confirm low risk strategies, and prepare extra documentation if required. Engaging advisers early often costs less than responding to an audit when the ATO has already dedicated significant compliance resources.
Frequently Asked Questions
These common questions help clarify how Section 100A works in practice and address the key concerns that corporate beneficiaries and their advisers encounter when structuring trust distributions.
Does Section 100A apply only to corporate beneficiaries?
No. The provision can also apply to individual or trust beneficiaries, including adult children or family members, but corporate beneficiaries attract special attention because they are taxed at lower marginal rates and can pay franked dividends.
What if the beneficiary is under a legal disability?
If a beneficiary is under a legal disability—for example, a minor child or someone with impaired decision-making capacity—the present entitlement may pass different tests, but the trustee still needs to show the arrangement is an ordinary family dealing and that tax purposes were not dominant.
Can I rely on the ATO’s Green Zone forever?
Not necessarily. Green Zone examples are designed to give comfort in certain circumstances, but facts change. A company that accumulates large unpaid present entitlements year after year may drift into higher risk territory even if it started compliant.
How does Section 100A interact with Capital Gains Tax?
A trust can distribute capital gains to a company beneficiary. As long as the company truly benefits and pays tax on its share, the distribution is usually safe. Problems arise when the gain is re-routed to someone else to access lower marginal rates.
Will the ATO audit every trust?
The ATO has stated it will not dedicate compliance resources to arrangements that clearly fall within its Green Zone. However, random reviews still occur, and higher risk features in one income year can prompt further analysis of prior years.
Conclusion
Section 100A is a powerful anti-avoidance provision, but it is not designed to punish every ordinary family trust. By ensuring your corporate beneficiary’s trust distributions involve genuine consideration, satisfy the trust deed, and line up with everyday commercial practice, you can confidently access lower marginal tax rates without risking a sudden assessment at the highest marginal tax rate.
Practical steps—such as paying cash across promptly, documenting working capital loans, and reviewing arrangements each financial year—help build a clear picture of commercial purpose. When in doubt, seek professional advice early so you can act, adjust and avoid expensive surprises.
Today’s tax environment demands reasonable care, yet it rewards those who take the time to understand the rules. With the right structure and a focus on low risk, a private company can remain a trusted part of the family’s long-term wealth plan, providing stability, smoother cash flow and peace of mind.