Section 100A Red Flags: Trust Distributions Under ATO Scrutiny
Section 100A red flags are back in the spotlight as the Australian Taxation Office (ATO) dedicates fresh compliance resources to the way family trusts share their income. Trustees now face closer questions about whether every trust distribution reflects genuine family or commercial objectives, or whether a reimbursement agreement has slipped in under the radar and could see the trustee taxed at the top marginal tax rate.
Families use discretionary trusts for many reasons—asset protection, flexibility, and the chance to smooth income from year to year. Yet Section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) is an anti-avoidance rule that can undo these benefits if a beneficiary is made presently entitled to trust income but someone else enjoys the money. The rule applies no matter how long the trust has been in place or how ordinary the arrangement may once have seemed. Below is a clear guide to the warning signs the ATO treats as higher risk, and the practical steps trustees can take this income year to keep every distribution in the green zone.
Why Section 100A Matters to Your Trust
Too many families still assume Section 100A only targets complicated tax schemes or unrelated parties. In reality, the ATO’s compliance approach is deliberately wide-ranging and focuses on situations that look like ordinary family or commercial dealings on paper but shift the economic benefit in a way that saves significantly less tax for the group.
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The Anti-Avoidance Rule
Under Section 100A, a trustee becomes liable for income tax at the top marginal tax rate if four conditions line up:
A beneficiary becomes presently entitled to relevant trust income.
An agreement—called a reimbursement agreement—connects that entitlement to some other benefit.
The benefit flows to someone other than the beneficiary.
Reducing income tax is at least one reason for the agreement.
The rule does not apply when an arrangement is entered into in the course of ordinary family or commercial dealings or where the beneficiary is under a legal disability (for example, a minor or a person with limited decision-making capacity). The challenge is proving that your distribution falls squarely within those safe territories.
What the ATO Looks For
The ATO’s Practical Compliance Guideline PCG 2022/2 sorts trust arrangements into coloured risk bands:
Green zone – low risk. Trustees can expect the ATO to confirm the facts but not devote ongoing compliance resources.
Red zone – higher risk. The ATO will allocate resources and may demand payment of additional tax.
White zone – income years that ended before 1 July 2014. Fresh reviews here are unlikely unless there is suspected fraud or evasion.
Understanding where your trust sits in this framework helps you decide how much documentation and early action you need to avoid future disputes.
Common Red Flags and How to Avoid Them
Even a single red flag can prompt the ATO to apply compliance resources and dig through several income years of tax returns. Below are the most common issues.
Adult Children, Parents, and Financial Dependence
A classic risk scenario involves trust distributions to adult children on lower marginal tax rates while the parents use the funds to pay the mortgage, private school fees, or other family living arrangements. Because the parents, not the children, enjoy the economic consequences, the ATO views this as a reimbursement agreement unless you can show genuine repayment of expenses the child legally owes.
How to manage risk:
Pay each child’s beneficiary entitlement directly into an account they control.
Document how the child uses the funds—rent, study costs, personal savings.
Avoid “repaid funds representing” reimbursed historical expenses unless those expenses are legally the child’s liability.
Circular or Intra-Family Arrangements
Circular flows involve trust income moving through related trusts, private companies, or an inter-party loan before returning to the original family group. These arrangements often create mismatches between trust net income and the beneficiary’s entitlement and can artificially produce franked distributions to use company franking credits.
How to manage risk:
Ensure every loan agreement has commercial terms and regular loan repayments.
Track interest, repayments, and timing so the movement of money has real legal and economic consequences rather than just journal entries.
Be prepared to explain any financing arrangements to the ATO and show they serve more than a tax-saving purpose.
Unpaid Present Entitlements and Loan Agreements
When a private company is made presently entitled to trust income, but the trustee postpones payment, the entitlement becomes an Unpaid Present Entitlement (UPE). If left outstanding, the UPE can also trigger Division 7A, resulting in a deemed dividend.
How to manage risk:
Put a complying seven-year or ten-year loan agreement in place before the private company’s tax return is lodged.
Make yearly principal and interest payments to show genuine intent to repay.
Where possible, clear older UPEs with cash rather than further inter-entity loans.
Mismatched Net Income and Distributable Income
A trustee may declare less distributable income than net income (or vice versa) to steer tax outcomes toward a beneficiary on a lower marginal rate. If that difference remains within the trust or is redirected through another entity, the ATO sees a red zone pattern.
How to manage risk:
Keep trust deed definitions of income up to date and consistent with accounting policies.
Document why any mismatch exists—capital gains streaming, timing of invoicing, or genuine differences between accounting and tax treatment.
Show the beneficiary retains control of the amount they were entitled to.
Building a Safe Distribution Strategy
Staying clear of Section 100A starts long before 30 June. The following steps help show that your trust distributions are aligned with ordinary family dealings and commercial dealing circumstances.
Documenting Trustee Resolutions and Trust Deed Check-Ups
Trustee resolutions must be signed before the end of the income year unless the trust deed allows a later date. A missing or late resolution can invalidate the decision and expose the trustee to tax at 47 percent on the trust net income.
Schedule a yearly trust deed review to confirm your deed allows the planned income entitlement split.
Store signed resolutions, meeting minutes, and contact details for every beneficiary.
If the deed requires notices to beneficiaries, send them on time and keep proof of delivery.
Showing Genuine Economic Consequences
The ATO uses bank statements, loan statements, and lifestyle evidence to verify that a beneficiary’s present entitlement leads to an actual change in their financial position.
Transfer cash rather than leave funds representing the entitlement in the trustee’s account.
If the trust retains cash for reinvestment, record a clear on-lend or reinvestment strategy with market-rate interest.
Avoid arrangements where the beneficiary never sees the money but the family group enjoys other benefits.
Aligning With Ordinary Family or Commercial Dealings
The simplest test is whether the trust distribution would still make sense if no tax benefit arose.
Would unrelated parties agree to the same financing arrangements?
Does the beneficiary’s share reflect their contribution to the family business?
Are the loan repayments or inter-party loan terms the same as a bank would demand?
If the answer is yes, you are closer to the green zone.
Practical Steps for This Income Year
Use the checklist below to manage Section 100A risk before 30 June and prepare for any ATO questions.
Review Beneficiary Circumstances and Contact Details
Taking time to review each beneficiary’s personal and financial situation ensures that trust distributions are made thoughtfully and in line with their real needs.
Reconfirm each beneficiary’s residency, financial dependence, and legal disability status.
Collect input from all entitlement beneficiaries—ask how the trust can meet their family or commercial objectives.
Keep notes of discussions as evidence of real and genuine consideration.
Assess Financing Arrangements and Loan Repayments
Regularly reviewing your trust’s financing arrangements helps maintain transparency and reduces the risk of ATO scrutiny.
Match each loan agreement to a repayment schedule.
Where interest is capitalised, explain why postponing payment is commercially necessary.
For any large inter-entity balance, consider partial repayment to reduce risk.
Prepare for ATO Questions
Being well-prepared for potential ATO questions will make it easier to demonstrate your trust’s compliance with tax rules.
Reconcile trust net income, distributable income, and assessable income early to avoid surprises in the tax return.
Keep a timeline that links each trustee resolution to the actual movement of money.
If your arrangement involves franked distributions or capital gains, confirm that beneficiaries understand the tax effect on their marginal tax rate.
Moving Forward With Confidence
The Full Federal Court has confirmed more than once that Section 100A applies only when a reimbursement agreement exists outside ordinary family or commercial dealings. Trustees who can show clear economic consequences, timely resolutions, and genuine benefits to each beneficiary have little reason to fear extra ATO scrutiny.
As the ATO continues to devote compliance resources to Section 100A, the best defence is a distribution strategy that is easy to explain and fully documented. By focusing on real-world outcomes instead of purely tax-driven objectives, your family trust can distribute income, capital gains, and franked distributions with confidence—now and in the years ahead.