The ATO is closely scrutinising discretionary trust distributions. The key risk areas trustees must understand, including Section 100A and anti-avoidance rules.
Discretionary trusts are one of the most widely used business and investment structures in Australia. Their flexibility, particularly the ability to distribute income to different beneficiaries each year, has made them a cornerstone of tax planning for families and business owners for decades.
In recent years, however, the ATO has significantly increased its scrutiny of discretionary trust distributions, particularly distributions that appear designed to reduce tax rather than reflect the genuine economic relationships between the trustee and beneficiaries. This article outlines the key risk areas that trustees and their advisers need to understand.
Section 100A of the Income Tax Assessment Act 1936 is the provision most frequently applied by the ATO in trust distribution cases. Where it applies, the beneficiary’s present entitlement is disregarded and the trustee is instead assessed on that share of the trust’s net income at the top marginal rate (47% including the Medicare levy). It is triggered where a trust distribution is made pursuant to a reimbursement agreement. Adding to its potency, assessments under Section 100A are not confined by the ordinary amendment periods, historic distribution years effectively remain open to the Commissioner.
A reimbursement agreement arises where a beneficiary becomes presently entitled to trust income under an arrangement where the economic benefit of that entitlement passes, in whole or in part, to someone else. In practice, this often means situations where income is distributed to a low-tax-rate beneficiary but the actual benefit of the money goes to another person such as the trustee or a higher-rate beneficiary.
The ATO issued a Tax Ruling in 2022 (TR 2022/4) setting out its views on Section 100A, together with a practical compliance guideline (PCG 2022/2) that sorts arrangements into coloured risk zones, and has been actively auditing trust arrangements that it considers fall within the provision.
The ATO has identified a number of patterns that it considers high-risk under Section 100A. These include distributions to adult children or other family members who have no genuine economic interest in the trust but who have low marginal tax rates; distributions followed by loans back to the trustee or another beneficiary; and distributions to corporate beneficiaries under arrangements where the funds are not actually used by the company.
It is important to note that not all distributions of this type will attract Section 100A, the provision excludes agreements entered into in the course of ordinary family or commercial dealing. However, the boundaries of that exception are not always clear, the ATO reads it narrowly, and its interpretation has been the subject of significant litigation. The provision’s significance has also grown following the High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18 (10 June 2026): with unpaid present entitlements no longer treated as Division 7A loans, the ATO has expressly identified Section 100A and Subdivision EA as its remaining integrity tools for arrangements involving corporate beneficiaries, so trustees should expect reimbursement-agreement arguments to feature more, not less.
One of the most practical risk areas in trust administration is the timing and adequacy of trustee resolutions. A trustee must make its distribution resolution before 30 June each year, in practice, before midnight on 30 June, for the relevant income year. A resolution made after that date is generally ineffective.
Distribution resolutions must also be sufficiently certain. A resolution that purports to distribute income without clearly identifying the amounts or percentages allocated to each beneficiary may not be effective. Professional guidance on drafting trust distribution resolutions is a genuine compliance necessity.
If your trust’s annual distribution resolutions have not been properly documented, this is a risk that should be addressed promptly with your tax adviser.
If you are the trustee of a discretionary trust, the most important steps you can take are: review your trust’s distribution history with your tax adviser in light of the ATO’s current compliance focus; ensure that your annual distribution resolutions are properly documented and made on time; and seek specialist advice if you are uncertain about any aspect of your trust’s tax position.
Australian Tax Experts provides expert advice on trust taxation, including Section 100A risk assessments, ATO audit response, and trust restructuring where appropriate.
Related guides: ATO Alert: Parents Benefiting From Children’s Trust Income.
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