With the ATO significantly increasing its scrutiny on trust arrangements in recent years, family trusts – once considered a routine structure for asset protection and tax planning -are now under the regulatory spotlight. The evolving tax landscape, driven by finalised Section 100A guidance and increased awareness of Section 99B of the Income Tax Assessment Act 1936, has made the management and distribution of trust income more complex and risk-laden than ever before.
This article examines the reasons behind the increasing prevalence of family trust distribution tax issues, whether Section 100A has been effectively implemented in practice since the ATO’s 2022 guidance, and how Section 99B is even catching experienced advisers off guard.
Family Trust Distribution Tax: Why the Pressure Is Rising
Family trusts have long served as flexible vehicles for income distribution. However, the ATO is increasingly challenging trust distributions, particularly those involving adult children or other beneficiaries who don’t ultimately benefit from the income distributed to them on paper.
What’s Driving the Rise?
- ATO Compliance Activity: The ATO has flagged trust compliance as a key focus area. It is proactively reviewing arrangements it considers aggressive, especially those with tax avoidance motives.
- Finalised Section 100A Guidance (2022): Clarifies how trust distributions may fall foul of anti-avoidance rules if they are part of arrangements that are not ordinary family or commercial dealings.
- Increased Audit Risk: Trustees now face a higher burden of proof to demonstrate the legitimacy of their distribution strategies, especially where beneficiaries do not receive or retain the benefit of the income.
Section 100A: Has the Dust Settled?
Since the ATO finalised its guidance on Section 100A in 2022, there has been a growing need for clarity around how trust distributions are structured and documented.
1. What Is Excluded as “Ordinary Family or Commercial Dealing”?
The ATO’s view is that Section 100A does not apply to distributions arising from standard family arrangements or legitimate commercial transactions. However, this exclusion does not cover arrangements that are contrived or involve income cycling, reimbursement agreements, or other non-arm’s length transactions.
Examples the ATO considers risky include:
- Distributions to adult children where the funds are immediately paid back to parents or used for family expenses without the child’s real control or benefit.
- Trusts that distribute income to a low-tax-rate beneficiary who then gifts the money to someone else in the family.
2. Distributions to Adult Children: Proceed With Caution
The ATO is closely examining distributions made to adult children, especially when:
- The beneficiary is unaware of the distribution.
- The income is used to fund family expenses or loans, rather than being paid directly to the beneficiary.
Proper documentation and demonstrable benefit to the beneficiary are now essential to defend against Section 100A assessments.
3. Consequences of Non-Compliance
If the ATO determines that a trust arrangement falls within Section 100A:
- The beneficiary’s entitlement may be disregarded for tax purposes.
- The income may be taxed at the top marginal rate (currently 45%) in the hands of the trustee.
- Penalties and interest charges may apply.
Section 99B: The Silent Trap
While Section 100A has dominated recent headlines, Section 99B of the ITAA 1936 is quietly becoming a key area of risk – often overlooked by advisers.
What Is Section 99B?
Section 99B is a catch-all provision that can apply when:
- A trust receives a distribution of income from another trust or source, and
- That amount was not previously included in the trust’s assessable income.
This provision is especially relevant for foreign source income, re-settled trusts, and income held in reserve for later distribution.
Key Triggers:
- Foreign Trusts or Deceased Estates: If a resident beneficiary receives income from a foreign deceased estate or trust, Section 99B may apply, particularly if the amount was not previously taxed.
- Previously Untaxed Accumulations: Income that has been accumulated in offshore structures or was exempt in a prior period may be captured when later distributed to an Australian trust or individual.
Tax Implications:
Amounts caught under Section 99B may be included in the trust’s assessable income, even if:
- They were previously non-taxable in the original jurisdiction, or
- They are considered capital (e.g., corpus) from the distributing trust.
Unlike regular trust distributions, no franking credits or CGT discounts apply to Section 99B inclusions.
ATO’s Draft Guidelines on Section 99B
In recent draft guidance, the ATO has clarified that:
- Even amounts received as capital from foreign trusts can be assessable under Section 99B if they represent accumulated income.
- The source and character of the amount must be traced, this can be a complex task, especially where records are poor or jurisdictions are opaque.
- Trustees and advisers must be diligent in reviewing the trust deed, source of funds, and historic tax treatment.
Risk Reduction Strategies
To mitigate the risks under Sections 100A and 99B, consider the following:
For Section 100A:
- Ensure transparency and documentation of all trust distributions.
- Confirm that beneficiaries receive and control the benefit of distributions.
- Avoid “round-robin” arrangements or income redirection.
For Section 99B:
- Obtain detailed records for any amounts received from foreign trusts or estates.
- Assess the original source and tax status of funds before distribution.
- Seek specialist advice when dealing with offshore entities or inherited overseas assets.
Final Thoughts
Family trusts remain a powerful tool in tax and estate planning, but they are no longer low-risk or passive structures. With the ATO’s sharpened focus on integrity and transparency, trustees and advisers must be proactive, compliant, and well-informed.
Whether you’re dealing with discretionary trust distributions to family members, foreign-sourced inheritances, or multi-generational trust succession, failing to stay ahead of Sections 100A and 99B could result in significant tax consequences.
Now is the time to review your trust arrangements – and seek professional advice – to ensure you’re not caught under the microscope.
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