Under Australian tax law, trust distributions remain a powerful planning tool — but ATO compliance for businesses is tightening. Recent guidance on section 100A, Division 7A and CGT event E4 means trustees and business owners must align entitlements with genuine benefits, avoid circular funding between trusts and companies, and document decisions thoroughly. This article explains the key risks and practical guardrails so you can pursue small business tax advice with confidence.
Why distributions face more scrutiny
Section 100A targets “reimbursement agreements” where a beneficiary is made presently entitled, but the benefit flows to someone else. Meanwhile, Division 7A can treat unpaid present entitlements (UPEs) to private companies as deemed dividends unless managed correctly. Together, these rules heighten the need for clear commercial purpose, clean money trails and careful timing.
Stay within section 100A
The ATO’s ruling and practical compliance guidance focus on whether the person named as beneficiary actually receives and controls the benefit. Ordinary family dealings can be low risk, but only when the facts support them. This leads to a simple rule: legal entitlement and economic benefit should match, and the trustee’s decision-making should be well evidenced.
Avoid reimbursement agreements
Arrangements that direct low-taxed distributions to family members who then return funds to controllers are high risk. So are circular payments or nominal entitlements where control never truly shifts. Another important consideration is proving ordinary family purposes with records — for example, payments for education or housing must be clearly documented and consistent with the beneficiary’s circumstances.
Use the green zone
The ATO’s green-zone guidance signals lower risk where beneficiaries receive and retain their entitlements, or where parents support children in genuine family situations. Building on this point, keep trustee resolutions timely (before 30 June), keep descriptions of purpose clear, and avoid complex chains across multiple entities unless you can show strong commercial drivers.
Manage UPEs to companies
In February 2025, the Full Federal Court held that a UPE to a corporate beneficiary is not itself a ‘loan’ for Division 7A purposes (Bendel). However, the ATO has special leave to appeal and has said it will continue to administer its existing approach pending the High Court outcome. Until there’s final clarity, treat UPEs conservatively—document terms, consider compliant loan settings, and obtain advice.
Watch circular arrangements
High-risk patterns include trust → company → loan back to individuals, or short-term pre-30 June movements that unwind after year-end. As a result, ensure funding sources are independent, maintain bank evidence, and keep agreements consistent with actual cash flows. If arrangements appear designed mainly to avoid tax, expect close review.
Plan for CGT event E4
In unit trusts, non-assessable payments (often from gains reduced or disregarded under small business CGT concessions) can reduce the unit’s cost base and trigger CGT event E4 if the payment exceeds that cost base. Strategies include retaining concession-derived capital in the trust, applying the retirement exemption at the trust level (and paying within required timeframes), using roll-over relief to defer gains, or restructuring with appropriate roll-overs. Accurate cost-base records and distribution statements are essential.
Foreign trust amounts and s 99b
Where Australian resident trusts or beneficiaries receive amounts from foreign trusts, amounts not previously assessed may be included in assessable income under section 99B, subject to exclusions. Trace the source and character of funds carefully, retain historical records, and avoid “round-tripping” through offshore entities without a clear commercial rationale.
Trustee duties after Owies
The Owies decision confirms trustees must give real and genuine consideration to all beneficiaries when exercising discretion. Invalid resolutions risk there being no valid present entitlement, exposing the trustee to tax at the top marginal rate under section 99A. Properly minute decisions, consider each beneficiary’s position, and ensure distributions reflect current facts — not just habit.
Professional firm allocations
For professional firms operating through trusts, ensure the individual professional is appropriately rewarded and that income splitting has commercial substance. ATO guidance sets risk ratings for allocations to associates. Failure to meet the low-risk criteria can elevate scrutiny under section 100A or even Part IVA. Align your model with business structuring advice that reflects real roles, effort and risk.
Should you wind up?
Trusts remain valuable for asset protection, income streaming and access to small business concessions, but they are not always the right long-term vehicle. If the trust has served its purpose, carries legacy Division 7A or section 100A risks, or no longer delivers tax benefits because all beneficiaries are high-income adults, simplify the structure. Conversely, where a trust carries on an active business and you plan to access small business CGT concessions, continuing may be preferable.
What to do next
Start with a compliance review that maps distributions, UPEs, and cash flows against current ATO guidance. Confirm who receives what, how and when; test arrangements against section 100A; bring UPEs into order under Division 7A; and model CGT event E4 outcomes in any unit trust. Looking ahead, keep governance tight: timely trustee resolutions, clear beneficiary communications, and strong records. Our small business accountants Sydney and legal team can help you navigate Australian tax law, reduce risk and implement tax planning strategies Australia tailored to your structure.
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NEED HELP? This article provides general information and should not be considered legal or tax advice. For personalised guidance, please contact our expert team of tax accountants at The Quinn Group by calling 1300 QUINNS (1300 784 667) or +61 2 9223 9166, or submit an online enquiry form to arrange an appointment.
