Trust distributions can be an effective way to share income among beneficiaries where this is permitted by the trust deed and the tax law. However, a distribution that looks valid on paper may still create a significant tax risk if the person nominated to receive the income does not genuinely receive the economic benefit.

This is where section 100A of the Income Tax Assessment Act 1936 becomes important. It is an integrity rule aimed at arrangements commonly described as “reimbursement agreements”. For business owners and families using discretionary trusts, it is essential to consider not only who is taxed on a distribution, but also where the money ultimately goes, who benefits and why the arrangement was put in place.

What section 100A is designed to address

Section 100A can apply where a trust beneficiary is made presently entitled to trust income, but there is an agreement, arrangement or understanding that another person will receive money, property, services or another benefit connected with that entitlement.

In plain English, the concern is often this:

  • the trust distributes income to a beneficiary who is expected to pay less tax on it;

  • the beneficiary does not receive or retain the real benefit of that income; and

  • someone else, often a person who would otherwise have paid more tax, benefits instead.

The law is not limited to formal written agreements. It can extend to informal understandings, implied arrangements and steps taken by related parties that point to a shared plan. A transaction does not need to be legally enforceable to be relevant.

This matters because trust distribution planning is often documented at EOFY, while the actual treatment of the entitlement may unfold later. A trustee resolution may name an adult child, spouse, company or other beneficiary. But the surrounding facts, including how the entitlement is recorded, paid, retained, loaned, gifted or used, can be just as important as the resolution itself.

Section 100A is not a general prohibition on distributing trust income to family members or related entities. Many ordinary family and commercial dealings can fall outside its scope. The issue is whether the overall arrangement has the features of a reimbursement agreement and is not part of an ordinary family or commercial dealing.

The key elements of a reimbursement agreement

The legislation and the ATO’s published ruling identify several elements that need to be considered together. The analysis is highly fact-dependent, but the central questions are relatively practical.

1. Was a beneficiary made presently entitled to trust income?

A discretionary trust commonly resolves to distribute income among one or more beneficiaries before the end of an income year. The terms of the trust deed and the trustee’s resolution are critical in determining whether a beneficiary has been made presently entitled.

A present entitlement does not necessarily mean cash has been paid immediately. The trust may owe an amount to the beneficiary, often recorded as an unpaid present entitlement, or UPE.

That distinction is important. A beneficiary may be assessed on trust income even where the trust retains the cash. But if the funds are retained, it becomes necessary to examine why they were retained, whether the beneficiary knew of and accepted the arrangement, and who actually obtained the benefit from those funds.

2. Was there an agreement, arrangement or understanding?

For section 100A purposes, an agreement can be much broader than a contract.

The arrangement may be:

  • written or verbal;

  • express or implied;

  • formal or informal;

  • legally enforceable or unenforceable;

  • established through a series of connected steps; or

  • inferred from conduct, records and surrounding circumstances.

For example, it may be relevant if a trustee repeatedly distributes income to an adult beneficiary, but the beneficiary has little involvement in the decision, does not receive the money and routinely allows it to be used for someone else’s private expenses.

The timing can also be important. The ATO’s published view is that the relevant agreement must exist at, or before, the time the beneficiary becomes presently entitled to the trust income. A later event does not automatically prove that an earlier agreement existed, but later conduct may be evidence of what was intended from the outset.

3. Did someone other than the beneficiary receive a benefit?

A reimbursement agreement involves a benefit being provided to another person or entity. The benefit can take many forms and does not have to be a direct cash payment.

Examples may include:

  • money being paid to another family member;

  • trust funds being used to meet another person’s private expenses;

  • the beneficiary lending funds back to the trust or a related party;

  • property being transferred to another person;

  • the beneficiary forgiving or postponing a debt;

  • a company beneficiary paying funds or dividends that benefit another party; or

  • the trustee retaining funds for the benefit of people other than the beneficiary.

The fact that a beneficiary is related to the person who benefits does not, by itself, establish a problem. Families often share resources and support one another. However, family relationships do not automatically make every arrangement an ordinary family dealing.

The real question is whether the beneficiary’s entitlement was connected with a plan for someone else to receive the economic benefit.

4. Was there a purpose of reducing income tax?

The tax purpose test is broad. The legislation can apply where one party to the agreement had a purpose of securing that someone would pay no income tax, or less income tax, than they otherwise would have paid.

The tax saving does not need to be the only purpose of the arrangement. It can be one of several purposes.

It is also not necessary for the intended tax outcome to have been achieved. What matters is whether the arrangement was entered into with the relevant tax reduction purpose.

This does not mean tax should be ignored when making trust distributions. Tax outcomes are a legitimate consideration in many business and family decisions. The concern arises where the arrangement is principally explained by shifting taxable income to one person while directing the actual financial benefit to another.

The ordinary family or commercial dealing exception

Section 100A does not treat every arrangement involving a benefit to another person as a reimbursement agreement. It excludes agreements entered into in the course of ordinary family or commercial dealing.

This exception is often central to the analysis, particularly for family-owned businesses and discretionary trusts.

The expression is not defined in the legislation. The ATO’s view is that the whole dealing should be assessed objectively, including what it was designed to achieve and whether the steps taken are capable of being explained by genuine family or commercial objectives.

Relevant considerations may include:

  • the purpose of the distribution and subsequent use of funds;

  • whether the arrangement reflects the family’s established financial practices;

  • whether the beneficiary was informed and involved;

  • whether the beneficiary genuinely benefited;

  • whether the transaction had a commercial rationale;

  • whether the steps were straightforward or unnecessarily complex;

  • whether there were artificial or contrived features; and

  • whether a less complex course could have achieved the stated family or commercial objective.

A family arrangement is not necessarily ordinary merely because it involves spouses, children, parents or family companies. Similarly, a commercial arrangement is not necessarily ordinary simply because it occurs within a business group.

For instance, a trust may distribute income to a spouse who contributes to the family business and participates in the family’s shared financial affairs. The spouse may use the distribution for household costs, family expenses, investments or personal financial commitments. Depending on the full facts, this may be capable of being explained by ordinary family objectives.

By contrast, concerns can arise if an adult child is allocated trust income largely because they have a lower tax burden, while the funds are directed to paying costs incurred by a parent or are otherwise returned to the parents’ control.

The answer will depend on the trust deed, the documents, the purpose, the conduct of everyone involved and the evidence available.

Unpaid present entitlements, corporate beneficiaries and Division 7A

A common trust planning issue arises where a private company is made presently entitled to income but the trust retains the cash. This may create an unpaid present entitlement owed by the trust to the company.

Section 100A and Division 7A are separate regimes, but they can both be relevant to the same arrangement.

From a section 100A perspective, the question may be whether the company’s entitlement and the retention or later use of funds form part of a reimbursement agreement. This can be particularly sensitive where trust income is repeatedly appointed to a company and then returned to the trust, directly or indirectly, in a way that produces a tax advantage.

From a Division 7A perspective, the ATO’s published determination addresses circumstances in which a private company beneficiary can provide financial accommodation to a trustee. Broadly, this can occur where the company knows it can demand payment of an amount owed by the trust, does not demand payment and, by arrangement or understanding, allows the trustee to continue using the funds.

The practical message is that a UPE should not be treated as a passive bookkeeping entry. Where a company beneficiary is involved, trustees should consider:

  • whether the trust has properly notified the company of its entitlement;

  • whether the company has recorded the entitlement accurately;

  • whether the amount has been paid, set aside or left available to the trustee;

  • whether a separate loan arrangement is needed;

  • whether the terms are commercially supportable;

  • whether Division 7A requirements may apply; and

  • whether the arrangement is consistent with the intended commercial purpose.

The ATO’s compliance guidance includes circumstances where trust funds are retained for working capital as lower-risk examples, provided specified conditions are met. Those conditions are not a substitute for reviewing the actual arrangement, trust deed, accounts and related-party transactions.

Importantly, an arrangement that falls outside an ATO lower-risk example is not automatically caught by section 100A. Equally, an arrangement that appears familiar is not automatically safe.

Arrangements that can attract closer attention

The ATO has published practical compliance guidance that identifies examples it considers lower risk and examples likely to attract closer scrutiny. The guidance does not replace the law, and being outside a higher-risk category does not guarantee a favourable outcome.

However, it provides useful indicators of arrangements that deserve particular care.

Potential warning signs include:

  • distributions to adult children where funds are used to reimburse parents for expenses incurred before the child became an adult;

  • distributions to beneficiaries who do not know about, control or benefit from their entitlement;

  • a beneficiary gifting or lending entitlement funds to another related party under a pre-arranged plan;

  • repeated circular distributions involving a trust and corporate beneficiary;

  • arrangements that return trust income to the trust in another form;

  • a company or trust beneficiary with losses being used in a way that appears primarily directed at reducing tax;

  • distributions involving non-resident beneficiaries where funds are made available to Australian resident controllers; and

  • distributions that are not reported correctly by the beneficiary.

A higher-risk classification in ATO guidance does not itself determine the legal outcome. It means the ATO may be more likely to allocate compliance resources to review the arrangement.

The ATO has also stated that its current compliance guideline is being reviewed in light of recent court decisions. That is a useful reminder that this area continues to develop, and older distribution practices should not be assumed to remain appropriate without review.

A practical example for a family business trust

Consider a family discretionary trust that operates a profitable business.

Before EOFY, the trustee resolves to distribute part of the trust income to an adult child who is a beneficiary under the trust deed. The child has relatively low income from other sources. The trust does not pay the distribution to the child. Instead, the amount is recorded as an entitlement in the trust accounts.

Soon afterwards, the trust uses the funds to pay private living expenses of the child’s parents. The child did not request this use of funds, was not involved in the decision and has no realistic expectation of receiving the amount.

The arrangement may raise section 100A concerns because:

  • the child was made presently entitled to trust income;

  • there may have been an understanding that the parents would receive the economic benefit;

  • the parents, rather than the child, benefited from the use of funds; and

  • the distribution may have been selected partly because the child was expected to pay less tax.

The outcome would still depend on the complete facts. But the trustee should not assume that a valid resolution and accounting entry are enough to settle the issue.

A more defensible approach would involve considering the child’s genuine entitlement, ensuring they understand it, documenting how funds will be dealt with, and making sure any use of the funds is consistent with the child’s rights and the trust deed.

How trustees can manage section 100A risk

Section 100A risk management starts well before the trust distribution resolution is signed.

A sound process should include the following steps:

  1. Review the trust deed

    Confirm who can receive income and capital distributions, how trust income is defined, what resolutions are required and whether there are restrictions on streaming, accumulation or retention of income.

  2. Understand each beneficiary’s circumstances

    Consider the beneficiary’s residency, legal capacity, other income, tax obligations, financial needs and whether they can genuinely receive and control the benefit of a distribution.

  3. Document the commercial or family rationale

    Record why distributions have been made and how they fit within the family’s or business group’s genuine objectives. Documentation should reflect the real arrangement, not be created later to justify a pre-planned result.

  4. Make valid, timely trustee resolutions

    Ensure resolutions are made in accordance with the trust deed and properly identify the income being distributed and the beneficiaries entitled to it.

  5. Communicate entitlements to beneficiaries

    Beneficiaries should understand that they have received an entitlement, particularly where amounts will not be paid immediately.

  6. Track what happens after the resolution

    Record payments, loans, set-offs, gifts, reinvestments and any other use of funds connected with the entitlement.

  7. Treat UPEs as real obligations

    If the trust owes an amount to a beneficiary, maintain clear records and consider whether the amount should be paid, held separately, invested for the beneficiary or dealt with under a properly documented arrangement.

  8. Review related-party dealings together

    Trust distributions, company dividends, shareholder loans, UPEs and private expenses should not be reviewed in isolation. The overall flow of funds is often what determines the risk.

The key takeaway

Section 100A is a reminder that effective trust distribution planning is about more than selecting a beneficiary with a favourable tax position. The beneficiary’s entitlement, the use of funds, the purpose of the arrangement and the real economic outcome all matter.

Where a discretionary trust distributes income to family members or related companies, clear records and genuine commercial or family reasons are essential. Care is particularly important where trust funds remain unpaid, are retained for business purposes or move between trusts, companies and family members.

This article is general information only and is not personal financial or tax advice. Trust distribution arrangements can have significant consequences, so speak with a registered tax agent or accountant, such as, about advice tailored to your trust deed, beneficiaries and specific circumstances.