Risk Management and Common Traps – (Trust Distributions Guide Chapter 5)

Trust Distributions Guide

Below is Chapter 5 of our ‘Trust Distributions Guide’ booklet. To read the other chapters of our booklet, click the links below:

 

Reimbursement agreements and section 100A

A recent issue that has arisen is the ATO’s application of section 100A of the Tax Act 36 to trust distributions. In essence, the ATO argues that situations involving trust recipients who are presently entitled to distributions, but do not ultimately ‘receive’ the economic benefit, are participating in a ‘reimbursement agreement’ and are therefore avoiding tax.

When section 100A is applied, the net income that would otherwise have been assessed to the beneficiary is assessed to the trustee at the top marginal tax rate. The ATO has interpreted section 100A extremely broadly to capture ordinary family dealings. For example, when a 20-year-old child receives a trust distribution, a UPE is recognised, and the funds are retained in the trust.

While the ATO’s interpretation of section 100A is not universally accepted by expert practitioners, trustees must ensure that a benefit conferred on a beneficiary is not ultimately received by another party.

 

What happens if a distribution is not made or is ineffective?

If a distribution of trust law income is ineffective at law, then the trust law income is either accumulated into corpus, or may have been subject to a default distribution under the trust deed. For tax purposes, the relevant proportion of tax law net income will then follow what happened to the trust law income.

TWO CHECKS:To ensure that a distribution is effective, first, check whether the trust deed empowers the trustee to do certain acts; second, check the procedure on how the trustee must exercise that power. To be effective, it is not enough that the trustee has the power, the power must be exercised properly according to the trust deed.

 

What happens if a trust’s net income is amended?

The High Court in Bamford held that the amended tax law net income of the trust did not flow to the ‘balance’ beneficiary, being the Church of Scientology. Instead, the section 95(1) net income of the trust was taxed to the benefciaries in proportion to the trust law income already appointed to them. Accordingly, some commentators feel that any attempt to direct additional tax law net income from a tax audit to a particular beneficiary will not be effective.

However, complexity arises when trust law income is defined as matching tax law net income. The argument goes that if there is an amendment to tax law net income, this automatically flows through to adjust trust law income. We do not consider that this point was directly considered by the High Court in Bamford.

Taxation Determination TD 2012/22, dealing with the proportionate approach, provides examples where after lodgement the ATO increases the trust’s section 95(1) net income, and this increase flows through to a ‘balance beneficiary’ (See Example 3), which provides a more manageable outcome than being assessed to the trustee.

 

Whether you are a trustee, advisor, or beneficiary, our team can help you understand your rights and responsibilities and avoid costly mistakes. Call us on 1300 654 590 or email us to make your trust distributions smarter, safer, and more strategic.

The information contained in this post is current at the date of editing – 22 August 2025.

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