Trust distributions have changed – retrospectively

“Reimbursement agreements” are arrangements that provide for money to be paid, property transferred, and services or other benefits offered to someone other than the beneficiary who is presently entitled to a share of the trust’s income. In these circumstances Section 100A could apply and the income is not treated as assessable income of the beneficiary; instead, the trustee of the trust is assessed on the income at the top marginal rate.

Historically, the Australian Taxation Office (ATO) has rarely activated Section 100A to challenge how family groups distributes wealth via discretionary trusts. On 23 February 2022, the ATO released a long- awaited draft ruling, guidelines, and a taxpayer alert relating to trust distributions that have associated “reimbursement agreements”. It appears the ATO now intends to apply Section 100A broadly to target certain trust distribution arrangements commonly seen in practice.

Special consideration should now be given to Section 100A in situations where the beneficiary is subject to no tax or a low tax rate in relation their share of the trust income. For instance, where a discretionary trust makes a distribution to a foreign resident and net income of the trust includes foreign sourced income or is otherwise subject to withholding tax in Australia. In these situations, if the beneficiary subsequently makes a payment either by way of gift or dividend, then Section 100A may be applicable.

As the ATO has stated that it could apply its Section 100A tax ruling retrospectively from the 2014 income tax year, this issue is generating significant concern in Australia.

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