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Trust Distributions & Section 100A

Once again, another financial year is almost in the books!

As we move (read: hurtle) closer and closer to 30 June 2023, Australian taxpayers are working to get their proverbial ‘ducks in a row’ in order to close out the 2023 financial year. One of the most important considerations around this time of the year pertains to trustees of a trust – specifically how the trustee will distribute the various components of trust’s income for the year. As a refresher – BLG Manager, Tim O’Brien provides a concise overview of what a trust is and the types of trusts.  

While always an important topic - the ‘Section 100A’ (s. 100A) guidance issued by the Australian Taxation Office (ATO) in December 2022 is currently at the forefront of discussions around trusts and trust distributions. This blog will aim to explore the considerations around trust distributions and s. 100A for the 2023 financial year.

Trust Distributions

Generally, the net income of a trust is distributed to the beneficiaries of the trust. Beneficiaries pay tax on their distribution, regardless of whether they receive the distribution in cash, or it is just allocated to them in the financial statements of the trust. This is known as a beneficiary being “presently entitled” to the trust distribution.

The s. 100A guidance issued by the ATO comes into play where a beneficiary has been made presently entitled to trust income. They ATO want to see that the beneficiary is the one that receives the corresponding financial benefit.

Section 100A

The s. 100A guidance finalised in December 2022 aims to set out the ATO’s view in relation to situations where a beneficiary’s trust entitlement arose from a ‘reimbursement agreement’.

Put simply, a reimbursement agreement involves an arrangements where a beneficiary is made presently entitled to trust income, but someone else receives the financial benefit from the trust. If this arrangement results in less tax being paid than if the recipient of the financial benefit declared the trust distribution as their own income, there is a potential s. 100A issue.

The ATO have published some guidance demonstrating examples of trust distributions and trust payments that they consider to be acceptable i.e. exempt from s.100A. The examples they give are quite basic, and there are still a lot of unanswered questions. We expect that further clarity will be provided from future court cases where the application of s. 100A is challenged.

Trust taxation - reimbursement agreement example 1

Trust taxation - reimbursement agreement
(Sourced from Australian Taxation Office on Trust taxation – reimbursement agreement)

If the ATO determine that a reimbursement agreement exists, this can lead to a much higher tax bill. Essentially the trust distribution is ignored, and the trustee pays tax on the income at 47% (equivalent to the highest marginal individual tax rate + Medicare Levy).

It is important for trustees to consider s. 100A and the ATO guidance when determining how they will distribute the trust’s income each year. This guidance around s. 100A is new and not straightforward. This article provides a very general and broad overview of concepts explored in the s. 100A guidance issued by the Australian Taxation Officer, and we would strongly recommend that you speak to an experienced adviser/professional before making any decision in relation to trust distributions.

This article provides a broad overview of concepts explored in the s. 100A guidance issued by the ATO, however our team can delve into this more with you in a way that pertains to your situation. As Wollongong Accountants who service all over Australia, we are always available to assist you, so if you are in need of advice reach out and benefit from a talk with us.

Wishing you and your business every success!

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*Please note that the above information is general advice only. We recommend you seek advice from a specialist relevant to your personal situation. This information is relevant at the time of publishing and is subject to change*
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