Who really benefits? Section 100A, family trusts and your estate plan

For many Australian families, the family trust sits at the centre of the estate plan. It holds the business, the share portfolio and sometimes the holiday house, and it is expected to pass from one generation to the next without the cost and delay of probate.

The trust deed may well outlive its founder. Whether the trust's distribution history will survive scrutiny from the Australian Taxation Office is a different question, and it turns on a provision that sat largely untouched for four decades before the ATO and the Federal Court brought it firmly back into view.

What Does Section 100A Actually Do?

Section 100A of the Income Tax Assessment Act 1936 (Cth) is an integrity provision introduced in 1979 to combat "trust stripping". In a typical trust-stripping arrangement, trust income is distributed on paper to a beneficiary who pays little or no tax, while the money itself ends up with someone else (often a parent, the trustee, or another family entity on a higher tax rate).

The section operates where four elements are present:

1. A present entitlement. A beneficiary is made "presently entitled" to trust income - that is, the trustee has resolved that the beneficiary has a current right to demand payment of a share of the income.
2. A reimbursement agreement. That entitlement arises out of, or in connection with, an agreement, arrangement or understanding (formal or informal, written or unwritten, and not necessarily enforceable) under which someone other than the beneficiary receives money, property or another benefit.
3. A tax reduction purpose. At least one party to the agreement entered into it for a purpose of someone paying less tax. It need not be the only or the main purpose.
4. No ordinary dealing. The agreement was not entered into in the course of "ordinary family or commercial dealing".

Where section 100A applies, the beneficiary is treated as never having been presently entitled to the income. The trustee is assessed on it instead under section 99A, at the top marginal rate (currently 47% including the Medicare levy). Importantly, the usual time limits on amending assessments do not apply to section 100A. The ATO has said it will generally confine itself to the four years after a trust lodges its return, but the law itself sets no limit.

Guardian AIT: The Agreement Must Exist First

The first of two recent Full Federal Court decisions is Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 (24 January 2023).

Guardian AIT was trustee of a discretionary trust of which Mr Springer was the principal. A company, AIT Corporate Services, was incorporated with its shares held by the trustee and was then made a beneficiary. The trustee made the company presently entitled to trust income but did not pay it, leaving an unpaid present entitlement. The company later paid a dividend back to the trust, which was in turn distributed to Mr Springer after he had become a non-resident. The Commissioner characterised this as a circular arrangement and assessed the trustee under section 100A for the 2012 to 2014 income years.

At first instance, Logan J (Guardian AIT Pty Ltd v Commissioner of Taxation [2021] FCA 1619) found no evidence of a reimbursement agreement in place before the company became entitled to the income. The Full Court unanimously agreed for the 2013 year. It accepted that an agreement need not be binding or enforceable, but held that there must still be a genuine consensus between the parties at or before the time of the present entitlement. An understanding reached between Mr Springer's accountants could not be attributed to him without evidence that he had adopted it or authorised them to act for him. The Court also observed that where a beneficiary is expected to pay money back, the beneficiary would ordinarily need to be a party to the agreement.

The taxpayer's win was only partial. The Full Court allowed the Commissioner's appeal on the general anti-avoidance rules in Part IVA for the 2013 year. Escaping section 100A, in other words, does not mean escaping scrutiny.

Blood: When Advisers' Purposes Count

Five months later, the Commissioner succeeded in B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89, commonly called BBlood.

The Illuka Park Trust, a discretionary trust, owned shares in a family company. In the 2014 income year, the trust deed was varied so that "income" meant income according to ordinary concepts. A newly incorporated company, BBlood Enterprises, was made presently entitled to the trust's income. The family company then bought back the trust's shares for about $10 million. For tax purposes, the buy-back proceeds were largely a franked dividend, so the corporate beneficiary was assessed on net income of around $10.3 million, with the tax substantially covered by franking credits. For trust law purposes, however, the proceeds were capital, so the trust kept the cash.

Thawley J (BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112) held that section 100A applied, and the Full Court agreed. Its reasoning on the tax reduction purpose is the part most relevant to family groups:

• The purpose of any party is enough, and it need not be the dominant purpose.
• Advisers who design and implement an arrangement with the knowledge and assent of the people controlling the entities are themselves parties to the agreement, so their purpose counts.
• It does not matter whether the expected tax outcome would actually have been achieved.
• Departures from a family's historical pattern of behaviour, without a commercial reason, can support a finding of tax purpose.

Neither Full Court addressed what "ordinary family or commercial dealing" means. The first instance judgments offer some guidance. Logan J described "ordinary" as the opposite of "extraordinary", referring to a dealing without artificiality. Thawley J said the agreement must be viewed as a whole, and that one involving more steps than needed to achieve its objective may more readily be seen as not ordinary.

Where the ATO Stands

The ATO finalised its guidance in December 2022: Taxation Ruling TR 2022/4, setting out its interpretation of section 100A, and Practical Compliance Guideline PCG 2022/2, which sorts arrangements into risk zones. Arrangements in the white and green zones will not ordinarily attract ATO compliance resources. Red zone arrangements will be reviewed as a priority.

The ATO has stated that a distribution to an adult child on a low tax rate will not attract section 100A where the child simply receives or otherwise enjoys the benefit of it. The concern arises where the child's entitlement is used to fund the parents' own expenses, or where funds circulate back to the trustee through a company or another trust. Taxpayer Alert TA 2022/1 targets precisely that pattern of parents benefiting from distributions made to their adult children.

Following Guardian AIT, the ATO indicated it would make minor updates to TR 2022/4 to reflect the Court's findings. The ATO's views are not law, but they show where its attention is directed.

Why This Is an Estate Planning Issue

Section 100A is usually discussed as a tax compliance issue for accountants at year end. For families using trusts to hold and pass on wealth, it is just as much an estate planning issue, for four reasons.

The liability stays with the trust. Section 100A assessments fall on the trustee. When the founder dies or loses capacity and control of the trust passes to the next generation under the appointor or guardian provisions of the deed, the new controllers inherit the trust's tax history along with its assets. With no fixed time limit on amendment, an issue created years earlier can surface after the founder is gone — at precisely the point when the people who could explain the reasons for past distributions are no longer available to give evidence.

"It is all going to the children anyway" is not a defence. Many families distribute to adult children while the parents continue to use the funds, reasoning that the wealth will pass to the children eventually. That is the very pattern the ATO has flagged. An intended inheritance does not convert an arrangement into an ordinary family dealing if the beneficiary did not, in substance, receive the benefit.

Unpaid entitlements become estate assets and debts. Long-standing unpaid present entitlements owed to family members or a corporate beneficiary must be dealt with when a beneficiary or controller dies. How they were created, and whether they were ever intended to be paid, can become a live question in the administration of the estate.

Pre-death restructures attract scrutiny. Succession often prompts changes: varying the trust deed, adding a new corporate beneficiary, buying back shares, or redirecting income. BBlood shows how a deed variation, a newly created beneficiary and a departure from historical practice can combine to support a finding of tax purpose — including the purpose of the advisers who designed it. Testamentary trusts established under a Will are subject to the same section.

Proactive Rather Than Reactive: What to Do Now

None of this means family trusts have lost their place in estate planning. It means the trust, the Will and the succession plan need to work together, and the paper trail needs to match what actually happens. If you control or benefit from a family trust, consider the following:

1. Check where distributions actually go. Each beneficiary should receive, or genuinely enjoy the benefit of, their entitlement. Where an adult child's distribution is applied for someone else, make sure there is a real and documented reason.
2. Record the reasons when decisions are made. Note the family or commercial purpose behind distribution resolutions at the time. Evidence created years later carries far less weight.
3. Deal with unpaid present entitlements. Pay them, formalise them, or plan how they will be handled on death.
4. Take care with restructures. Before varying a deed, adding beneficiaries or buying back shares, confirm each step serves the stated objective and nothing more.
5. Align the trust with the Will. Review the appointor, guardian and succession provisions of the deed alongside your Will, enduring power of attorney and any memorandum of wishes, so control passes to the right people with an understanding of the trust's history.
6. Keep your solicitor and accountant talking. Distribution decisions are made at year end by accountants; succession is planned by solicitors. Section 100A sits between the two.

Plan the Trust, Not Just the Will

Guardian AIT and BBlood point in different directions on their facts, but they share a lesson. Section 100A turns on evidence: what was agreed, when, by whom, and why. Families who document their decisions as they make them are in a far stronger position than those who try to reconstruct them years later.

A family trust can be a powerful estate planning tool. It can also pass on a tax problem along with the assets. The difference usually lies in the planning done while the founder is still here to explain it.