What common trust distributions to adult children can be attacked under Section 100A?
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
The ATO is concerned about taxpayers who are specifically entering into arrangements to avoid tax on the net income of their trusts. Parents are doing so by using the lower marginal tax rate applying to their adult children in circumstances where the benefit from these arrangements is, in substance, enjoyed by them.
This includes arrangements where adult children are paying amounts for expenses that would ordinarily be met by their parents, where the adult children’s entitlements are otherwise being applied for the benefit of the parents either directly, or by the charging of excessive amounts, and/or there are elements of contrivance.
ATO warning on trust distributions used to repay parents for childhood expenses
The Australian Taxation Office (ATO) has issued a warning to trustees about distributing trust income to adult children who are on a lower marginal tax rate than their parents and then using that distribution to offset a debt supposedly owed by the child for costs incurred during their upbringing. These costs may include private school fees, uniforms, extracurricular activities, and a portion of family holidays.
If an adult child is made presently entitled to trust income and the funds are either paid to a parent (or caregiver) to cover expenses incurred before the child turned 18 or applied against a debit balance in the trust that represents these expenses, the arrangement is considered high-risk under section 100A of the Income Tax Assessment Act. The ATO does not view such debts as legitimate expenses of the child, instead categorising them as "parental expenses" from which the parents, not the child, benefit.
In these cases, the ATO is likely to scrutinise the arrangement under its compliance resources, as it falls into the "red zone" for reimbursement agreements. Trustees and beneficiaries should ensure that any trust distributions and related agreements involve real and genuine consideration and are consistent with ordinary family or commercial dealings to avoid these risks.
Example - Trust distributions used to repay private school fees
Alex is the controller and a beneficiary of a discretionary family trust. His son, Liam, who just turned 18, is also a beneficiary of the trust. Liam, living at home while studying full-time at university, doesn't have a job.
Before the end of the 2024 income year, Liam and Alex agreed that any trust distribution Liam receives (after tax) would be paid to Alex. This payment was intended to help repay Alex for the $85,000 in private school fees he had paid for Liam's schooling in Years 10, 11, and 12.
For the 2024 income year, the trust earned a total income of $160,000, which also equaled the trust’s net taxable income.
The trustee decided to distribute the trust income as follows:
- $110,000 to Liam
- $50,000 to Alex
The trustee deposited $110,000 into Liam’s bank account. Liam used $28,417 of this to pay his tax liability on the distribution, then transferred the remaining $81,583 to Alex’s bank account as partial repayment for the school fees.
Alex’s share of the trust income was added to his salary of $130,000, leading to a tax liability of $19,500 on the $50,000 trust distribution. If the entire $160,000 had been distributed to Alex, his tax liability on the additional $110,000 would have been $51,700.
Potential ATO action on invalidating Liam's trust distribution
The ATO is likely to apply Section 100A to invalidate Liam's trust distribution. This arrangement falls into the high-risk red zone according to the ATO’s guidelines. As such, the ATO plans to dedicate compliance resources to this situation as a priority, aiming to use Section 100A to invalidate the trust distribution.
In this case, the ATO would argue that Liam is not genuinely receiving the economic benefit of the distribution because he is using it to repay his father (Alex) for parental expenses. This would mean that the exclusion for ordinary family dealings does not apply, and the distribution could be invalidated under tax law.
TAX TIP - Distributions used to pay an adult child's university fees
The ATO acknowledges that trust distributions to adult children used to pay university fees are treated differently under Section 100A compared to those used for school fees. While school fees are considered parental expenses, university fees are seen as "legitimate expenses that might ordinarily be borne by an adult child."
Specifically, the ATO accepts that if an adult child is made presently entitled to trust income and the distribution is used to pay university fees, this arrangement typically falls within the low-risk green zone. This holds true even if the adult child is on a lower marginal tax rate than their parents. In these situations, the adult child is deemed to have genuinely received the economic benefit of the distribution, meaning the ATO would not seek to apply Section 100A to invalidate the distribution.
ATO's view on adult children using trust distributions to pay board
It's common for adult children living at home to pay board to their parents, which helps cover household expenses. Board in this context refers to domestic arrangements for "board and lodging" between family members. These payments are informal agreements and are not assessable income for the recipient, nor are the related expenses deductible. However, with the ATO’s increased scrutiny of family trust distributions, a question arises about whether Section 100A could apply when an adult child uses their trust entitlement to pay board to a parent who is the controller of the trust.
While the ATO has not provided direct guidance on this specific scenario, it has addressed similar situations involving adult children who pay board to their grandparents using their trust distributions. In such cases, the ATO did not consider Section 100A to be a concern, as the distribution was applied to cover a legitimate expense of the adult child. This reasoning suggests that when an adult child uses their trust distribution to pay board to their parents, Section 100A should not apply, provided the arrangement reflects an ordinary family or commercial dealing and the child genuinely benefits from the distribution.
However, a potential risk exists if an adult child, particularly one still in high school, uses a trust distribution to pay board to their parents. The ATO may argue that the costs associated with housing a child during this stage are parental expenses, increasing the likelihood that Section 100A could be applied. Moreover, if the board is not charged at a reasonable, arm’s length rate or if there is no evidence of an agreement regarding board, the ATO may view the arrangement as lacking genuine consideration, which could lead to the application of Section 100A to invalidate the distribution.
TAX WARNING - Trust distributions paid into mortgage offset account
The ATO has scrutinised arrangements where an adult child’s trust distribution is paid into their parent’s mortgage offset account to reduce interest on the family home loan. According to the ATO, such arrangements are classified as high-risk and fall within the red zone of the Section 100A compliance guidelines. This classification is particularly relevant when the arrangement results in less overall tax being paid.
Given the high-risk nature of these arrangements, the ATO is likely to dedicate compliance resources to investigate and potentially apply Section 100A to invalidate the trust distribution.
What are the exclusions from a trust distribution being attacked under S.1OOA?
When evaluating whether a trust distribution may be invalidated under Section 100A of the Income Tax Assessment Act, several key exclusions must be considered. If any of these exclusions apply to the trust income, Section 100A will not invalidate the trust distribution.
The primary exclusions are as follows:
Beneficiary under a legal disability
Section 100A does not apply if a trust distribution is made to a beneficiary under a legal disability, such as a minor or a bankrupt individual. In such cases, the trust income is assessed to the trustee on behalf of the beneficiary under Section 98. It’s important to note that in these circumstances, the beneficiary’s entitlement to the trust income arises without any intent to reduce tax. All references to a beneficiary assume the beneficiary is not under a legal disability unless otherwise stated in the trust deed.
No tax reduction purpose
Section 100A does not apply to any reimbursement agreement or commercial dealing that was not entered into for a tax reduction purpose. A tax reduction purpose is defined as an intent to ensure that a person (whether or not a party to the agreement) pays no income tax, or less income tax than would otherwise be payable if the trust distribution had been made to the person who actually benefited from it. Even if a tax reduction purpose is not the sole or dominant purpose, Section 100A can still apply, requiring further analysis to ensure genuine consideration and economic benefit were provided in the distribution.
Tax tip: S.100A is unlikely for distributions made to controllers
Section 100A is generally not applicable to trust distributions made to the controllers of the trust or their spouses. Controllers of a trust, often being primary beneficiaries, typically benefit the most from the trust’s income, so distributions made to them are usually paid directly to and used by these individuals. This alignment of benefit and distribution reduces the likelihood of a Section 100A challenge.
Moreover, controllers of a trust typically pay tax at a higher marginal tax rate than other beneficiaries, which means that distributions made to them do not generally involve a tax reduction purpose. Since there is no intention to reduce taxable income through these distributions, they are less likely to be seen as high-risk red zone arrangements under Section 100A.
In some situations, controllers may choose to retain their trust entitlements within the trust, such as for working capital or reinvestment within the trust estate. While this can have potential implications under Section 100A, the Australian Taxation Office’s guidelines in PCG 2022/2 outline a low-risk green zone scenario for such arrangements. This guidance suggests that as long as the retained amounts are used appropriately and reflect genuine commercial dealings, the risk of Section 100A being applied remains low.
Related article: How section 100a affects distributions to grandparents
If you want to learn more about how Section 100A might apply to trust distributions made to grandparents, read our article "When will distributions to grandparents be attacked under Section 100A?"
About Causbrooks
Causbrooks gives you a client manager supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business.
Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.
Disclaimer
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.
What common trust distributions to adult children can be attacked under Section 100A?
Download our Readers Guide to setting up your business
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
The ATO is concerned about taxpayers who are specifically entering into arrangements to avoid tax on the net income of their trusts. Parents are doing so by using the lower marginal tax rate applying to their adult children in circumstances where the benefit from these arrangements is, in substance, enjoyed by them.
This includes arrangements where adult children are paying amounts for expenses that would ordinarily be met by their parents, where the adult children’s entitlements are otherwise being applied for the benefit of the parents either directly, or by the charging of excessive amounts, and/or there are elements of contrivance.
ATO warning on trust distributions used to repay parents for childhood expenses
The Australian Taxation Office (ATO) has issued a warning to trustees about distributing trust income to adult children who are on a lower marginal tax rate than their parents and then using that distribution to offset a debt supposedly owed by the child for costs incurred during their upbringing. These costs may include private school fees, uniforms, extracurricular activities, and a portion of family holidays.
If an adult child is made presently entitled to trust income and the funds are either paid to a parent (or caregiver) to cover expenses incurred before the child turned 18 or applied against a debit balance in the trust that represents these expenses, the arrangement is considered high-risk under section 100A of the Income Tax Assessment Act. The ATO does not view such debts as legitimate expenses of the child, instead categorising them as "parental expenses" from which the parents, not the child, benefit.
In these cases, the ATO is likely to scrutinise the arrangement under its compliance resources, as it falls into the "red zone" for reimbursement agreements. Trustees and beneficiaries should ensure that any trust distributions and related agreements involve real and genuine consideration and are consistent with ordinary family or commercial dealings to avoid these risks.
Example - Trust distributions used to repay private school fees
Alex is the controller and a beneficiary of a discretionary family trust. His son, Liam, who just turned 18, is also a beneficiary of the trust. Liam, living at home while studying full-time at university, doesn't have a job.
Before the end of the 2024 income year, Liam and Alex agreed that any trust distribution Liam receives (after tax) would be paid to Alex. This payment was intended to help repay Alex for the $85,000 in private school fees he had paid for Liam's schooling in Years 10, 11, and 12.
For the 2024 income year, the trust earned a total income of $160,000, which also equaled the trust’s net taxable income.
The trustee decided to distribute the trust income as follows:
- $110,000 to Liam
- $50,000 to Alex
The trustee deposited $110,000 into Liam’s bank account. Liam used $28,417 of this to pay his tax liability on the distribution, then transferred the remaining $81,583 to Alex’s bank account as partial repayment for the school fees.
Alex’s share of the trust income was added to his salary of $130,000, leading to a tax liability of $19,500 on the $50,000 trust distribution. If the entire $160,000 had been distributed to Alex, his tax liability on the additional $110,000 would have been $51,700.
Potential ATO action on invalidating Liam's trust distribution
The ATO is likely to apply Section 100A to invalidate Liam's trust distribution. This arrangement falls into the high-risk red zone according to the ATO’s guidelines. As such, the ATO plans to dedicate compliance resources to this situation as a priority, aiming to use Section 100A to invalidate the trust distribution.
In this case, the ATO would argue that Liam is not genuinely receiving the economic benefit of the distribution because he is using it to repay his father (Alex) for parental expenses. This would mean that the exclusion for ordinary family dealings does not apply, and the distribution could be invalidated under tax law.
TAX TIP - Distributions used to pay an adult child's university fees
The ATO acknowledges that trust distributions to adult children used to pay university fees are treated differently under Section 100A compared to those used for school fees. While school fees are considered parental expenses, university fees are seen as "legitimate expenses that might ordinarily be borne by an adult child."
Specifically, the ATO accepts that if an adult child is made presently entitled to trust income and the distribution is used to pay university fees, this arrangement typically falls within the low-risk green zone. This holds true even if the adult child is on a lower marginal tax rate than their parents. In these situations, the adult child is deemed to have genuinely received the economic benefit of the distribution, meaning the ATO would not seek to apply Section 100A to invalidate the distribution.
ATO's view on adult children using trust distributions to pay board
It's common for adult children living at home to pay board to their parents, which helps cover household expenses. Board in this context refers to domestic arrangements for "board and lodging" between family members. These payments are informal agreements and are not assessable income for the recipient, nor are the related expenses deductible. However, with the ATO’s increased scrutiny of family trust distributions, a question arises about whether Section 100A could apply when an adult child uses their trust entitlement to pay board to a parent who is the controller of the trust.
While the ATO has not provided direct guidance on this specific scenario, it has addressed similar situations involving adult children who pay board to their grandparents using their trust distributions. In such cases, the ATO did not consider Section 100A to be a concern, as the distribution was applied to cover a legitimate expense of the adult child. This reasoning suggests that when an adult child uses their trust distribution to pay board to their parents, Section 100A should not apply, provided the arrangement reflects an ordinary family or commercial dealing and the child genuinely benefits from the distribution.
However, a potential risk exists if an adult child, particularly one still in high school, uses a trust distribution to pay board to their parents. The ATO may argue that the costs associated with housing a child during this stage are parental expenses, increasing the likelihood that Section 100A could be applied. Moreover, if the board is not charged at a reasonable, arm’s length rate or if there is no evidence of an agreement regarding board, the ATO may view the arrangement as lacking genuine consideration, which could lead to the application of Section 100A to invalidate the distribution.
TAX WARNING - Trust distributions paid into mortgage offset account
The ATO has scrutinised arrangements where an adult child’s trust distribution is paid into their parent’s mortgage offset account to reduce interest on the family home loan. According to the ATO, such arrangements are classified as high-risk and fall within the red zone of the Section 100A compliance guidelines. This classification is particularly relevant when the arrangement results in less overall tax being paid.
Given the high-risk nature of these arrangements, the ATO is likely to dedicate compliance resources to investigate and potentially apply Section 100A to invalidate the trust distribution.
What are the exclusions from a trust distribution being attacked under S.1OOA?
When evaluating whether a trust distribution may be invalidated under Section 100A of the Income Tax Assessment Act, several key exclusions must be considered. If any of these exclusions apply to the trust income, Section 100A will not invalidate the trust distribution.
The primary exclusions are as follows:
Beneficiary under a legal disability
Section 100A does not apply if a trust distribution is made to a beneficiary under a legal disability, such as a minor or a bankrupt individual. In such cases, the trust income is assessed to the trustee on behalf of the beneficiary under Section 98. It’s important to note that in these circumstances, the beneficiary’s entitlement to the trust income arises without any intent to reduce tax. All references to a beneficiary assume the beneficiary is not under a legal disability unless otherwise stated in the trust deed.
No tax reduction purpose
Section 100A does not apply to any reimbursement agreement or commercial dealing that was not entered into for a tax reduction purpose. A tax reduction purpose is defined as an intent to ensure that a person (whether or not a party to the agreement) pays no income tax, or less income tax than would otherwise be payable if the trust distribution had been made to the person who actually benefited from it. Even if a tax reduction purpose is not the sole or dominant purpose, Section 100A can still apply, requiring further analysis to ensure genuine consideration and economic benefit were provided in the distribution.
Tax tip: S.100A is unlikely for distributions made to controllers
Section 100A is generally not applicable to trust distributions made to the controllers of the trust or their spouses. Controllers of a trust, often being primary beneficiaries, typically benefit the most from the trust’s income, so distributions made to them are usually paid directly to and used by these individuals. This alignment of benefit and distribution reduces the likelihood of a Section 100A challenge.
Moreover, controllers of a trust typically pay tax at a higher marginal tax rate than other beneficiaries, which means that distributions made to them do not generally involve a tax reduction purpose. Since there is no intention to reduce taxable income through these distributions, they are less likely to be seen as high-risk red zone arrangements under Section 100A.
In some situations, controllers may choose to retain their trust entitlements within the trust, such as for working capital or reinvestment within the trust estate. While this can have potential implications under Section 100A, the Australian Taxation Office’s guidelines in PCG 2022/2 outline a low-risk green zone scenario for such arrangements. This guidance suggests that as long as the retained amounts are used appropriately and reflect genuine commercial dealings, the risk of Section 100A being applied remains low.
Related article: How section 100a affects distributions to grandparents
If you want to learn more about how Section 100A might apply to trust distributions made to grandparents, read our article "When will distributions to grandparents be attacked under Section 100A?"
About Causbrooks
Causbrooks gives you a client manager supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business.
Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.
Disclaimer
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.
This category can cover various topics related to taxation, such as changes in tax laws, how to file taxes, common tax mistakes, and tax planning strategies.
About Causbrooks
Disclaimer
FAQ's
Download our Readers Guide to setting up your business
With this Complimentary White Paper, you will find answers to:
.svg)
How to budget and manage cashflow- How to set up your business as a Barrister
- How to manage your tax obligations
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Contact us today for a consultation.
Contact us today to learn more about how our accounting services can benefit your business. We look forward to hearing from you and helping you achieve financial success!
