Preventing S100A: Safeguarding Your Family Trusts

Tax time is coming. In today’s article, we will talk about the recent audit focus from the Australian Taxation Office (ATO) in examining the distribution from the family trusts, especially the S100A of ITAA36.

We always inform our clients that before the tax time is due, we need to ensure that the distribution statement is prepared and signed, if not then it would be no beneficiary is presently entitled to the distribution, meaning that the trustee has to pay the highest marginal tax rate. 

The Australian Taxation Office (ATO) has kept an eye out for Trusts Distribution using Section 100A because of its inherent asset protection, flexibility, and capacity to pass assets to future generations with minimal tax consequences (s100A).

The fundamental reason for this caution is the possibility that the money given to one beneficiary on paper could be used by someone else. In general, the scope of s100A is to capture agreements in which someone has received a tax benefit as a result of entering into such agreements.

The ATO is concerned about circumstances in which the distribution recipient is a lower-taxed person or business. The ATO has the authority under Section 100A to tax the trustee of a trust at a rate of 47 percent on such “sham” distributions.

An example of Family Trusts S100A:

Adult children do not receive “cash” payments from the Trust; instead, the money is spent by the parents for their purposes, and the Trust’s records show that the children’s entitlements have been paid out. In this situation, there is a risk of s100A.

Trustees should keep in mind that if an amount is distributed “on paper” to a beneficiary, the money should ideally follow. Furthermore, there are no amendment periods under s100A, so the ATO can go after these arrangements as far as they wish.

When it comes to family trusts or company structures, it’s highly beneficial to familiarize yourself with their intricacies. It’s even more advisable to seek guidance from a tax specialist in your area to ensure you make informed decisions.