The ATO’s Attack on Trusts and Trust Distributions

Clarke McEwan Accountants

Late last month, the Australian Taxation Office (ATO) released a package of new guidance material that directly targets how trusts distribute income. Many family groups will pay higher taxes (now and potentially retrospectively) as a result of the ATO’s more aggressive approach.

Family trust beneficiaries at risk

The tax legislation contains an integrity rule, section 100A, which is aimed at situations where income of a trust is appointed in favour of a beneficiary but the economic benefit of the distribution is provided to another individual or entity. If trust distributions are caught by section 100A, then this generally results in the trustee being taxed at penalty rates rather than the beneficiary being taxed at their own marginal tax rates.

The latest guidance suggests that the ATO will be looking to apply section 100A to some arrangements that are commonly used for tax planning purposes by family groups. The result is a much smaller boundary on what is acceptable to the ATO which means that some family trusts are at risk of higher tax liabilities and penalties.

ATO redrawing the boundaries of what is acceptable

Section 100A has been around since 1979 but to date, has rarely been invoked by the ATO except where there is obvious and deliberate trust stripping at play. However, the ATO’s latest

guidance suggests that the ATO is now willing to use section 100A to attack a wider range of scenarios.

There are some important exceptions to section 100A, including where income is appointed to minor beneficiaries and where the arrangement is part of an ordinary family or commercial dealing. Much of the ATO’s recent guidance focuses on whether arrangements form part of an ordinary family or commercial dealing. The ATO notes that this exclusion won’t necessarily apply simply because arrangements are commonplace or they involve members of a family group. For example, the ATO suggests that section 100A could apply to some situations where a child gifts money that is attributable to a family trust distribution to their parents.

The ATO’s guidance sets out four ‘risk zones’ – referred to as the white, green, blue and red zones. The risk zone for a particular arrangement will determine the ATO’s response:

White zone

This is aimed at pre-1 July 2014 arrangements. The ATO will not look into these arrangements unless it is part of an ongoing investigation, for arrangements that continue after this date, or where the trust and beneficiaries failed to lodge tax returns by 1 July 2017.

Green zone

Green zone arrangements are low risk arrangements and are unlikely to be reviewed by the ATO, assuming the arrangement is properly documented. For example, the ATO suggests that when a trust appoints income to an individual but the funds are paid into a joint bank account that the individual holds with their spouse then this would ordinarily be a low-risk scenario. Or, where parents pay for the deposit on an adult child’s mortgage using their trust distribution and this is a one-off arrangement.

Blue zone

Arrangements in the blue zone might be reviewed by the ATO. The blue zone is basically the default zone and covers arrangements that don’t fall within one of the other risk zones. The blue zone is likely to include scenarios where funds are retained by the trustee, but the arrangement doesn’t fall within the scope of the specific scenarios covered in the green zone.

Section 100A does not automatically apply to blue zone arrangements, it just means that the ATO will need to be satisfied that the arrangement is not subject to section 100A.

Red zone

Red zone arrangements will be reviewed in detail. These are arrangements the ATO suspects are designed to deliberately reduce tax, or where an individual or entity other than the beneficiary is benefiting.

High on the ATO’s list for the red zone are arrangements where an adult child’s entitlement to trust income is paid to a parent or other caregiver to reimburse them for expenses incurred before the adult child turned 18. For example, school fees at a private school. Or, where a loan (debit balance account) is provided by the trust to the adult child for expenses they incurred before they were 18 and the entitlement is used to pay off the loan. These arrangements will be looked at closely and if the ATO determines that section 100A applies, tax will be applied at the top marginal rate to the relevant amount and this could apply across a number of income years.

The ATO indicated that circular arrangements could also fall within the scope of section 100A. For example, this can occur when a trust owns shares in a company, the company is a beneficiary of that trust and where income is circulated between the entities on a repeating basis. For example, section 100A could be triggered if:

The trustee resolves to appoint income to the company at the end of year 1.
The company includes its share of the trust's net income in its assessable income for year 1 and pays tax at the corporate rate.
The company pays a fully franked dividend to the trustee in year 2, sourced from the trust income, and the dividend forms part of the trust income and net income in year 2.
The trustee makes the company presently entitled to some or all of the trust income at the end of year 2 (which might include the franked distribution).
These steps are repeated in subsequent years.

Distributions from a trust to an entity with losses could also fall within the red zone unless it is clear that the economic benefit associated with the income is provided to the beneficiary with the losses. If the economic benefit associated with the income that has been appointed to the entity with losses is utilised by the trust or another entity then section 100A could apply.

Who is likely to be impacted?

The ATO’s updated guidance focuses primarily on distributions made to adult children, corporate beneficiaries, and entities with losses. Depending on how arrangements are structured, there is potentially a significant level of risk. However, it is important to remember that section 100A is not confined to these situations.

Distributions to beneficiaries who are under a legal disability (e.g., children under 18) are excluded from these rules.

For those with discretionary trusts it is important to ensure that all trust distribution arrangements are reviewed in light of the ATO’s latest guidance to determine the level of risk associated with the arrangements. It is also vital to ensure that appropriate documentation is in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of beneficiaries.

Companies entitled to trust income

As part of the broader package of updated guidance targeting trusts and trust distributions, the ATO has also released a draft determination dealing specifically with unpaid distributions owed by trusts to corporate beneficiaries. If the amount owed by the trust is deemed to be a loan then it can potentially fall within the scope of another integrity provision in the tax law, Division 7A.

Division 7A captures situations where shareholders or their related parties access company profits in the form of loans, payments or forgiven debts. If certain steps are not taken, such as placing the loan under a complying loan agreement, these amounts can be treated as deemed unfranked dividends for tax purposes and taxable at the taxpayer’s marginal tax rate.

The latest ATO guidance looks at when an unpaid entitlement to trust income will start being treated as a loan. The treatment of unpaid entitlements to trust income as loans for Division 7A purposes is not new. What is new is the ATO’s approach in determining the timing of when these amounts start being treated as loans. Under the new guidance, if a trustee resolves to appoint income to a corporate beneficiary, then the time the unpaid entitlement starts being treated as a loan will depend on how the entitlement is expressed by the trustee (e.g., in trust distribution resolutions etc):

If the company is entitled to a fixed dollar amount of trust income the unpaid entitlement will generally be treated as a loan for Division 7A purposes in the year the present entitlement arises; or
If the company is entitled to a percentage of trust income, or some other part of trust income identified in a calculable manner, the unpaid entitlement will generally be treated as a loan from the time the trust income (or the amount the company is entitled to) is calculated, which will often be after the end of the year in which the entitlement arose.

This is relevant in determining when a complying loan agreement needs to be put in place to prevent the full unpaid amount being treated as a deemed dividend for tax purposes when the trust needs to start making principal and interest repayments to the company.

The ATO’s views on “sub-trust arrangements” has also been updated. Basically, the ATO is suggesting that sub-trust arrangements will no longer be effective in preventing an unpaid trust distribution from being treated as a loan for Division 7A purposes if the funds are used by the trust, shareholder of the company or any of their related parties.

The new guidance represents a significant departure from the ATO’s previous position in some ways. The upshot is that in some circumstances, the management of unpaid entitlements will need to change. But, unlike the guidance on section 100A, these changes will only apply to trust entitlements arising on or after 1 July 2022.

< Older Post

Newer Post >

Reviewing your fund’s investment strategy

By Clarke McEwan • October 21, 2026

Superannuation law requires trustees of SMSFs to formulate, regularly review and give effect to an investment strategy that has regard to the whole of the circumstances of the fund. Although there is nothing in the law stating a timeframe that may define ‘review regularly’, it is commonly accepted that this would be at least annually. This aligns with comments on the ATO’s website where they expect reviews to occur at least annually. Some trustees will undertake an annual review leading up to, or at the beginning of a new financial year, while others will undertake the review as part of reviewing the completed financial accounts from the previous financial year. Neither is the right or wrong option, and you must consider what is best for your situation. Either way, you will need to be able to show your fund’s auditor that you have reviewed the investment strategy and documented any decisions made, whether it be recording changes deemed necessary or determined the existing strategy remains appropriate. There may be other times that it is appropriate to review the investment strategy. These may include when: There is a market correction; A member joins or leaves the fund; A member starts a pension in the fund. An investment policy will generally be comprised of two parts: 1. Investment objective – this part outlines the fund’s objectives and expected outcomes. For example, an objective may be to achieve a certain level of return over a certain period. This would generally take into account the age of the members, their retirement needs and investment risk profile. 2. Investment strategy – this part outlines how the fund will achieve the stated objectives. For example, it may include investment asset ranges or specific assets that will be held. When reviewing your fund’s investment strategy, consideration must be given to: The risk of holding particular investments and their returns, with regards to the fund’s objectives and expected cashflow requirements; Composition of investments and the risk of inadequate diversification; Liquidity of investments, with regards to expected cashflow requirements; Ability to discharge existing and prospective liabilities; and Whether insurance cover for one or more members should be held by the fund. Although these points need to be considered, it is up to the trustees to determine how they are applied, based on the circumstances of the fund. As an example, you must consider the diversification of the fund’s assets, but that does not mean you are required to have a diversified investment strategy. Many funds hold just a property and a bank account, and this may be appropriate for those funds. However, the trustees should document what consideration they gave to diversification, why the lack of diversification is appropriate and why they have chosen these particular assets. Likewise, there is no legal requirement to hold insurance cover for the members, but you do need to document that it has been considered. As noted above, a member starting a pension may be reason to review the fund’s investment strategy. This is due to the fact that this is likely to change the liquidity considerations and investment profile of the fund. When members are all in the pre-retirement growth phase, expenses are usually more predictable and there isn’t a need for many funds to hold large cash reserves. Once members reach the point they are accessing their benefits, as either pension or lump sum payments (or both), cashflow, liquidity and a potential cash buffer become a more important consideration. It is not uncommon that leading up to the end of any given financial year we will field enquiries and concerns from trustees that do not have the cash to satisfy even the minimum pension requirements for the year. While there may be several reasons for this, it should raise questions about the appropriateness of the fund’s current investment strategy and considerations as to whether a review of the asset holdings is warranted. If we revisit the one property and one bank account funds mentioned early, this may have been a reasonable strategy during the growth phase, but does it remain so during the drawdown phase? Although many people are comfortable with property and Australian investors in general have an affinity for the old bricks and mortar, this does not mean it is an appropriate investment in all circumstances. If the rental income from the property cannot support your retirement needs and minimum pension withdrawal requirements, something needs to change. This will hold true for any other investment that may not be easily sold, such as holdings in unlisted companies and trusts. Reviewing your fund’s investment strategy and giving consideration to the needs of the members and the asset holdings of the fund should not be seen as just a tick-a-box legal requirement. You’ve worked hard to build you retirement wealth and when the time comes, you want to be able to enjoy it. Having an appropriate investment strategy that will allow this is an important element of running an SMSF. Have you reviewed your strategy lately?

“Widow tax” fixed

By Clarke McEwan • October 21, 2026

Federal Parliament has closed an unintended loophole in the recent negative gearing and capital gains tax reforms that became widely known as the “widow tax”. At the same time, the Government also fixed a technical issue that could have affected people who first use a main residence to generate rental income after Budget night on 12 May 2026. What the problem was As you might be aware, the tax rules have recently been changed to ensure that losses generated from residential rental properties from 1 July 2027 can be ‘quarantined’. This means that they can only be offset against income or capital gains generated from other residential rental properties. However, the changes won’t generally apply to properties that were purchased by the relevant taxpayer before 12 May 2026. However, a problem could arise when an ownership interest in a property passes to someone as a result of the death of the original owner or because of a relationship breakdown and this occurs after 12 May 2026. Under the original version of the new rules, that transfer could be treated as a new acquisition. This could have meant that a surviving spouse or former partner risked losing the protected negative gearing treatment that had applied to the property in the hands of the previous owner. How it was fixed The Government moved quickly once the issue was identified. Some new rules now specifically protect people who acquire a residential property interest from a spouse because of death or relationship breakdown. The rules can also potentially protect someone who inherits an additional ownership interest in a rental property from a co-owner who isn’t their spouse. Case study 1 – the widow tax fix Sarah and David bought a rental unit in 2019 as equal joint owners. The property has always been negatively geared, with annual rental losses of around $8,000 offset against their other income each year. Under the original May 2026 reforms, the property was protected because it was acquired well before Budget night. However, if David had died and the property transferred fully into Sarah’s name, the additional 50% interest that Sarah inherited from David’s estate risked being treated as a new acquisition. Sarah could have lost the ability to claim the losses generated from this interest in the property against her other income. With the updated rules now in place, that outcome is avoided. Because the transfer occurs due to the death of a spouse, Sarah keeps the original protected treatment and can continue offsetting the rental losses in the same way as before. Former main residences A related technical issue also needed fixing. Under the original rules there was a risk that an existing main residence purchased before 12 May 2026 could lose its protected status if it was later first used to generate taxable rental income after that date. This was because of the interaction with a long-standing tax rule that can treat someone as if they had reacquired a former main residence when it is first used to produce income. The Government has now passed legislation to correct this. The new rules specifically disregard that “first use to produce income” rule when determining the acquisition date for negative gearing purposes. Case study 2 – renting out a former home James bought his home in 2018 and has lived in it as his main residence ever since. In 2027 he decides to move in with his partner and rent the property out for the first time. Under the original drafting of the 2026 reforms, first renting the property after 12 May 2026 risked resetting its acquisition date. That could have caused the property to be treated as a post-Budget night acquisition and subjected to the tighter negative gearing limits. With the new rules now in place, that reset is disregarded for negative gearing purposes. Because James originally acquired the property before 7:30 pm on 12 May 2026, it keeps its original acquisition date. He can continue to offset any rental losses in the same way as if the property had always been an investment property acquired before Budget night. Why these fixes matter Both changes remove sources of unexpected cash-flow disruption. The “widow tax” fix protects people at a difficult personal time. The main residence clarification gives homeowners greater flexibility if their circumstances change and they later decide to rent out a property they already own. What you should do now If you own a jointly held investment property acquired before 12 May 2026, the “widow tax” fix provides reassurance that a future transfer on death or separation should not remove negative gearing rights, but the rules are still complex and it is always best to have the position checked. If you own a main residence bought before 12 May 2026 and are considering renting it out in future, the new rule means the property should keep its original acquisition date for negative gearing purposes, but there could still be some complex CGT implications. Keep clear records of the original purchase date and ownership history. If either situation applies to you and you would like confirmation of how the amended rules work in your circumstances, contact us.

$21 billion in lost super is waiting

By Clarke McEwan • October 21, 2026

More than $21 billion in lost and unclaimed superannuation is currently sitting idle across Australia, according to the latest ATO figures. The average lost account holds around $41,000. Last year alone the ATO reunited more than $1.1 billion with members. That is real money that could be working harder for your retirement. Tax time is the natural moment to check whether any of it belongs to you. How super becomes “lost” Super generally becomes lost when an account becomes inactive and the fund can no longer contact the member. Common triggers include: Changing jobs and leaving an old account behind Moving house or updating your phone number without telling the fund Changing your name When the fund cannot reach you, the account may be classified as lost. In some cases, the balance is eventually transferred to the ATO to hold until the rightful owner claims it. The money does not disappear; it simply sits waiting to be reunited with its owner. A five-minute health check Finding lost super is straightforward and free. The quickest way is through ATO online services via myGov: 1. Log in to myGov and open the ATO section. 2. Select Super, then Fund details. 3. You will see any active accounts plus any lost or ATO-held super linked to your tax file number. You can also use the ATO app or call the automated lost super search line on 13 28 65. A paper form is available if you prefer. Many people are surprised by what turns up from old accounts from early jobs, small balances that have grown over time, or larger amounts they had completely forgotten about. Especially valuable if you are approaching retirement For clients still decades from retirement, finding lost super is useful. For those at or approaching retirement age it can be particularly meaningful. An extra $20,000 or $40,000 (or more) can make a noticeable difference to the size of the nest egg available to draw on. Even smaller amounts compound further once consolidated into a single active account that continues to earn returns and attract any future contributions. One important practical warning before you consolidate If you decide to roll multiple accounts into one preferred fund, check the insurance cover attached to each account first. Death, total and permanent disability, or income-protection cover that comes with a super account can sometimes end when the balance is rolled over. Losing that cover without realising it can leave a gap in your protection at the exact time you may need it most. Speak with your fund or adviser before consolidating so you understand exactly what will transfer and what will not. The commercial upside is simple Every dollar sitting in a lost or low-balance account is potentially earning less than it could, or incurring unnecessary fees. Bringing the money into one active account usually reduces fees, improves investment choice, and makes it easier to keep track of your overall position. The ATO’s reunification figures show that when people do the search, meaningful amounts are regularly returned. The process takes only a few minutes and costs nothing. Given that more than $21 billion is currently waiting to be claimed, the odds that some of it belongs to you are higher than many people expect. You can start the free search here: https://www.ato.gov.au/forms-and-instructions/superannuation-searching-for-lost-superannuation If you would like help interpreting what you find, or advice on whether consolidation makes sense in your circumstances (including the insurance check), just get in touch. A short conversation now can put money back into your retirement savings that might otherwise stay forgotten.

Travel records under the microscope

By Clarke McEwan • October 21, 2026

Travel records under the ATO microscope

Should You Buy or Lease Your Business Premises?

By Clarke McEwan • October 7, 2026

Owning your business premises can build long-term wealth and eliminate rent increases. Leasing can offer greater flexibility and preserve cash flow. Every business is different. Let us help you analyse the costs and benefits so you can make the right decision. 📞 Get in touch today.

Should you buy or lease your business assets?

By Clarke McEwan • September 18, 2026

There are certain items of equipment, machinery and hardware that are essential to the operation of your business – whether it’s the delivery van you use to run your client deliveries, diagnostic equipment in your medical practice or the high-end digital printer to run your print business. But when a critical business asset is required, should you buy this item outright, or should you lease the item and pay for it in handy monthly instalments? To buy or to lease? That is the question Buying new pieces of business equipment, plant, machinery or vehicles can be an expensive investment. So, depending on your financial situation, it’s important to weigh up the pros and cons of buying, or opting for a leasing option. First of all, let’s look at why you might decide to buy the item… Buying: the pros and cons: - Pro: It’s a tangible asset – when you buy an item, you own the item outright and it will appear on your balance sheet as one your business assets. As such, by owning these assets outright you increase the perceived capital and value of your business. You can also claim the cost of the asset against your capital allowance for tax purposes. - Pro: It’s yours for the life of the asset – once you own the item, you have full use of the equipment for the duration of the life of the asset. Your use of the asset isn’t reliant on you being able to keep up regular lease payments, and if your financial circumstances change then you can sell the asset to free up the capital. - Con: It’s an expensive outlay – paying for the item up-front is a large outlay for the business and will require you having the cash to cover this cost. Spending a large lump sum in this way may take cash away from other areas of the business, so you need to be 100% sure that this purchase is the right decision and a sound investment. - Con: You may require extra funding – if you don’t have the liquid cash available to buy the item outright, you may need to take out a loan. Asset finance is available from funding providers, but does tie you into a loan agreement that will add to your liabilities as a business – reducing your worth on the balance sheet. Leasing: the pros and cons: - Pro: Leasing has a cheaper entry point – if the item you need to purchase has a large price tag, leasing allows you to make use of the asset without the cost of buying it in full. For start-ups and smaller businesses with minimal capital behind them, this can make leasing a very attractive option. You may not own the asset, but you can make use of it – and this may be the difference between the success or failure of your business. - Pro: You can spread the cost – there is still an associated cost of leasing, but you can spread the cost over a longer period, making it easier to find the necessary liquid cash to meet your lease payments. With this money saved, you can then invest in other areas of the business, helping you to expand, grow and bring in more customers and revenue. - Con: You don’t own the asset – there are different types of leasing agreement. Under a capital lease, you do own the asset (once you’ve paid if off). But if you opt for an operating lease, this is a more short-term lease and you won’t own the asset at the end of the contract. Ownership does have its advantages (including being able to sell off the asset if required) so it’s important to consider what kind of leasing agreement you’re entering into and what the advantages/disadvantages may be. - Con: You may pay more in the long run – most leasing agreements will attract additional costs and interest on your agreement, so you may well end up paying more than the market price for your asset in the long term. If you can cope with the higher cost, this is fine, but bear in mind that buying outright may have offered greater value. - Con: You may lose the use of the asset – if you can’t keep up your lease payments (due to poor cashflow for example) then the owner of the lease agreement may recall the asset. If this item is crucial to your business model, losing this key asset can have a profound impact on your ability to operate. In this respect, leasing is a more risky prospect, but also an easier option for businesses with less cash to splash.Talk to us about whether buying or leasing is the best way forward. Whether you opt to buy or lease your equipment isn’t always a straightforward decision to make – so it’s a good idea to consult with your accountant early on in the decision-making process. We’ll help you review your current financial position, assess your available cashflow and look at your regular cost base to decide whether buying or leasing is the right thing for your business.