Family Trust Distributions: How to Stay Golden Under the ATO’s Current Rules
Updated June 2026
Family trusts can be a powerful structure for asset protection, tax planning and family wealth management. But like gold, they need to be handled carefully. A well-managed trust can shine; a poorly documented or tax-driven arrangement can quickly lose its lustre under ATO scrutiny.
In recent years, the Australian Taxation Office has increased its focus on family trust distributions, particularly where income is allocated to adult children, companies, or other beneficiaries who do not actually receive or enjoy the economic benefit of that income.
This article explains the current position on section 100A reimbursement agreements, adult child trust distributions, corporate beneficiaries, unpaid present entitlements, and Division 7A.
Key Takeaways
- Section 100A is not a new law. It is an anti-avoidance rule introduced in 1979, but the ATO finalised updated guidance in TR 2022/4 and PCG 2022/2.
- The ATO is concerned when one beneficiary is made presently entitled to trust income, but someone else receives the real benefit.
- Distributions to adult children are not automatically a problem, but they may attract attention where parents benefit from those entitlements.
- Corporate beneficiary unpaid present entitlements need fresh review, especially following the High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18.
- Documentation is gold. Trust deeds, resolutions, payment records, beneficiary acknowledgements and commercial reasoning are critical.
- The safest approach is proactive review before 30 June each year.
What Is a Family Trust?
A trust is a structure where a trustee holds assets or carries on business for the benefit of beneficiaries. As business.gov.au explains, “a trustee holds your business for the benefit of others.”
Family trusts are commonly used by Australian business owners, investors and farming families because they may offer flexibility in distributing income and managing family wealth. However, that flexibility comes with strict tax rules.
The trustee must act in accordance with the trust deed, make valid distribution resolutions, and ensure the tax outcome reflects the substance of what has actually happened.
What Is Section 100A?
Section 100A is an anti-avoidance rule in the Income Tax Assessment Act 1936. It can apply where a beneficiary is made presently entitled to trust income under an arrangement where:
- another person receives a benefit;
- there is a purpose of reducing tax; and
- the arrangement is not an ordinary family or commercial dealing.
The ATO states that a reimbursement agreement can involve an arrangement where “a beneficiary is made presently entitled to trust income” and someone else receives a benefit in connection with the arrangement.
The key point is this: the ATO is not simply looking at who is named in the distribution resolution. It is looking at who actually receives the benefit of the trust income.
Why Has This Become Such a Big Issue?
Section 100A has existed since 1979, so the law itself is not new. What has changed is the ATO’s published guidance and compliance approach.
The ATO finalised its key guidance in:
- TR 2022/4 – Income tax: section 100A reimbursement agreements
- PCG 2022/2 – Section 100A reimbursement agreements: ATO compliance approach
- TA 2022/1 – Parents benefitting from the trust entitlements of their children over 18 years of age
In simple terms, the ATO wants to distinguish between ordinary family or commercial arrangements and arrangements designed to place income in the hands of a lower-tax beneficiary while the real benefit flows elsewhere.
Adult Children and Trust Distributions: What Is the ATO Looking For?
Distributing trust income to adult children is not automatically wrong. Many family trusts legitimately distribute income to adult children who are genuine beneficiaries.
The risk increases when an adult child is made presently entitled to income, but:
- the money is never actually paid to them;
- the funds are used by the parents;
- the child is expected to gift or return the money;
- the entitlement is offset against family expenses without proper evidence;
- the arrangement appears mainly designed to access the adult child’s lower marginal tax rate.
The ATO’s Taxpayer Alert TA 2022/1 specifically addresses arrangements where parents benefit from trust entitlements of children over 18.
Golden rule
If the trust resolution says the adult child received the income, your records should be able to show that the adult child genuinely received, used, controlled, or benefited from that income.
If the paperwork says one thing but the money trail says another, the arrangement may not glitter for long.
What Happens If Section 100A Applies?
If section 100A applies, the intended tax outcome may be unwound. The beneficiary may be treated as not being presently entitled to the relevant trust income, and the trustee may instead be assessed.
In many cases, this can result in tax being payable by the trustee at the top marginal rate.
That is why trust distribution planning should never be reduced to “who has the lowest tax rate this year?” The better question is:
Who is genuinely intended to receive and enjoy this income, and can we prove it?
The ATO’s Risk Zones: Green, Blue and Red
PCG 2022/2 sets out the ATO’s compliance approach to section 100A arrangements.
While every arrangement needs to be assessed on its own facts, the ATO broadly categorises arrangements by risk.
Green zone
These are generally lower-risk arrangements. For example, where beneficiaries receive and use their entitlement, or where the arrangement is consistent with ordinary family or commercial dealing.
Blue zone
These arrangements are not necessarily high risk, but they may require closer review and better documentation.
Red zone
These are higher-risk arrangements that are more likely to attract ATO attention. Red-zone arrangements may involve circular flows of funds, tax-preferred beneficiaries, unpaid entitlements, or arrangements where the economic benefit clearly lands with someone other than the beneficiary assessed.
The goal is not to “paint” an arrangement green after the fact. The goal is to ensure the actual arrangement has commercial or family substance and is properly recorded.
Corporate Beneficiaries, UPEs and Division 7A
Many family groups use a private company as a beneficiary of a family trust. This can be legitimate, but it requires careful management.
A common issue is an unpaid present entitlement, often called a UPE. The ATO explains that a UPE arises where a private company beneficiary is presently entitled to trust income but does not actually receive payment of that distribution.
For trust entitlements created on or after 1 July 2022, the ATO published TD 2022/11 on when an unpaid present entitlement or amount held on sub-trust may become the provision of financial accommodation.
However, this area now needs fresh attention because of the High Court’s decision in Commissioner of Taxation v Bendel [2026] HCA 18, delivered on 10 June 2026.
The High Court case considered whether unpaid present entitlements of a corporate beneficiary were loans for the purposes of section 109D of Division 7A.
This decision is highly relevant for trusts with corporate beneficiaries. However, it should not be treated as a free pass. Trust deed wording, distribution resolutions, whether separate trusts are created, whether a debtor-creditor relationship exists, and other Division 7A provisions may still matter.
At the time of this June 2026 update, trustees and advisers should review any further ATO response before changing their treatment of corporate beneficiary UPEs.
Record Keeping: The Golden Shield
Good records are often the difference between a defensible trust arrangement and a costly ATO dispute.
Trustees should keep:
- signed trust distribution resolutions before 30 June;
- the current trust deed and any amendments;
- beneficiary account records;
- payment records showing who received the funds;
- loan agreements where relevant;
- evidence of expenses paid on behalf of beneficiaries;
- beneficiary acknowledgements where appropriate;
- notes explaining the commercial or family reasons for the distribution.
Think of your records as the bullion vault. If the ATO asks questions later, your documentation is what protects the value of your position.
Practical Examples
Example 1: Adult child genuinely receives the income
A family trust distributes income to an adult child. The amount is paid to the child’s bank account. The child uses the money for university costs, rent and personal savings.
This is more likely to be defensible, assuming the trust deed and resolution are valid and the arrangement reflects ordinary family dealings.
Example 2: Adult child assessed, parents benefit
A family trust distributes income to an adult child on a lower tax rate. The amount is not paid to the child. Instead, the funds remain in the parents’ business or are used for the parents’ personal expenses.
This is more likely to attract ATO attention.
Example 3: Company beneficiary not paid
A family trust distributes income to a private company beneficiary, but the amount remains unpaid. This may raise Division 7A and UPE issues and should be reviewed carefully, especially in light of the Bendel decision and any updated ATO guidance.
What Should Trustees Do Before EOFY?
Before year-end, trustees should review:
- Whether the trust deed allows the proposed distributions.
- Whether distribution resolutions will be made validly and on time.
- Whether beneficiaries will actually receive or benefit from the income.
- Whether any adult-child distributions could be questioned under TA 2022/1.
- Whether any company beneficiary UPEs create Division 7A issues.
- Whether the arrangement falls within a lower-risk or higher-risk category under PCG 2022/2.
- Whether records are strong enough to support the arrangement if reviewed later.
The best time to polish your trust structure is before 30 June, not after the ATO has started asking questions.
Final Word: Keep Your Trust Strategy Bright, Not Tarnished
Family trusts remain valuable structures for many Australian families and business owners. But the ATO’s current guidance makes one thing clear: trust distributions need substance, documentation and a genuine commercial or family basis.
A tax-effective outcome is not a problem by itself. The problem arises when the arrangement looks artificial, circular, undocumented, or designed so that one person is taxed while another person enjoys the benefit.
If your family trust distributes income to adult children, companies, related trusts, or other tax-preferred beneficiaries, now is the time to review your arrangements.
Need Help Reviewing Your Family Trust?
At DJ Grigg Financial, we can help you review your trust deed, distribution strategy, beneficiary entitlements, Division 7A exposure and year-end documentation.
Before 30 June, make sure your trust planning is as solid as gold.
Contact DJ Grigg Financial today to book a family trust review.