Trusts Are Currently Under The ATO Microscope: Is Yours Compliant?
If you have your finances and assets tied up in a trust, now is the time to assess and make sure you are compliant.
The Australian Taxation Office (ATO) has recently renewed its focus on Section 100A of the Income Tax Assessment Act 1936, a section that was designed to make sure that family trusts are being used as they were originally intended. Essentially, the ATO wants to ensure trust structures only support genuine business and family arrangements, not tax-avoidance tactics.
This renewed scrutiny follows a growing concern that some professionals may be using family trusts to distribute income from their own personal labour to family members on lower tax rates. While this has been a common strategy for years, the ATO now considers many of these arrangements as stepping into tax avoidance territory. That’s where Section 100A comes into play.
What is Section 100A?
Section 100A is an anti-avoidance rule that targets arrangements where a beneficiary of a trust is made “presently entitled” to income (essentially, they’re legally owed a share), but the actual benefit ends up with someone else, which is often the trustee or another family member.
If the ATO finds that this setup was designed to reduce tax rather than for a genuine family or business purpose, it can cancel that distribution entirely and tax the trustee instead, at the top marginal rate (47%).
For example —
A family trust distributes $100,000 of income to an adult child who’s studying and has no other income, so they’ll pay very little tax.
But, instead of the child receiving or using that money themselves, the funds are redirected to pay household bills, a parent’s mortgage, or back into the family business.
In this case, the ATO can apply Section 100A, as the child never truly benefited from these funds, only the parents. The distribution would be ignored, and the trust would be taxed at the highest rate.
Why is the ATO cracking down?
The ATO’s renewed interest in Section 100A is part of a broader effort to tighten tax integrity and ensure that everyone pays their fair share.
Family trusts have long been a powerful tool for asset protection and wealth management, but they’ve also been used (and sometimes abused) to shift income purely for tax advantages.
By enforcing Section 100A more aggressively, the ATO aims to level the playing field, making sure that income from personal effort and skill is taxed in the hands of the person who actually earned it, not spread around to minimise tax responsibility.
Additionally, the ATO is facing political and economic pressure. This past August, at the federal government’s Economic Reform Roundtable, Labor highlighted the potential to raise around $19 billion by tightening the taxation of trusts. As a result, the ATO’s approach is changing. Where they were once somewhat lenient on certain income-splitting arrangements accepted as industry custom, they are now taking a much stricter stance.
So, who does this scrutiny affect?
This crackdown will primarily affect family or discretionary trusts – which is one of the most common structures used by small business owners, investors, and professionals across Australia.
You might fall within the ATO’s sights if:
You operate a business or hold investments through a family trust.
You make trust distributions to adult children or other family members who don’t actually receive or use the income
You distribute income to a company or another trust, but the real benefit goes elsewhere.
You have complex or circular arrangements, such as unpaid entitlements or loans that blur who’s actually benefiting from the income.
It is worth noting that the ATO has made it very clear that most small business owners and families using their trusts genuinely have nothing to fear. The issue lies in arrangements where the paperwork and reality don’t match up.
Why does this all matter?
If Section 100A applies, the consequences can be pretty severe.
For instance —
You can get taxed at the top marginal rate (47%) on the income in question.
There is no time limit on how far back the ATO can go to review and amend returns under Section 100A.
There are penalties and interest on any underpaid tax they find.
Beyond that financial hit, there can also be a compliance and reputational risk. Once the ATO starts digging, it can often lead to a broader review of your structure. This means that keeping things transparent and defensible is immensely important, especially now.
How can I stay compliant?
The good news throughout this time of added scrutiny is that staying on the right side of the ATO isn’t complicated. It just requires clarity, documentation, and intent.
Here’s what you need to do to protect yourself —
One, ensure the beneficiary actually benefits. If you’re making a distribution, make sure the entitled person is truly receiving the funds or the benefit, not someone else.
Two, keep proper records. Maintain trustee resolutions, meeting minutes, and clear evidence of where the money goes. The ATO wants to see that the beneficiary’s entitlement is real and traceable.
Three, understand what “ordinary family or commercial dealings” means and if it applies to you. Section 100A doesn’t apply to genuine arrangements made for family or business reasons, like helping a child buy their first car, paying for education, or retaining income for business working capital. But anything that looks contrived or primarily designed to reduce tax will attract scrutiny.
Four, review your trust distributions annually. Don’t just roll over the same approach each year. Sit down with your accountant or advisor to make sure your trust’s distributions are documented correctly and reflect what’s truly happening. Additionally, avoid complex structures as simple and straightforward arrangements are less likely to raise concerns.
Five, avoid circular or artificial arrangements. If money flows from the trust to a beneficiary and straight back to the trustee or another family member, that is a red flag and needs to be avoided.
Six, don’t hesitate to seek professional advice. The rules around Section 100A are complex, and the ATO’s interpretation continues to evolve. Sitting down with a tax specialist can be immensely beneficial in helping to assess your current risk and keep your structure clean.
Here at FRE.DM Wealth, we believe that smart wealth-building isn’t about pushing the limits, but about understanding the rules deeply enough to use them to your advantage, while keeping yourself risk-free from crackdowns such as these.
If you’re feeling uncertain about where your trust stands under the ATO’s renewed guidelines, we’re here to help. Together, we’ll review your structure, clarify your next steps to ensure compliance, and make sure everything is aligned to support your financially abundant future.
