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Family trust distributions and Section 100A when someone else gets the benefit
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Overview
Before your family trust distributes income, check who will actually use the money. A prior agreement for someone else to benefit can change who pays the tax.
When Section 100A can apply
Your family trust plans to distribute income to an adult daughter. She’ll pay tax on it, but the family has already agreed that the money will go back to her parents for their home loan. That agreement deserves a conversation before the trustee signs. It raises a question that a distribution minute alone can’t answer. Who gets the benefit?
Section 100A deals with certain arrangements known as reimbursement agreements. Broadly, someone becomes entitled to trust income under an arrangement that benefits someone else, and reducing income tax is a purpose of that arrangement. The agreement can be informal. If the section applies, the trustee can generally be assessed on that income at the top marginal rate.
There’s an exception for agreements made in the course of ordinary family or commercial dealings. Being related doesn’t establish the exception on its own. Equally, a delay between a distribution and a cash payment doesn’t settle the matter. The full arrangement, including why the family made it, matters.
Talk through the payment while everyone is at the table
Ask who will control the money, who will bear the tax, whether anyone has agreed to pass on a benefit and what each person understands about their entitlement. Keep the resolution, beneficiary account, bank movements and any loan or gift documents together. The paperwork should reflect the decision the family actually made.
If the proposed beneficiary would be surprised to learn what’s being distributed to them, pause before signing.
