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Understanding Section 100A and PCG 2022/2: What It Means for Family Trusts in 2025

· 4 min read
Myaccountant Team

Section 100A of the Income Tax Assessment Act 1936 has been on the books for decades, but it has taken on renewed significance following the ATO's release of Practical Compliance Guideline PCG 2022/2. For the thousands of Australian families that operate through discretionary trusts, understanding these rules is now essential.

What Is Section 100A?​

Section 100A is an anti-avoidance provision that targets trust distributions where the beneficiary who is made presently entitled to income is not the person who actually benefits from it. In simple terms, it applies where a trust distributes income to one person on paper, but the real economic benefit flows to someone else — typically a higher-income family member who would otherwise pay more tax.

When Section 100A applies, the trustee is assessed on the distributed income at the top marginal tax rate, currently 47 per cent (including the Medicare levy). The tax benefit of distributing to a lower-income beneficiary is effectively reversed.

How PCG 2022/2 Changes the Landscape​

The ATO's Practical Compliance Guideline PCG 2022/2 sets out how the ATO will allocate compliance resources to trust distribution arrangements. It establishes a risk framework with four zones: white (low risk), green (low risk), blue (moderate risk), and red (high risk).

White zone arrangements include distributions to adult beneficiaries who receive the funds and use them for their own benefit. These are straightforward and unlikely to attract ATO scrutiny.

Green zone arrangements involve distributions where the beneficiary benefits from the income indirectly — for example, where distributed funds are used to pay household expenses. The ATO considers these low risk provided there is a genuine connection between the beneficiary and the benefit.

Blue and red zone arrangements involve circular flows of funds, distributions to beneficiaries with little or no involvement in the trust, or arrangements that appear designed primarily to reduce tax. These will attract ATO review.

Practical Implications for Family Trusts​

The key takeaway for families operating through discretionary trusts is that the substance of distributions matters more than ever. The ATO is looking beyond the trust deed and the resolution — it wants to see that the beneficiary who is entitled to the income actually receives and controls it.

Common arrangements that may now carry risk include:

  • Distributing to adult children who return the funds to parents. If the child is entitled to income but the money flows back to a parent through loans, gifts, or payments for living expenses, Section 100A may apply.
  • Distributing to low-income beneficiaries who do not receive the funds. Where income is allocated to a beneficiary on paper but remains in the trust or is applied for the benefit of another person, the arrangement is in the blue or red zone.
  • Unpaid present entitlements (UPEs) that are never settled. Large UPE balances that accumulate year after year can indicate that the beneficiary is not genuinely benefiting from the distribution.

What Trustees Should Do​

Trustees and their advisers should review existing distribution practices against the PCG 2022/2 framework. Key steps include:

  1. Ensure beneficiaries receive real economic benefit from distributions made to them.
  2. Document the purpose and flow of funds for each distribution. Clear records reduce the risk of an adverse ATO assessment.
  3. Avoid circular arrangements where funds distributed to one beneficiary are returned to the trust or redirected to another party.
  4. Review UPE balances and develop a plan to settle or reduce them over time.
  5. Seek professional advice. The interaction between Section 100A, Division 7A, and general anti-avoidance provisions is complex. A qualified tax adviser can assess your specific arrangements and recommend adjustments where needed.

Section 100A is not new, but the ATO's willingness to enforce it is. Trustees who take the time to review and adjust their practices now will be in a far stronger position than those who wait for an audit.