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

Family trusts have long been a popular structure in Australia for professionals like doctors, lawyers, consultants, and business owners. They allow for flexibility in income distribution and help manage tax efficiently within the family group.

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But if you’re using a discretionary trust to distribute income to family members, you need to understand section 100A of the Tax Act — and the ATO’s compliance guide PCG 2022/2.

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These rules can result in hefty tax bills if trust distributions are made on paper to someone, but the money is really used by someone else.

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Let’s break it down in simple terms.

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What is Section 100A?

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Section 100A is a rule that lets the ATO cancel a trust distribution if it’s part of a reimbursement arrangement.

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A reimbursement arrangement typically happens when:

1. A beneficiary is made entitled to trust income,
2. But someone else gets the actual benefit, and
3. There was an understanding or plan in place to make this happen, usually to save tax.

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If section 100A applies, the ATO can ignore the distribution and tax the trustee at 47%, regardless of the beneficiary’s tax rate.

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What is PCG 2022/2?

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PCG 2022/2 is the ATO’s Practical Compliance Guideline that explains when it will apply section 100A and how it assesses risk.

It introduces a traffic light risk system:

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🟢 Green Zone (Low Risk):

• Distributions to individuals who get the money and benefit from it themselves.
• Typical family arrangements where income is used by the beneficiary for living expenses.

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🔵 Blue Zone (Uncertain):

• A bit grey – not clearly high or low risk.
• May require further review or a private ruling.

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🔴 Red Zone (High Risk):

• Distributions made to a person (often adult children or other relatives) on paper, but the funds are used by someone else, like parents or the controller of the trust.
• These are seen as deliberate tax minimisation strategies.
• The ATO will likely investigate.

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Common Example: The Professional Family Trust

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Let’s say Dr. Smith, a successful medical professional, runs his clinic through a discretionary family trust. The trust earns $300,000 in profit.

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To reduce the family’s tax, Dr. Smith:

• Distributes $90,000 each to his two university-aged children.
• They have no other income, so their marginal tax rate is low.
• But the children never actually receive the money.
• The funds are either:
  • Left in the trust,
  • Used to pay family bills,
  • Or reinvested into the business under Dr. Smith’s control.

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Why is this a problem?

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• The beneficiaries (the children) were used to access lower tax rates.
• But the real benefit went to someone else (the parent).
• There was likely an agreement or understanding to do this from the start.

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ATO's view:

• This is a red zone arrangement under PCG 2022/2.
• Section 100A may apply.
• The ATO could ignore the distribution, and the trust could be taxed at 47% on $180,000 of income.

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What Should Trustees and Advisors Do?

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1. Review Existing Arrangements

Go back and look at:

• Who received trust distributions.
• Whether they actually received the cash or benefit.
• Whether someone else controlled or used the money.

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2. Avoid Reimbursement Arrangements

• Ensure the person who gets the distribution also gets the benefit of it.
• Avoid “on paper” entitlements where someone else uses the money.

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3. Keep Clear Documentation

• Show evidence of bank transfers, spending, or savings in the beneficiary’s name.
• Maintain meeting minutes and distribution resolutions.

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4. Use Green Zone Structures

• Make genuine distributions to family members who use the money.
• If you want to reinvest income into the business, consider retaining profits in the trust and paying tax accordingly.

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5. Seek Professional Advice

If your structure is in the blue or red zone, speak to your accountant or apply for an ATO private ruling.
Being proactive can help avoid unexpected tax bills and penalties.

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When Does This Apply?

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The ATO applies PCG 2022/2 to:

• Arrangements entered into before and after 1 July 2022.
• While the ATO has said it will be more flexible for older arrangements, they are still within scope if high-risk.

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Final Thoughts

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Section 100A and PCG 2022/2 have serious implications for discretionary trusts used by professionals and family businesses.

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The days of distributing income to low-tax family members who never see the money are numbered.

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To avoid trouble:

• Understand your trust structure
• Follow the ATO’s guidance
• Work with a trusted tax advisor to ensure compliance.

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