Managing Trust Liquidity: Navigating Division 7A and Increased ATO Scrutiny

For Australian families and French expats using discretionary trust structures, the era of 'set and forget' distributions has ended. The Australian Taxation Office (ATO) has significantly sharpened its focus on how income flows through trusts to corporate beneficiaries (bucket companies), while the rising interest rate environment has increased the cash flow burden on internal loan repayments.

The Benchmark Rate Squeeze

Many investors use 'bucket companies' to cap the tax on trust income at the corporate rate (currently 25% or 30% depending on the company's status). However, where that income is not physically paid to the company but instead used by the trust for investments or property acquisitions, a Division 7A loan is typically created. This loan must be repaid over a set term (usually 7 years for unsecured loans) at a benchmark interest rate set by the ATO [1].

For the 2024-25 financial year, the Division 7A benchmark interest rate was set at 8.77% [1]. This represents a significant increase from the 4.52% rate seen only a few years prior. For a trust with a $500,000 internal loan, this rate hike adds thousands of dollars to the mandatory annual minimum repayment. Failure to make these principal and interest repayments by the relevant lodgment deadline results in the unpaid amount being treated as a 'deemed dividend,' taxed at the beneficiaries' marginal rates plus potential penalties [1].

Section 100A and 'Project Integrity' Risks

The ATO's Trusts Taskforce is currently scrutinizing 'reimbursement agreements' under Section 100A of the Income Tax Assessment Act 1936. This anti-avoidance provision targets arrangements where income is distributed to a low-tax beneficiary (such as an adult child or a bucket company), but the actual economic benefit is retained by someone else, usually the parents or the trust itself [2].

Following the Tax Ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2, the ATO has established a 'traffic light' system for compliance risk. Arrangements where children are named as beneficiaries but never receive the cash, which is instead used to pay for the parents' lifestyle or mortgage, are now considered high-risk 'Red Zone' activities [3]. If Section 100A is successfully applied, the distribution is disregarded, and the trustee is taxed at the top marginal rate of 45% [2].

Strategic Adjustments for Investment Portfolios

For investors using trusts to fund property or share acquisitions, these changes necessitate a review of liquidity. The higher benchmark interest rates mean that the trust must generate sufficient cash flow to service the internal debt back to the bucket company. If the underlying investments (such as negatively geared property) do not produce enough cash, the trustee may be forced to liquidate assets or find external capital to satisfy the Division 7A requirements.

• Physical Cash Transfers: Ensure that distributions to adult children are either physically paid or that the children genuinely have the power to call upon the funds for their own benefit to avoid Section 100A triggers [3].
• UPE Management: Unpaid Present Entitlements (UPEs) created after July 2022 must generally be placed on complying Division 7A loan terms to avoid being treated as a deemed dividend [2].
• Superannuation Contributions: Note that the Superannuation Guarantee (SG) rate rose to 12% on 1 July 2025, which may impact the cash flow of business-operating trusts [4].

The combination of high Division 7A rates and aggressive ATO positioning on trust distributions means that the 'paper-only' distribution model is essentially obsolete. Investors must prioritize documenting the commercial reality of their trust operations and ensure their portfolios can support the increasing cash demands of internal loan compliance.

Sources

[1] Australian Taxation Office, Division 7A - benchmark interest rate: https://www.ato.gov.au/tax-rates-and-codes/division-7a-benchmark-interest-rate
[2] Australian Taxation Office, TR 2022/4 - Income tax: section 100A reimbursement agreements: https://www.ato.gov.au/law/view/document?DocID=TXR/TR20224/NAT/ATO/00001
[3] Australian Taxation Office, PCG 2022/2 - Section 100A compliance approach: https://www.ato.gov.au/law/view/document?DocID=COG/PCG20222/NAT/ATO/00001
[4] Australian Taxation Office, Super guarantee percentage: https://www.ato.gov.au/tax-rates-and-codes/key-superannuation-rates-and-thresholds/super-guarantee
[5] Assemblée Nationale (France), Question N° 6186 (No bilateral agreement France-Australia): https://questions.assemblee-nationale.fr/q16/16-6186QE.htm
[6] Direction Générale des Finances Publiques, Prélèvements sociaux pour non-résidents: https://www.impots.gouv.fr/international-particulier/questions/je-suis-non-resident-suis-je-redevable-des-contributions

This article contains general educational information only and does not constitute personal financial, legal, or tax advice. Please consult a licensed professional before making any financial decisions.