A real-world case study on trust distributions Mark and Lisa had what most people would describe as a “pretty standard” setup. They ran a successful family business through a discretionary trust. The trust had been in place for years, established when the business was small and cash was tight. Over time, the business grew, profits improved, and the trust started distributing decent amounts of income each year. The tax returns were lodged. Nobody had ever had a problem with the ATO. So naturally, they assumed everything was fine. This is where the story starts to get interesting. Year one: the harmless decision In a good year, the business made about $280,000. It was suggested that some income be distributed to Mark and Lisa’s two adult children, Josh and Emily. Both were over 18, both were studying, and neither earned much income. On paper, it made sense. Josh received $40,000. Emily received $40,000. The rest was split between Mark, Lisa, and a company beneficiary. The tax bill went down. Everyone was happy. But here’s the first quiet detail that mattered later. Josh and Emily never actually received the money. No bank transfer. No separate accounts. No conversations about what they wanted to do with it. The trust kept the funds in its main business account and used them to pay suppliers and reduce debt. At the time, nobody thought twice. “It’s still family money.” “They can access it if they need it.” “We’ll square it up later.” These are very common thoughts. And this is exactly where risk quietly begins. Year two: things get a little more complicated The next year was even better. They used a bucket company to cap tax at the company rate. Again, a common and legitimate strategy when used properly. So the trust distributed $200,000 to the company. No cash moved. It was recorded as an unpaid present entitlement. The idea was that the company would get paid later, when cash flow allowed. Meanwhile, the trust needed funds to buy new equipment and cover a short-term cash squeeze. The trust borrowed money from the company. There was a loan agreement. Interest was charged. Everything looked tidy on paper. From the outside, it all seemed sensible. But economically, nothing really changed. The trust made money. The trust kept using the money. The same people controlled everything. The bucket company never actually used the funds for its own business or investments. This detail becomes important later. Year three: circular money without anyone realising By year three, things had become routine. Distributions were made to the kids again. The bucket company received another entitlement. Loans were adjusted at year-end through journal entries. What is really happening is a circular flow. Money was being allocated to beneficiaries, then effectively coming back to the trust, either because it was never paid out or because it was loaned back almost immediately. No one was trying to hide anything. No one thought they were doing the wrong thing. They were just following what they’d always done. This is how section 100A issues usually arise. Slowly, quietly, and without any single dramatic mistake.

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