Distributions to tax-exempt beneficiaries: anti-avoidance rules

This information is for trustees with tax-exempt beneficiaries who are presently entitled to trust income.

Specific anti-avoidance rules prevent trustees from using tax-exempt entities to avoid tax (sections 100AA and 100AB of the Income Tax Assessment Act 1936).

Broadly, the anti-avoidance rules apply if a tax-exempt beneficiary is presently entitled to trust income for an income year and:

• the trustee does not notify the beneficiary of their entitlement or pay the income within two months of the end of the year – this is the pay or notify rule, or
• the beneficiary's entitlement exceeds a 'benchmark percentage' – this is the benchmark percentage rule.

If either of these rules apply, the tax-exempt beneficiary is treated as not being – and never having been – presently entitled to the affected share of trust income. This share of net income is instead assessed to the trustee.