Section 99A: Trustee Tax on Retained Income

Section 99A taxes the trustee on residual net income when the beneficiary assessment rules do not allocate that amount elsewhere. For an ordinary discretionary trust, establish present entitlement before calculating the trustee’s liability. Cash left in the bank does not establish retained taxable income.

Identify the Income Assessed to the Trustee

Start with the trust deed’s income definition and determine who has an effective entitlement to that income. Prepare the tax reconciliation separately, because accounting profit and taxable net income can differ.

Use the deed and any amendments to establish distributable income. Then inspect the entitlement decision and any default-beneficiary clause. Record each beneficiary’s entitlement, legal capacity and residency before allocating taxable net income under Division 6 of the Income Tax Assessment Act 1936.

A valid unpaid entitlement can exist while cash remains in the trust. Conversely, a cash payment does not prove that an effective entitlement arose. Examine the legal rights and supporting records before treating either balance as the trustee’s assessment base.

Fictional Income Reconciliation

Assume an ordinary resident discretionary trust has no capital gains or franked distributions. Its deed-defined income is $80,000 and its taxable net income is $100,000 after a $20,000 non-deductible expense adjustment. Assume that the deed excludes that adjustment from distributable income.

Assume the trust also has $50,000 in its bank account. The assessment calculation still starts with the $25,000 residual taxable net income. That bank balance could include borrowings or amounts already owed to beneficiaries.

Incorrect: Apply the trustee tax rate to the $50,000 bank balance.

Correct: Reconcile deed-defined income to entitlements, then allocate taxable net income and explain the $25,000 trustee amount.

Keep this assessment workpaper with the annual trust tax return file so the distribution figures trace to the same reconciliation.

Section 99A and Section 99

Section 99 applies only when section 99A does not apply to the trust for that income year. The trustee cannot elect the lower route because the result is cheaper.

Section 99A provides an exception for specified estates and trusts where the Commissioner considers its application unreasonable. These include deceased estates, specified bankrupt estates and trusts holding property described in paragraph 102AG(2)(c).

For an exception claim, retain the trust’s origin and the facts relevant to the Commissioner’s opinion. These include how property or money reached the trust and any special benefits or rights. A qualifying description alone does not establish the required opinion.

Apply this assessment sequence before choosing the return treatment:

1. Identify the trust’s residency and the income’s source. A non-resident trust requires a separate source analysis.
2. Allocate amounts assessed to beneficiaries under section 97 or to the trustee under section 98. Keep those amounts separate from residual trustee income.
3. Determine whether a statutory exception removes section 99A. Record the supporting facts and any ruling or correspondence about the Commissioner’s opinion.
4. Apply section 99 to the remaining relevant income only if section 99A does not apply. Otherwise calculate the section 99A assessment.

Section 99 uses the applicable trustee rate schedule. Deceased-estate treatment depends on the estate’s circumstances and age, so ordinary discretionary-trust assumptions cannot be carried across. The Income Tax Rates Act contains both the section 99A rate and the section 99 schedules.

Calculate and Reconcile the Assessment

Calculate tax on the supported trustee assessment base. Reconcile the resulting liability to credits and amounts already paid. Use the income year under review throughout the workpaper.

For the fictional 2025-26 discretionary trust above, the section 99A income-tax rate is 45%. The separate Medicare levy is 2%, giving a combined 47% before credits. The Medicare levy provisions set the levy rate.

Income tax on $25,000 is $11,250. Medicare levy adds $500, so the estimated liability is $11,750. Assume no credits or instalments in this example. A corporate trustee uses the trustee assessment rules for this income, rather than its company tax rate.

Capital Gains and Franked Distributions

Calculate these components through their specific allocation rules before applying the ordinary-income proportion. Division 6E adjusts the ordinary Division 6 calculation, while Subdivisions 115-C and 207-B allocate those components separately.

For a section 99A assessment, section 115-222 reverses the relevant capital gains tax discount and small-business 50% reduction. Check specific entitlements and the trustee’s share of each gain before calculating that adjustment.

For franked distributions, calculate the trustee’s attributed distribution and franking-credit gross-up. Then establish entitlement to the corresponding tax offset under Subdivision 207-B. Check the holding-period and related-payment rules before allowing a credit.

The following separate fictional 2025-26 example shows why multiplying the return’s net income by 47% can understate the liability. Assume all income is retained by an ordinary resident discretionary trust. There are no beneficiary entitlements, losses or instalments. The franking-credit requirements are satisfied.

Trace the $30,000 net income to the return and retain the $10,000 trustee adjustment separately. A calculation of $30,000 multiplied by 47%, less $3,000, would produce $11,100. That understates this example’s liability by $4,700.

Before lodgment, match the trustee assessment code and distribution amounts to the workpaper. Reconcile capital gains and franking credits to their schedules without counting either twice. Compare the tax software estimate with the independent calculation, then deduct actual instalments and other available credits. Investigate any difference before finalising the return.

Deal With an Ineffective Distribution

A missing or ineffective entitlement decision requires you to establish who actually became entitled under the deed and applicable law. A default-beneficiary clause can change the result even when the intended decision fails.

Retain the signed decision, deed clauses and contemporaneous evidence of what the trustee decided and when. Preserve the original records. A journal entered later cannot itself create a timely entitlement, and backdating a document cannot repair one.

If the legal effect is unclear, obtain advice on the existing rights before finalising the assessment. Use the trust distribution resolution guide for the separate entitlement-document task. This workpaper records the assessment consequence of the decision that actually occurred.

A reimbursement agreement raises a different question even where an entitlement appears effective. Investigate who receives the economic benefit and whether an arrangement involves a tax-reduction purpose outside ordinary family or commercial dealing. The ATO explains these triggers in TR 2022/4.

Section 100A can deem the beneficiary never to have been presently entitled to the relevant income. That can leave an amount assessed to the trustee under section 99A. Cash remaining in the trust alone does not establish a reimbursement agreement.

A minor who is presently entitled also requires separate treatment. Assess section 98 and Division 6AA using the beneficiary’s age and legal capacity, together with the income’s character. A minor’s entitlement does not automatically become ordinary retained income assessed under section 99A.

Complete the review by recording the effective entitlements, the residual assessment provision and the calculation that follows from those facts. When a disputed entitlement changes, update the allocation and tax estimate together before lodging or amending the affected returns.