ATO finalises guidance on when ancillary funds ‘provide a benefit’

Following our earlier analysis of draft Taxation Determination TD 2025/D3, the Australian Taxation Office (ATO) has now finalised its guidance with the release of Taxation Determination TD 2026/3. The determination confirms the ATO’s view on when an ancillary fund ‘provides’ a benefit and provides further clarification on the role of legally binding commitments when assessing compliance with minimum distribution requirements and related-party benefit restrictions.

Consistent with the draft, the final determination sets out the Commissioner’s view on when an ancillary fund is taken to ‘provide a benefit’ for the purposes of:

• subsection 15(4) of the Guidelines (minimum distribution requirement)
• subsection 22(3) (prohibition on benefits to related entities).

While TD 2026/3 largely adopts the draft position, there are targeted refinements that are particularly relevant for trustees in practice.

Comparison – TD 2025/D3 (Draft) vs TD 2026/3 (Final)

The changes between the guidance in its draft and finalised form have been summarised in the table below.

Key Feature	TD 2025/D3	TD 2026/3	Practical Impact
Overall structure	First detailed ATO guidance on when ancillary funds provide benefits	Largely unchanged from the draft guidance	Final determination confirms (rather than revises) the ATO’s position
Meaning of ‘benefit’	Broad concept – includes any advantage, profit, or gain	Unchanged	Unchanged
Section 15(4) – distributions to deductible gift recipients (DGRs)	Benefit must be provided, measurable, and a net benefit	Unchanged	Core technical requirements remain the same
Non-binding promises	Limited explanation and a single example provided	Expanded explanation and multiple examples provided	Key refinement - clarifies that a distribution only counts if it creates a binding obligation at the relevant time
Future commitments / multi-year pledges	Not clearly addressed	Explicitly addressed in new examples	Informal or staged pledges will not satisfy the annual distribution requirement unless they are legally binding
Section 22(3) – related party benefits	Broad integrity measure covering, direct, indirect, and omission-based benefits	Unchanged	No change – continues to require a substance-based review of arrangements
Valuation of benefits	Must be objectively ascertainable and capable of valuation	Unchanged	No change – reinforces need for supportable valuation, particularly for non-cash benefits
Enforceability of commitments	Limited explanatory guidance	Expanded discussion and clarity	Greater emphasis on trust deed powers, enforceability is now central to whether a benefit has been provided

From a structural perspective, TD 2026/3 closely mirrors TD 2025/D3. The substantive changes are broadly confined to:

• paragraphs 22 – 29 in the draft (now paragraphs 23 – 27) which deal with non-binding promises of future payment
• the addition of a more detailed Appendix addressing enforceability of commitments.

Outside of these areas, the guidance remains materially unchanged.

Key clarification – non-binding promises and when a benefit is ‘provided’

The final determination refines the guidance around non-binding promises of future payment. In this section, the ATO confirms that:

• a benefit is only ‘provided’ where it is actually conferred on the DGR (i.e. the fund must cause the DGR to have the benefit)
• a non-binding promise of future payment does not constitute a benefit, as it creates no legal right or entitlement for the DGR
• accordingly, arrangements such as:
  • grant approvals
  • notifications
  • accounting entries
• will not amount to the provision of a benefit unless they result in a legally binding obligation.

This is illustrated through expanded examples, including multi‑year pledges and non-binding grant notifications, which show that an intended or announced payment is insufficient without a binding commitment.

Whilst TD 2025/D3 expressed the same principle, it only dealt with it briefly and included a single example. TD 2026/3 builds on this by expanding the explanation of non-binding promises, introducing additional examples and more clearly distinguishes between a mere expectation of payment and a legally enforceable obligation.

The underlying position is unchanged, but the final determination makes the practical application much clearer.

The included Appendix to TD 2026/3 provides important context for the revised non‑binding promise analysis by focusing on when a commitment gives rise to a legally binding obligation. In particular, paragraph 58 explains that a promise to make a future payment will not generally be binding where:

• the trustee is committing in advance to the outcome of a discretion that must be exercised later
• the promise restricts the trustee from making the relevant discretionary decision at the time the payment is to be made
• the trust deed does not permit the relevant power to be exercised at the time the promise is made.

In these cases, the promise does not create any legal rights in favour of the DGR and therefore does not result in the provision of a benefit. More broadly, the Appendix reinforces that the analysis turns on the legal effect of the trustee’s actions under the governing trust deed, including whether a power has been validly exercised to bind the fund and confer enforceable rights at the relevant time. This highlights that, for the purposes of subsection 15(4), the focus is on whether a binding obligation arises, rather than the trustee’s intention, approval, or communication of a proposed grant.

Key takeaway

TD 2026/3 represents a finalisation of the ATO’s draft position, with only limited drafting changes. However, the refinements to the treatment of non‑binding promises are significant in practice.

Trustees must ensure that distributions are legally effective at the relevant time, rather than relying on informal approvals or expectations. While narrow in scope, these changes directly affect minimum distribution compliance and year-end risk management and should be carefully considered in the administration of ancillary funds.

How SW can help

SW can assist ancillary funds in ensuring that any benefits they wish to provide fall within the scope of the Guidelines as clarified in TD 2026/3. We can review proposed distributions and related party arrangements to confirm they meet the ATO’s definition of a ‘benefit’ and do not trigger penalties under subsection 22(3).

For assistance in establishing or managing a fund, please contact our private client specialist, Heather Dyke.

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