Section 174AA Explained: What Every NSW Employer Needs to Know
Many business owners use trust structures to distribute income to themselves or their family members, seeing it as a smart strategy for tax minimisation, asset protection, and cash flow management.
And while trusts do offer flexibility, they also come with hidden risks — especially when it comes to workers’ compensation insurance and tax obligations in New South Wales.
Let’s shed some light on Section 174AA of the Workers Compensation Act 1987 (NSW), a provision that ensures that trust distributions used to supplement below-market wages are still classified as wages for workers’ compensation purposes. For businesses using trusts as part of their financial strategy, this legislation could lead you down a path of unexpected liabilities if not managed correctly.
What is Section 174AA of the Workers Compensation Act 1987 (NSW)?
The Workers Compensation Act 1987 (NSW) ensures employees receive proper compensation for work-related injuries or illnesses, regardless of how they are paid. Section 174AA specifically addresses how payments made through a trust are classified, ensuring that:
If an individual is paid below market wages and later receives a trust distribution to make up the difference, that payment is still legally considered wages.
Businesses that underpay wages and then distribute income through a trust cannot exclude those payments from workers' compensation wage calculations.
Workers' compensation benefits must reflect true earnings, even when part of those earnings come from a trust.
For business owners, this means that any attempt to reduce workers' compensation costs by paying through a trust could backfire if wages are found to be underreported.
How do trust payments count as wages?
For a trust distribution to be considered wages under this law, two conditions must be met:
The individual is paid less than the normal market rate for their role.
They later receive a trust distribution to compensate for that shortfall.
How is the wage shortfall calculated?
The wage shortfall is the difference between what a worker actually receives as salary and the minimum industry-standard wage for their role.
So, let’s say you're meant to earn $60,000 per year but only receive $30,000 in salary, and later receive a $30,000 trust distribution. In this case, that $30,000 extra trust payment is ALSO considered wages for workers' compensation purposes.
However, if the trust distribution exceeds the wage shortfall (e.g., you're $30,000 short of the normal market rate but receive $50,000 from the trust), only the amount covering the shortfall counts as wages — in this case, $30,000.
Why does this matter for your business?
Many businesses structure payments through a trust to reduce taxable wages for themselves, business partners, friends, or family members for differing reasons. However, the law makes sure that any underpaid wages later "topped up" through a trust are still classified as wages. So, if you own or run a business that structures payments through a trust for one reason or another, you may find that this could impact:
Workers' compensation costs – Your premiums might increase if the Australian Taxation Office (ATO) or regulators determine you’ve underreported wages.
Superannuation obligations – If distributions are classified as wages, you could owe additional super payments.
Tax compliance risks – The ATO scrutinises businesses that use trusts for personal income, and incorrect reporting could lead to penalties.
What if your business operates in another state?
Yes, Section 174AA applies specifically to New South Wales, but each Australian state and territory has its own set of workers' compensation laws. While the exact wording may differ, other states also have rules to prevent businesses from underreporting wages through trust distributions. If you operate across multiple states, it would be beneficial to review the specific workers’ compensation laws in each jurisdiction.
What should you do next?
If your business pays individuals (including yourself) through a trust instead of wages, now is the time to review your tax planning and compliance strategy. Mismanaging trust distributions could lead to higher premiums, unexpected tax bills, and compliance risks.
Understanding the legal and financial impact of trust distributions is essential — and getting it right can save you and your business from costly surprises down the track.
Need guidance on how to structure your trust distributions correctly? Reach out to us! We're always happy to discuss your trust structure and tax planning strategies to ensure you’re fully compliant — without unnecessary costs.
