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Special Counsel, Lucy Ferreira, and Associate, Arfa Shoukat, from HHG Legal Group outline the new guidance to section 100A and the risks when making trust distributions.
Section 100A of the Income Tax Assessment Act 1936 (Cth) (the Act) applies to trust reimbursement agreements. Where trust distributions have been made to a beneficiary (who is not under a legal disability) as part of a reimbursement agreement, section 100A allows the Commissioner of Taxation to impose tax at the highest marginal tax rate on that distribution.
The Australian Taxation Office (ATO) has released new guidance materials targeting trust distributions under section 100A which has brought attention to family trusts and challenges the effectiveness of many common end of year tax planning practices.
What is a Reimbursement Agreement?
A reimbursement agreement is effectively an agreement that provides for the benefit of a trust distribution to be given to someone other than the entitled beneficiary. The agreement must have been entered into for purposes that include reducing tax liability and not entered during ordinary family or commercial dealing.
The definition of 'benefit' can include payment or loan of money, transfer of property, provision of services or other benefits, and 'agreement' can include any agreement, arrangement or understanding, or a series of them, whether formal or informal, whether express or implied and whether enforceable, or intended to be enforceable, by legal proceedings.
The phrase 'ordinary family or commercial dealing' is unfortunately not defined in the Act. There has been case law dealing with section 100A in the past but there has been limited judicial review of what is included in ordinary family or commercial dealings in the context of section 100A.
New Guidance
The ATO has now released Draft Taxation Ruling TR 2022/D1 Income Tax: Section 100A Reimbursement Agreements. This Draft Ruling is supported by a practical compliance guideline and a taxpayer alert. These guidance documents set out the Commissioner of Taxation's view on when the entitlement of a beneficiary (not under a legal disability) to trust income arises out of a reimbursement agreement.
The practical compliance guideline sets out that the proposed compliance approach in relation to beneficiary entitlements is conferred on or after 1 July 2022. The administrative position outlined in Trust Taxation - Reimbursement Agreement (July 2014) will continue to apply for beneficiary entitlements conferred before 1 July 2022. However, it is important to note that the ATO has an unlimited period in which to review reimbursement agreements and make or issue amended assessments under section 100A.
The new guidance reiterates and details the following basic requirements for Section 100A to apply:
- a beneficiary must have a present entitlement (deemed or otherwise) to a share of the trust income in connection with or as a result of a reimbursement agreement;
- the agreement must provide for the benefit to be received by another person and not the entitled beneficiary;
- one of the purposes that the agreement was entered into must be to reduce income tax; and
- the agreement must not be one that has been entered into during an 'ordinary family or commercial dealing'.
The new guidance goes further to provide examples of circumstances that may trigger the application of section 100A and provides four risk category zones. The risk zones are colour coded with white (low risk), green (low risk), blue (medium risk) and red (high risk), and each zone differentiates ATO compliance approaches, and the responses required from taxpayers and advisors.
It is very important for trustees and taxpayers to ensure that the risk of section 100A in the context of the new guidance is considered when making trust distributions, including the examples and risk zones, as the onus ultimately falls on the taxpayer themselves.
If you have any questions and require assistance regarding the amendments to section 100A, please do not hesitate to contact HHG Legal Group's Wills and Estates or Agribusiness lawyers on (08) 9322 1966 or email reception@hhg.com.au.
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