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Trust Distributions – Draft Section 100A – What you need to know?

In the late 1970s, then-Treasurer John Howard introduced Section 100A (S 100A), a provision designed to overcome ‘trust-stripping’ and to address the integrity of trusts and their income distributions.

Treasurer John Howard’s press release in 1980 read in part, “Last year’s measures are contained in Section 100A of the Income Tax Assessment Act. This section applies so that, where amounts of trust income are directed to persons not intended to have the benefit of them, the amounts are treated as income to which no beneficiary is presently entitled, and thus taxable at the maximum personal rate.”

Pointedly, S 100A relates to the ATO’s consideration of trust entitlements and arrangements created to distribute income to beneficiaries where there is no intention for the beneficiaries to receive the benefit of those trust entitlements and arrangements.

In 2014, the Australian Taxation Office (ATO) sent out a Fact Sheet giving a heads-up on S 100A and where the ATO saw the future of trust distribution compliance heading. Those who heeded the 2014 Fact Sheet are now likely quite versed in the direction the ATO is wanting to take its S 100A draft ruling.

The newly-released draft guidance has some differences from the 2014 Fact Sheet such as working capital properly done left in a trust would not cause a S 100A to be brought nor would loans on commercial terms, however any differences are outlined in the draft guidance available now.

It is worth noting that The Tax Institute’s senior advocate, Robyn Jacobson, has stated that this draft guidance is the most significant guidance on trusts in over 10 years. Let’s look at it more closely…

The draft guidance includes:

  • A draft Taxation Ruling – TR 2022/D1 – referencing Income Tax: Section 100A Reimbursement Agreements
  • A draft Practical Compliance Guideline – PCG 2022/D1 – referencing S 100A Reimbursement Agreements (ATO’s approach to compliance and the allocation of resources to review and assess)
  • A Taxpayer Alert – TA 2022/1 – referencing parents benefitting from any trust entitlement of their adult children
Reimbursement Agreements – TR 2022/D1

There is no limit to what might be a ‘reimbursement agreement’, an agreement that provides for the transfer of money or property to a person other than the beneficiary or to the beneficiary and some other person/s (including persons, companies, trustees).

It should be noted that the onus is on a taxpaying beneficiary to show that they would be entitled anyway to distributed trust income but for a reimbursement agreement.

Trust distributions for the purpose of tax reduction might see a trustee’s past transactions reviewed under S 100A. For example, trustees who use trust distributions to take advantage of lower marginal tax rates of beneficiaries (see Taxpayer Alert – TA 2022/1) could be non-compliant with S 100A where there is any purpose of tax avoidance.

To avoid invoking a S 100A, a trust will be tax-driven within the scope of an ‘ordinary’ family or commercial dealing as S 100A does not apply to arrangements entered in to in the course of ‘ordinary’ family or commercial dealings.

This exception of ‘ordinary’ family or commercial dealing applies when the transactions between family members and their entities within a trust can be explained as regular familial or normal commercial acts without the need for further explanation. Although the definition of ‘ordinary’ is not yet clearly defined, the draft ruling contains examples that would or would not be classified as ‘ordinary’ family or commercial dealings.

The ATO has to date taken a rather broad view of TR 2022/D1 when S 100A has been applied and considered in the Federal Court, as set out in the full decisions of the Federal Court in the cases of FCT v Prestige Motors Pty Ltd [1998] FCA 221 and Idlecroft Pty Ltd v FCT [2005] FCAFC 141.

Taxpayer Alert – TA 2022/1

The ATO’s taxpayer alert concerns family trusts wherein arrangements are made to distribute trust income to adult children, or other lower-taxed family members, and parents benefit via repayments and reimbursements then made by the adult children back to the parents. Where it is not intended that the adult children retain any benefit of the distributed trust income, rather their acquisition of the income is purely based on tax avoidance, then the ATO will assert its concern and authority. (Note: Minors are not affected by S 100A)

Trust income distributions to adult children still living at home and studying will face tougher inspection, especially if the parents have used this method to access lower tax rates for the parents’ own benefit. Although a commonplace activity, the ATO will assess whether such a trust income distribution event falls within an ‘ordinary’ family dealing.

Robyn Jacobson of The Tax Institute has said that although not uncommon for adult beneficiaries to receive trust income distributions, “the ATO is being very clear that it will be watching these arrangements very clearly” and that these “common set-ups… [may be] subject to tax under Section 100A”.

What else do you need to know?

It is anticipated that the ruling would possibly commence on 1 July 2022, however there will be a period for consultation and feedback and how much longer the guidance will be in draft form is unknown at this time.

It would be wise to start note-taking on what your trust has done so far in relation to S 100A, relative to both FYE22 tax planning and whether past distribution arrangements of your trust need to be reviewed.

The draft ruling allows for ATO not reviewing arrangements entered in to prior to 1 July 2014.

Taking the new ATO draft guidance on trusts in to consideration, trustees might be highly likely to incur higher tax payments on future trust distributions or the ATO might want to examine past income distributing executions.

Next Steps

We encourage you to contact YML Chartered Accountants now about your FYE22 planning and look at prior trust distributions in light of the new draft guidance.

How can YML help?

Talk to our YML Chartered Accountants Team today to see how YML Group can assist you with your trust compliance under S 100A. For more information, view our website and contact us on (02) 8383 4400 or by using our Contact Us page on our website.

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