ATO has released finalised section 100A guidance

On 8 December 2022, the ATO released its long anticipated final guidance on s. 100A of the ITAA 1936.

TR 2022/4 titled Income tax: s. 100A reimbursement agreements (the Ruling) sets out the Commissioner’s view in respect of the application of s. 100A.

PCG 2022/2 titled Section 100A reimbursement agreements — ATO compliance approach (the Guideline) sets out the ATO’s compliance approach, including how the ATO will assess the taxpayer’s risk level. Both documents contain a number of practical examples.

Together the Ruling and the Guideline are referred to as the finalised guidance.

The finalised guidance was previously issued in draft in February 2022 as TR 2022/D1 and PCG 2022/D1 respectively, and differs from the drafts in a number of respects. Broadly, these include:

• the removal of the blue zone from the risk framework — reducing the number of coloured zones from four to three
• the amendments to the green zone scenarios
• the inclusion of recent case law
• additional guidance in relation to a number of matters
• additional examples and revisions to draft examples
• a new section on record keeping requirements.

A Compendium accompanies each of the Ruling and the Guideline, setting out the Commissioner’s responses to comments received during consultation, including changes reflected in the finalised guidance — refer to TR 2022/4EC and PCG 2022/2EC.

The ATO has updated its website guidance on s. 100A titled Trust taxation — reimbursement agreement (QC 41167) to reflect the finalised guidance.

Date of effect

The finalised guidance will apply both before and after its date of issue (8 December 2022).

In relation to entitlements arising before 1 July 2022, note that:

• the Commissioner will stand by the administrative position reflected in Trust taxation — reimbursement agreement, which was first published on the ATO website in July 2014, to the extent that it is more favourable to the taxpayer’s circumstances than PCG 2022/2
• the ATO will not dedicate compliance resources to consider the application of s. 100A where the taxpayer demonstrates that a) their arrangement satisfies the white zone, or b) they have taken reasonable care in applying the administrative position in Trust taxation — reimbursement agreement to determining that s. 100A does not apply.

Legislative background

Section 100A of the ITAA 1936 is an anti-avoidance provision which, subject to the ordinary dealing exception, applies in cases in which a beneficiary has become presently entitled to trust income where it has been agreed that another person will benefit, and that agreement is made by any of its parties with a purpose that some person will pay less or no income tax as a result.

Broadly, the effect where s. 100A applies — i.e. where a beneficiary’s present entitlement arises from a reimbursement agreement — is that:

• the beneficiary is deemed not to be, and never to have been, presently entitled to the relevant trust income
• the trustee, and not the beneficiary, is made liable to tax at the top marginal rate on amounts that would generally otherwise be included in the assessable income of the beneficiary in respect of the present entitlement.

Note: There are two Federal Court decisions which concern s. 100A that are currently subject to appeal in the Full Federal Court. Those decisions are Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT [2021] FCA 1619 (Guardian) and BBlood Enterprises Pty Ltd v FCT [2022] FCA 1112 (BBlood). The Ruling refers to these cases.

In the ATO’s view, there is no reimbursement agreement and s. 100A will not apply to a beneficiary’s present entitlement to trust income where any of the following apply:

(a) The beneficiary is under 18 years of age or otherwise under a legal disability.

(b) Only the beneficiary benefits from their trust entitlement and no one else benefits from the beneficiary’s share of trust net income and trust capital gains.

(c) There was no agreement, arrangement or understanding to provide a benefit to someone other than the beneficiary at the time the beneficiary became presently entitled.

The four basic requirements for s. 100A to apply

1) Connection requirement

There must be a present entitlement, or deemed present entitlement, of a beneficiary (other than a beneficiary under a legal disability) to a share of trust income, which has arisen out of, in connection with or as a result of a reimbursement agreement (being an agreement, understanding or arrangement that has the three qualities described in requirements 2, 3 and 4 below).

‘Agreement’ is defined widely to include arrangements and understandings whether formal, informal, express or implied. An agreement can include a single step or a series of steps or transactions.

2) Benefits to another requirement

The agreement must provide for the payment of money or transfer of property to, or provision of services or other benefits for, a person other than that beneficiary.

3) Tax reduction purpose requirement

One or more of the parties to the agreement must have entered into it for a purpose (which need not be a sole, dominant or continuing purpose) of securing that a person would be liable to pay less tax in an income year than they otherwise would have been liable to pay.

 4) Ordinary dealing exception

Agreements entered into in the course of ordinary family or commercial dealing are not reimbursement agreements for the purposes of s. 100A. This ‘ordinary dealing’ test is an objective test applied, at least principally, from the perspective of the persons whose purposes are relevant to the operation of s. 100A.

It is the whole dealing in the course of which the agreement is entered into which must have the quality of ‘ordinary family or commercial dealing’.

To test whether there is ordinary family or commercial dealing, consider all relevant circumstances, including what is sought to be achieved by the dealing (in particular, whether it is explained by the family or commercial objectives it will achieve) and whether the steps that comprise the dealing will likely achieve those objectives.

Factors relevant to whether a dealing is ‘ordinary family or commercial dealing’ can include family living arrangements, financial dependence on one another, cultural traditions, and financing arrangements.

‘Family’ takes its ordinary meaning— i.e. a relationship of natural persons based on birth or affinity, and may often involve co-residence. The exception does not apply just because all parties to an agreement are family members.

Features indicating that a dealing may not be ordinary family or commercial dealing include:

• the arrangement is artificial, contrived, is overly complex or contains steps that might be explained by objectives different to those said to be behind the ordinary family or commercial dealing
• circumstances or conduct that is inconsistent with the legal or economic consequences of the beneficiary’s entitlement, such as:
• appearing unlikely that the beneficiaries will receive their entitlements when the assets or funds representing the entitlement are purportedly paid or lent to others without any intention of being returned or repaid
• funds representing the entitlement are dealt with in a way that is inconsistent with the beneficiary’s right to demand the entitlement
• beneficiaries are not informed of their entitlements
• where income entitlements have actually been paid to the beneficiary and there is an agreement for the beneficiary to pay some or all of their income entitlement to another person.

Consequences of a reimbursement agreement

Section 100A disregards a beneficiary’s entitlement to the extent that it arises out of a reimbursement agreement. This means that the net income that would otherwise have been assessed to the beneficiary (or trustee on their behalf) is instead assessed to the trustee at the top marginal tax rate.

There is comparable treatment for a reimbursement agreement that involves franked distributions or capital gains.

Compliance approach — the risk framework

The following table describes the ATO’s compliance approach for arrangements to which s. 100A may apply:

Arrangements outside of the zones

For arrangements not within the white, green or red zones, the following principles may indicate whether the arrangement has a higher risk of the ATO dedicating compliance resources to consider the application of s. 100A:

(a)          a benefit is provided to a person other than the beneficiary

(b)          the provision of that benefit involves complexity or contrivance

(c)           that benefit could have been provided in a more direct manner

(d)          the arrangement results in significantly less tax being paid compared to if the benefit had been provided more directly.

Record keeping

While each arrangement depends on its facts, the following documents and records are important and should be kept wherever possible:

• the trust deed (including amendments), trustee resolutions and contact details of the trustee and former trustees
• notes, contemporaneous documents and records of discussions or meetings explaining the transactions that have happened or calculations that have been made
• details of how the beneficiary was notified of their present entitlement to trust income
• details of how the present entitlement to trust income was satisfied and, where practical, used by the beneficiary
• details of how the trustee utilised the underlying funds; for example, to satisfy the trustee retention of funds or the trustee working capital condition
• copies of loan agreements and records showing how the loan repayments were satisfied from time to time.

The ATO acknowledges that family arrangements are typically conducted with a greater level of informality than dealings between unrelated parties. Nonetheless, contemporaneous records which demonstrate the intended objectives should be kept, e.g. in the form of a file note of a meeting.

Notwithstanding that an arrangement is fully documented, s. 100A may still apply.

Further resources and training

Our monthly Online Tax Updates and Public Sessions are excellent and cost effective options to stay on top of your CPD requirements. We present these monthly online, and also offer face-to-face Public Sessions at 17 locations across Australia. ATO guidance in relation to section 100A will be comprehensively covered in these options.

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