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ATO Scrutiny on Trust Distributions to Family Beneficiaries

Article By Jeff Little | | Accounting & Tax

Learn the details of the 2021 Federal Budget announcement that $1 billion will go to the ATO Tax Avoidance Taskforce over 4 years and how it may affect you…

One area of particular interest to the ATO is section 100 of the ITAA 1936. The ATO has released draft Taxation Ruling TR 2022/D1 and guidelines. It has also released a Taxpayer Alert in February 2022. This highlights their concerns with certain beneficiaries, particularly adult children, and companies, paying lower tax on distributions.

What’s is 100A all about?

Designed to counter tax avoidance, s 100A was inserted in its current form in 1979. It was to prevent trusts from distributing income to beneficiaries that would pay no tax. These might be, for example, tax-exempt beneficiaries or those with significant losses that would absorb the tax liability.

Where s 100A applies, the beneficiary is deemed not to be entitled to the income distributed to it. It applies instead to the trustee who is assessed on the income at the top marginal rate.

The key requirements of 100A are as follows:

  • a beneficiary must be presently entitled to income of a trust estate.
  • the beneficiary’s entitlement must arise due to a “reimbursement agreement” – i.e. an agreement that provides for the payment of money, transfer of property or provision of services or other benefits to a person other than the beneficiary, in circumstances where the purpose of one of the parties to the arrangement was to ensure that the tax liability of the person who would otherwise have received the income (i.e. absent the arrangement) was reduced.
  • s 100A does not apply to a reimbursement agreement which is entered during “ordinary family or commercial dealings”.

What is the ATO’s view in their new draft guidance?

The ATO consider there to be four requirements for s 100 to operate.

  • “Connection” between the present entitlement to trust income of a beneficiary to a share of trust income in connection with a pre-existing reimbursement agreement. Conduct of parties before and after the present entitlement arose are relevant to if the agreement exists.
  • “Benefits to another”: The reimbursement agreement provides for the payment or other benefit for one or more persons other than the beneficiary alone.
  • “Tax Reduction Purpose”: One or more of the parties to the reimbursement agreement must have entered into it for a purpose(does not need to be the sole or dominant purpose) of eliminating, reducing, or deferring to a later year, someone’s income tax.
  • “Ordinary dealing exception”: agreement is not entered into during ordinary family or commercial dealings. Transactions between family members and their entities must be capable of explanation as achieving normal or regular familial or commercial ends.

So, what does this mean for you?

The ATO has not previously released a detailed explanation of their view on “ordinary family or commercial dealings” in relation to s 100A. Tax lawyers and accountants have been vocal that the ATO’s view is a significant shift away from what has been acceptable to them until now. It will mean all discretionary trusts with family beneficiaries will come under scrutiny.

Of major concern is there is no limited amendment period in relation to assessments under s 100A, meaning the ATO can amend historical assessments as far back as the 1977/78 financial year.

There is nothing to be done for now. The Government and Opposition have both acknowledged the concerns of tax specialists regarding the ATO’s view and have agreed to review and amend the legislation in consultation with all parties after the election.