ATO clarifies s100A but raises some eyebrows

This article was current at the time of publication.

The Australian Taxation Office (ATO) has finalised its guidance around family trust distributions in a bid to clarify where section 100A of the Income Tax Assessment Act 1936 (the Act) may apply.

Specifically, Taxation Ruling TR2022/4 clarifies the ATO’s position on reimbursement agreements under section 100A, including the exception for ordinary family or commercial dealings, as well as identifying arrangements of concern to the regulator.

The ruling also supports the reasoning behind Taxpayer Alert TA 2022/1 which covers arrangements where adult children who have relatively low tax rates are made entitled to trust income in circumstances where their parents retain control over and enjoy the economic benefits of that income.

The ATO has also finalised the accompanying Practical Compliance Guideline PCG 2022/D1, setting out when it will apply its compliance resources to review arrangements where the trust-specific anti-tax avoidance rule section 100A may apply.

The need for clearer guidance

ATO Deputy Commissioner Louise Clarke says the guidance has been developed to support trustees and their advisers, who have been requesting clearer guidance to help them manage their tax obligations.

“Section 100A is an anti-avoidance rule, so our guidance is firstly about ensuring that those structuring their affairs to avoid their tax obligations are held to account, as the community would expect,” Clarke says. 

“But it also provides confidence and guidance to those who legitimately use trusts in their financial affairs but are concerned they might inadvertently trigger section 100A. 

“Specifically, it addresses reimbursement agreements where, for a purpose of avoiding tax, an entity is provided a trust distribution but someone else benefits from that distribution.”

Full Federal Court decision

The provision has already been tested, with the Full Federal Court of Australia recently handing down its appeal decision in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 (Guardian). 

The Court found that the section 100A did not apply as it was determined that no reimbursement agreement between the trust and its beneficiaries existed at the relevant times. However, Part IVA of the Act was found to apply to one of the income years in question.

Partner at national law firm Holding Redlich, tax lawyer Sue Williamson, says the Full Federal Court decision means the ATO may need to reflect on its guidance on section 100A.

“In their guidance, the ATO takes a narrower view as to when a reimbursement agreement can exist, so they might need to go back and review it,” Williamson says.

“The interesting thing about the decision is that the ATO very easily finds a reimbursement agreement by the actions of one of the parties [the trustee] and spends a lot of time asking [if] it is an ordinary commercial or family dealing.

“The court, in this case, said you can’t just impute the agreement – you’ve got to identify if an agreement [or even an understanding] is in place – and if it’s not there you don’t even get to ask if it’s an ordinary family dealing. Section 100A simply doesn’t operate.”

Williamson says advisers need to be aware of the ATO’s position when advising clients “because most clients don’t want to spend money fighting the ATO in court”.

“So, you need to see if you can structure arrangements so that they don’t fall foul of the ATO’s view.”

Even so, there’s still a question as to whether the ATO is correct and as Williamson emphasises, don’t accept that they’re right “just because they’ve written guidance that states something”.

On the other hand, Clarke believes the vast majority of small businesses operating through a trust won’t be affected by the ATO’s ruling.

“A distribution to an adult child who has a low marginal tax rate will not attract section 100A where they simply receive or otherwise enjoy the benefit of their distribution,” she says.

Retrospective arrangements

The ATO says it’s standing by its previous guidance for trust distribution arrangements entered between 1 July 2014 and 30 June 2022 for those taxpayers who relied on it.

In most cases, the regulator says it will only apply section 100A within four years of a trustee lodging their tax return.

“We will not be reviewing arrangements prior to 1 July 2014, other than in exceptional circumstances as outlined in the guidance,” Clarke says.

However, partner at accounting and business advisory firm Findex, David Hall FCPA, says it’s apparent the ATO is actively reviewing past trust distribution arrangements.

“The ATO claims they aren’t necessarily reviewing pre-1 July 2014 arrangements, but advisors are observing ATO officers looking to apply section 100A in their compliance activities which can go back for quite some years,” Hall says. “So, this is raising quite a bit of uncertainty about how the ATO is approaching section 100A in practice.” 

Hall believes most tax practitioners understand the ATO’s approach, but there are specific aspects where criticism remains, aspects that have “probably overstepped the mark,” he notes. 

The definition of ordinary family dealings remains unclear, and the concern is that the ATO will take the default view that if there is some perceived tax minimisation, then the ordinary family dealings exception will not apply.

“The common-enough situation where adult beneficiaries allow their parents to use the money until they want it remains a particular sticking point.” Where to now?

With the Guardian case providing no insight on the ordinary family or commercial dealings exception and the ATO maintaining its view on the application of section 100A, practitioners will need to identify and risk-assess potentially affected clients then discuss their options as the ATO’s compliance approach takes effect from 1 July 2022.