Draft Taxation Ruling -
Income tax: Section 100A reimbursement agreements
After a long wait, the Australian Taxation Office has released the Commissioner’s preliminary views around the scope and application of Section 100A of the Income Tax Assessment Act 1936.
What is Section 100A?
Section 100A is an anti-avoidance provisions that, broadly speaking, applies in cases (subject to certain exceptions) where:
- a beneficiary has become presently entitled to trust income but it has been agreed that another person will benefit from that income; and
- that agreement is made with the purpose that some person will pay less or no income tax as a result; and
- the agreement was entered into outside the course of ordinary family or commercial dealings.
The consequence of Section 100A applying is that it deems a fictitious set of tax facts to substitute the reality. That is:
- Where the beneficiary is in fact presently entitled to a share of trust income (either because a trustee has exercised a discretion to distribute income or amounts have been paid to them or applied for their benefit), they shall be deemed, for the purposes of tax law only, not to be, and never to have been, presently entitled to the trust income.
- The consequence of this deeming is that the trustee, rather than the presently entitled beneficiary, will be assessed under Section 99A and liable to tax at the top marginal rate.
- Importantly, the fictitious set of facts created by the deeming in Section 100A in these cases is that the beneficiary continues to have the general law rights or entitlements that would cause them to be presently entitled to the relevant income of the trust estate, but that is ignored for tax purposes.
What are the Commissioner’s views on the basic
requirements to satisfy Section 100A?
The Commissioner in Draft TR 2022/D1 sets out the basic requirements that, in his opinion, will satisfy Section 100A, namely:
- The '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. A reimbursement agreement is an agreement, understanding or arrangement that has the following three qualities.
- The 'Benefit 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.
- The 'Tax reduction purpose requirement' – a purpose of one or more of the parties to the agreement must be that a person would be liable to pay less income tax for a year of income.
- The 'Ordinary dealing exception' – the agreement must not be one that has been entered into in the course of an 'ordinary family or commercial dealing'.
Examples outlined in the draft Ruling
The Commissioner provides some non-exhaustive examples of what, in his view, may cause concern and trigger red flags regarding the potential application of Section 100A (though at the same time the Commissioner emphasises that decisions on individual cases will depend on the overall circumstances of that case):
- Gifts from parents to a child – lower marginal tax rate parents repeatedly gifting trust entitlements to higher marginal tax rate children in lieu of the trustee distributing to the adult children directly.
- Trustee entitlements gifted to a trustee – a beneficiary being made presently entitled to trust income for a particular year but then deciding to gift his or her entitlement back to the trustee (or some other person).
- Unpaid entitlements held on subtrust – a trustee making a family member presently entitled to a share of trust income, setting aside funds underlying the present entitlement upon a separate trust for the sole benefit of the family member, but then applying the trust funds in a way that is inconsistent with an intention to satisfy the family member’s entitlements to the funds.
- Non-commercial loan between family members – lower marginal tax rate parents repeatedly loaning trust entitlements to higher marginal tax rate children in lieu of the trustee distributing to the children directly.
- Circular flow of funds – where a trustee of a discretionary trust owns the shares in a private company and, year on year, there is a flow of funds between the two entities.
These examples are not intended to be exhaustive and are by no means the only facts and circumstances to which the Commissioner believes Section 100A could apply. Taxpayers (and their advisors) should remain vigilant in assessing the broad range of facts and circumstances that Section 100A could potentially apply to. For example, though not dealt with in the examples, the Commissioner takes the view that Section 100A can apply to capital gains and franked distributions that are streamed to beneficiaries. However, by omission, it appears the Commissioner’s view is that Section 100A cannot apply to circumstances involving capital distributions of non-taxable gains.
Date of effect
When issued in final, it is proposed that the ruling will apply to arrangements both before and after its issue. However, the ruling will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the determination.The companion piece to the draft ruling is Draft Practical Compliance Guideline PCG 2022/D1 that sets out the Commissioner’s proposed compliance approach that includes proposed bases on which compliance resources will not be directed to certain arrangements, including particular arrangements entered into in current and prior income years. Our summary on Draft PCG 2022/D1 can be found here.
To read our recent submission to the ATO on Draft Taxation Ruling TR 2022/D1 and Draft Practical Compliance Guideline PCG 2022/D1, click here.
Taxpayers and their advisors should remain vigilant in assessing the broad range of facts and circumstances that Section 100A could potentially apply to.
Questions or concerns about these updates?
If you have identified issues or would like assistance in reviewing your or your clients’ risks associated with TR 2022/D1, please contact one of our team members below.
