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Be Alert… and perhaps a little alarmed!

Trusts – Section 100A

On 23 February 2022, the ATO issued new guidelines as to how it proposed to treat (and tax) trust distributions to beneficiaries and its new revised interpretation as to the operation of Section 100A.

Section 100A was introduced into the Tax Act in 1979 (over 40 years ago) as a specific anti avoidance provision to prevent trust stripping schemes.

The ATO’s new guidance is contained in:

  • Draft Taxation Ruling TR2022/D1
  • Practical Compliance Guideline PCG 2022/D1
  • Taxpayer Alert TA 2022/1

and substantially changes what has generally been considered to be acceptable practice in prior years.

In applying Section 100A, the ATO is looking at:

  • Arrangements where beneficiaries have been made presently entitled to trust income where there has been an opportunity of utilising the beneficiaries lower rate of tax to shelter the trust income from being taxed at a higher rate (“a tax reduction purpose”); and
  • The arrangement results in someone other than the presently entitled beneficiary having the use and enjoyment of the economic benefit referable to the trusts income (“the benefit to another requirement”).

If Section 100A applies, then the beneficiary will be deemed not to be presently entitled to the income distribution (notwithstanding that it may in fact have been paid to the beneficiary) and the trustee of the trust will be taxed on the amount of the distribution at the highest marginal tax rate (47%) (notwithstanding that the trustee may not be able to recoup the tax from the beneficiary to whom it has been paid).

But, Section 100A expressly states that it is not to apply to arrangements entered into in the course of “ordinary family or commercial dealings”.

In its new guidelines in restricting what previously may have been considered “ordinary family or commercial dealings”, the ATO has made the following comments:

  • To be an ordinary family or commercial dealing or transaction:
    • It must be capable of explanation as achieving normal or regular familial or commercial objectives;
    • There should not be any tax driven objectives;
    • A dealing is not ordinary merely because it is common place;
    • A dealing is not an ordinary family dealing merely because it only involves family members;
    • It is relevant to determine whether there is a more direct way to achieve the family or commercial objective (e.g. could the person who actually benefits have been made presently entitled directly).

In the new guideline documentation the ATO has provided, numerous examples of its new interpretation of Section 100A.

In Tax Alert TA 2022/1, the ATO highlights as high risk:

  • A trust distribution to a child where the money is not paid to the child but used to pay current year ( or accrued prior year) education expenses because such expenses are typically viewed as “parental costs” and accordingly the parent receives a “benefit” from using the trust income to pay them.

[Note: The ATO has gone so far as to “flag” that it may seek to apply the promoter penalty regime or refer to the Tax Practitioners Board any advisors who may facilitate such arrangements]

But, in another example, a trust distribution to a child where the money is used to pay university fees is deemed as a lower risk.

In conclusion, it should be noted:

  • The ATO’s draft ruling is not law, it only states the ATO’s interpretation of the law;
  • There are a number of tax cases currently before the Courts concerning Section 100A, the results of which will clarify what the law actually is; and
  • The draft ruling may change when issued in final form.