Tax Law: 13 April 2022
Be Alert... and perhaps a little alarmed about the #ATO's new guidelines on the operation of Section 100A. The guidelines may not become law and there may yet be changes before they are issued in their final form, but there is plenty to pay attention to now.
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:
and substantially changes what has generally been considered to be acceptable practice in prior years.
In applying Section 100A, the ATO is looking at:
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:
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:
[Note: The ATO has gone so far as to "flagthat 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: