Over recent months, there’s been a lot of activity dealing with Section 100A (S100A) ‘reimbursement agreements’ of the Income Tax Assessment Act 1936 (ITAA1936).
On 8 December 2022, the ATO released its finalised guidance documents on S100A. In addition to this, on 24 January 2023, the Full Federal Court handed down its decision on the ‘Guardian AIT’ case, one of two cases dealing with S100A. We also await the other Full Federal Court Appeal in the ‘Blood’ case that was heard at the same time as Guardian AIT.
So, what’s all the fuss about S100A and what does it mean for your trust distributions? Firstly, it’s important to understand what S100A is and when it does and doesn’t apply. S100A is an anti-avoidance provision that targets situations where one person (not under a legal disability such as a minor) is made presently entitled to income of a trust, but another person(s) receive the benefit of the funds represented by the income.
A typical example is where a family trust distributes to an adult child on a low marginal tax rate, which creates an unpaid entitlement to the adult child. The child then gifts the unpaid entitlement to the parents, or the child’s entitlement is reduced by expenses (such as school fees) paid for by the parents when the child was a minor.
There are several requirements to be considered a ‘reimbursement agreement’. However, where these are satisfied, the present entitlement of the beneficiary is cancelled, and the trustee is taxed on that income at the top marginal tax rate.
Importantly, S100A does not apply to arrangements entered in the course of ‘ordinary family or commercial dealings’ or where no party to the arrangement has a tax avoidance purpose. Further, S100A will not apply when the beneficiary receives and enjoys the benefit of the income distributed.
Although you may be part of a ‘family group’, the ATO does not automatically consider these arrangements to be ‘ordinary family or commercial dealings’.
The ATO has outlined several scenarios they consider to be a lower risk (‘green zone’) and a higher risk (‘red zone’) arrangement. Therefore, it will be important to consider these when making trust distributions in 2023 and future financial years to ensure that your trust distributions fall into the green zone.
Further, it will be important to retain additional documentation in the event of the ATO questioning the trust distributions made.
We recommend that clients keep thorough records that:
▪ Explain the transactions that have taken place
▪ Provide a clear explanation in writing as to why entitlements have been dealt with (and distributed) in the way they have
▪ Evidence that a beneficiary has received or enjoyed the benefit of their entitlement
▪ For an inter-party loan, prepare loan agreements and keep a record of the purpose for making the loan rate.
Good record keeping, including being able to provide the trust deed (including amendments) and trustee resolutions will also assist in timely resolution in the event of an ATO audit.
Distributions from discretionary trusts are under increasing scrutiny from the ATO. Therefore, it’s imperative that trustees are aware of the full implications that their decisions in distributing trust income to beneficiaries are understood in the light of these recent S100A developments.
If you need any assistance with your trust distributions, please contact us.
