Blue zone arrangements can be saved. With a few tweaks, you can usually move back into the green zone.
Blue Zone Arrangements
There are white, green, blue and red zone arrangements as per PCG 2022/D1.
White is nothing. Green is all clear. Red is a no-go. So that leaves blue zone arrangements in the middle. The ones where you might be in trouble or not. Where the ATO might look at you or not.
What makes blue zone arrangements? What makes it blue and not red, green or white?
Andrew Henshaw of Velocity Legal in Melbourne will walk you through the examples the ATO gives you. Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Blue Zone Arrangements
If an arrangement is neither green nor red, it is blue. Here is what throws an arrangement out of the green zone.
An arrangement involving a UPE – ie. the trustee doesn’t pay – is no longer in the green zone when:
- It is red;
- There is a tax avoidance purpose – think Part IVA;
- The trustee reduces trust income by exercising a power, or amending the deed, solely for that purpose.
- The beneficiary does one of the following:
- Gifts their UPE to the trust.
- Converts their UPE into a loan back to the trust.
- Disclaims their entitlement.
- Forgives the UPE.
- Releases the trustee from its obligation to pay.
- Pays or loans to the trust which is then used to pay the UPE (reimbursement agreements).
The PCG gives several examples of reimbursement agreements that would throw you out of the green into the blue zone.
1 – A dividend payable by a corporate beneficiary to the trustee is set-off against the amount payable by the trust.
2 – The trustee issues units in the trust to the beneficiary and the amount owed for the units is set-off against the amount payable by the trust.
3 – The trustee is made entitled to income of another trust that is comprised of franked distributions paid by the beneficiary.
When an arrangement is within the blue zone, it does not mean that s100A necessarily applies. It just means the ATO will dig deeper if they find it.
What the ATO really hopes is that – after reading their ‘colour guide’ – you will change things so you move back into the green zone.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 16 May 2022