s100A ITAA36 is about reimbursement arrangements. I pay you something and then you pay me straight back – that sort of arrangement.
In the last episode, we focused on TD 2022/D1 which covers the Div 7A issue around UPEs to private companies. Today let’s talk about the other three publications that link back to s100A ITAA1936. They are
Taxpayer Alert 2022/1 (TA 2022/1),
Draft Taxation Ruling 2022/D1 (TR 2022/D1), and
Practical Compliance Guideline 2022/D1 (PCG 2022/D1).
Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
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Section 100A of the Income Tax Assessment Act 1936 (ITAA36) was inserted in 1979. Originally intended to apply to ‘trust stripping arrangements’, it is very widely drafted. But also poorly written – extremely confusing to read.
One important thing to remember about s100A is that it has no amendment period, so there is an unlimited period of review. The reason for this is that the beneficiary is deemed never have been presently entitled. Instead the trustee is assessed under 99A, and hence – if the trustee didn’t lodge a return – the amendment period never started
For s100A to apply, you have three requirements:
1 – Connection
2 – Benefit to another
3 – Tax reduction purpose
There must be a present entitlement due to a ‘reimbursement agreement. This reimbursement agreement must be made before present entitlement
Benefit to Another
The agreement must provide for the payment of money (or transfer or property, services, etc.) to a person who is not the beneficiary
Tax Reduction Purpose
One of the purposes of this agreement must be that a person would be liable to pay less tax.
There is one big exception for s100A NOT to apply The ‘ordinary course’ exception. If the agreement is entered into in the course of ‘ordinary family or commercial dealing’, then s100A does not apply.
So this is s100A until March 2022. Now the three ATO publications come in – TR 2022/D1, TA 2022/1 and PCG 2022/D1. Let’s go through them one by one.
TR 2022/D1 is largely a technical ruling and is to apply retrospectively. The taxation ruling places big emphasis on what constitutes ‘ordinary family dealings’ and says that minimising tax is not an ordinary family dealing.
So the big question is what is an ordinary dealing.
To determine whether something is or is not an ordinary dealing, look for:
1 – Contrived
Does the arrangement seem to be a lot more complex than what seems to be necessary for the stated goal?
2 – Inconsistency
Does what is said on paper not match reality? For example, the son is made entitled to a trust distribution but is never told about it. Or a daughter doesn’t even know there is a trust and is unlikely to ever receive the actual distributions. That would be an inconsistency.
3 – Proportionate
Does one beneficiary receive a lot less or more than the others? And does that beneficiary happen to have a lower marginal tax rate?
4 – Relationship
Does the beneficiary have a close dependent relationship with the trustee, for example, high-income father and financially dependent son?
Here are some examples based on TR 2022/D1:
1 – Property bought for an adult child
Making gifts between family members for ordinary purposes is an ordinary dealing.
Let’s say a married couple controls the family trust and is the primary beneficiary of the trust. Their daughter – on a lower tax rate – purchases a property and the parents pay for it through their trust distributions to themselves.
Here, parents providing a home for their child is considered ‘ordinary family dealing’ and needs no further explanation.
However, if the daughter had a higher tax rate and all trust distributions went to her parents on lower tax rates who then repeatedly gift the money to her, then this would not be ordinary.
2 – Entitlement gifted to Trustee
Let’s say a family trust made a child (adult full-time student) presently entitled to trust income each year, which the daughter then gifts back to the trustee.
This would alert the ATO’s attention. It is unlikely that this arrangement would be given the green light.
Aggravating factors would be if the daughter gifted her entitlement back not just once or twice, but every year. Or if she gifted it directly back to her parents. Or if she used the money to reimburse her parents for the costs to parent her when a minor, for example past private school fees.
3 – Unpaid entitlements held on separate trust
Let’s say a family trust makes a child presently entitled and this child is a full-time student with no income from other sources. The funds for this present entitlement are held in a separate trust for the sole benefit of the child.
The child has no intention of calling on the funds any time soon, but could at any time.
Provided no other additional facts, this arrangement will be considered as ordinary dealing.
However, it would not be ordinary dealings if instead, the trustee loaned the funds on interest-free terms for an undefined period to another person or otherwise applied the trust’s funds that were inconsistent with an intention to satisfy John’s entitlements.
4 – Circular flow of funds
We discuss this as washing machine arrangements in the interview.
TA 2022/1 – Taxpayer Alert: ‘paying for Childhood’
This is the only publication of the four that is already issued and no longer in draft form.
It covers the arrangement where the trustees (or directors of corporate trustee) are parents and the trust income is used to meet parenting expenses. These expenses are recorded as beneficiary loans made from trustee to parents throughout the year.
The trust resolution then makes one or more children being presently entitled to trust income. And this income will not result in children’s taxable income being over AUD 180,000.
The children don’t actually receive any funds. All payments go to the parents to cover the children’s debt.
These sort of arrangements are an issue if the children have to reimburse their parents for the costs of their upbringing while minors. Or if the costs are above market rate while an adult. And if the parents manage all this.
The purported entitlement of the children may be a sham for tax purposes. The arrangement could be potential reimbursement agreement under s100A. As a result, the parents may be treated as presently entitled instead of children (per S95A(1) and 97(1)). The general anti-avoidance provisions might also apply.
PCG 2022/D1 lists four zones: White – Green – Blue – Red. Almost like a traffic light system but not quite.
Low priority – Arrangements entered into in income years before 1 July 2014 0 No new compliance resources
Low priority – Various scenarios fall under this zone – No new compliance resources
Medium priority – Arrangements that don’t fall into the other three zones – New compliance resources may apply
High priority – Various scenarios fall under this zone – New compliance resources will apply – High priority to investigate
This is a very short overview of some of the points we discuss in this episode. Please listen to Andrew Henshaw in this interview since he explains all this much better than we ever could.
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 28 March 2022