8 February 2023
TR 2022/4 section 100A reimbursement agreements
Section 100A is a specific integrity provision aimed at situations where income of a trust is appointed to a beneficiary but the economic benefit of the distribution is provided to another party. When section 100A applies, the trustee is taxed on the income at penalty rates rather than the presently entitled beneficiary being assessed.
The ruling explains how section 100A operates from a technical perspective and looks at the four key elements that need to be considered in determining whether section 100A is triggered.
The following three requirements need to be satisfied in order for section 100A to apply:
- The present entitlement must relate to a reimbursement agreement;
- The agreement must provide for a benefit to be provided to a person other than the beneficiary who is presently entitled to the trust income; and
- A purpose of one or more of the parties to the agreement must be that a person would be liable to pay less income tax for a year of income
It is then necessary to look at whether the 'ordinary dealing exception' applies. This is because the rules don’t apply if the agreement has been entered into in the course of ordinary family or commercial dealing.
The ruling discusses each of these elements in detail and includes a number of examples, particularly in relation to what is considered an ordinary family or commercial dealing. The ruling also refers to recent and ongoing cases that deal with the operation of section 100A. As these cases move their way through the courts it is possible that the ATO will need to make some amendments to the ruling to ensure that it reflects case law in this area.
PCG 2022/2 Section 100A reimbursement agreements - ATO compliance approach
In addition to the final tax ruling on section 100A the ATO has released a final practical compliance guideline (PCG) which explains how the ATO differentiates risk and will apply compliance activities in connection with section 100A.
The PCG sets out a number of scenarios that would be considered low risk and some scenarios that would be considered high risk. The ATO also explains how it would approach this area when dealing with a situation that doesn’t specifically fall within the low risk or high risk scenarios outlined in the PCG.
A brief summary of arrangements that the ATO considers low risk include:
- The present entitlement is physically paid or applied for the beneficiary’s benefit within a two year
period, although this is subject to some exclusions. For example, if the funds are physically paid to the beneficiary within two years but the beneficiary then gifts these funds to another party then this won’t
necessarily be considered a low risk scenario - The funds are paid to a joint bank account that the beneficiary holds with their spouse and the funds are used to meet household expenditure
- The funds are retained by the trustee and certain conditions are met, including that the funds are used as working capital in a business carried on by the trust and the beneficiary controls the trustee
- Arrangements that are treated as ordinary family or commercial dealings in TR 2022/4
However, the following scenarios are generally considered high risk from a section 100A perspective:
- The beneficiary is a company or trust with losses and the beneficiary is not part of the same family group as the trust making the distribution
- A beneficiary company or trust returns the funds to the trustee (i.e., circular arrangements)
- The beneficiary is issued units by the trustee of the trust (or a related trust) with the amount owed for the units being set-off against the entitlement
- Adult children are made presently entitled to income, but the funds are paid to a parent in relation
to expenses incurred before the beneficiary turned 18
Practitioners who are familiar with the draft version of the PCG should carefully review the final version because there are some additional examples and the ATO has modified its approach to certain scenarios.
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