TAX Section 100A
E-commerce, Transportation, Logistic and Freight
09/12/2022
Accessing superannuation – Retirement and other life events
13/03/2023
Section 100A
The ATO has now issued a final ruling and practical compliance guideline (PCG) on the reimbursement agreement rules in section 100A ITAA 1936, which deal with trust distribution arrangements.
When is S100A triggered?
Section 100A is primarily aimed at situations where a beneficiary is made presently entitled to some of
the income of a trust, but the real benefit of the funds is provided to another party. Section 100A will generally be triggered when the following conditions are satisfied:
A beneficiary becomes presently entitled to a share of the income of a trust; and
The present entitlement arises in connection with, or as a result of, an agreement that has the following features:
· The agreement must provide for the payment of money, the transfer of property
or provision of services or other benefits to a person other than the beneficiary
referred to above; and
· A purpose of one or more parties to the agreement is that a person would be liable to pay less income tax for a year of income.
There are some exceptions to section 100A. The main exceptions are:
§ When the beneficiary who is presently entitled to the trust income is under a legal disability (eg, a minor); or
Where the agreement is entered into in the course of ordinary family or commercial dealing.
Guidance on the term ‘ordinary family or commercial dealing’ by the ATO;
§ A dealing is not an ordinary family or commercial dealing merely because it is commonplace.
§ The ordinary dealing exception does not apply simply because all parties to an agreement are family members. To be in the course of ordinary dealing, the transactions between family members and their entities must be able to be explained as achieving family or commercial objectives.
§ If the objective of a dealing can properly be explained as the payment of less tax to maximise group wealth, rather than some other objective which is a family or commercial objective, it is not an ordinary family or commercial dealing.
§ Cultural factors inform the question whether a dealing is to achieve family or commercial objectives.
Risk Zones
The PCG explains how the ATO will apply compliance resources to the potential application of section 100A.
Risk Level | Risk Zone | Description and compliance approach |
Low Risk | White | Applies to arrangements entered into in income years that ended prior to 1st July 2014.
Except in limited situations the ATO will not dedicate new compliance resources to consider the application of section 100A to arrangements in the white zone. |
Low Risk | Green | The green zone applies to arrangements that are described in paragraphs 20 to 30 of the PCG.
The ATO will not dedicate compliance resources to consider the application of section 100A to arrangements in the green zone, other than to confirm that the features of the relevant scenario are present in your circumstances |
High Risk | Red | The red zone applies to arrangements that are described in paragraphs 34 to 48 of the PCG.
Arrangements in this zone will attract ATO attention and the ATO will conduct further analysis on the facts and circumstances of the arrangement as a matter of priority. The ATO may proceed to audit where appropriate. |
A brief summary of the four green zone scenarios is below.
- Distributions to individuals who are members of the family
- Entitlement is received by the beneficiary within 2 years and used by the beneficiary
- Retention of funds by the trustee
- Arrangement is classified as an ‘ordinary family or commercial dealing’
Key Exclusions from the green zone
- The beneficiary’s entitlement is satisfied by payments sourced from the beneficiary
- Beneficiary is a loss company or loss trust that uses its entitlement to pay distributions which compromise the ability of the beneficiary to repay its liabilities
- Beneficiary is a company which uses the entitlement to fund distributions to a non-resident
- The trustee doesn’t notify the beneficiary of the entitlement by the earlier of the due date and actual lodgement date of the trust’s tax return
There are six different red zone arrangements which are discussed briefly below.
- Beneficiary lends or gifts the entitlement to another party.
- The income is returned to the trust in the form of assessable income ( Circular arrangements)
- The beneficiary is issued units in a trust with the amount owed for the units set-off against the entitlement
- The beneficiary’s share of the net income of the trust is significantly more than the entitlement
- The beneficiary has losses and is outside the family group
- Arrangements subject to a Taxpayer Alert
How to determine if the ATO will allocate compliance resources to your situation.
The following principles can be used as a guide in determining whether the arrangement has a higher risk of the ATO dedicating compliance resources to consider the application of section 100A:
- A benefit is provided to a person other than the beneficiary;
- The provision of that benefit involves complexity or contrivance;
- That benefit could have been provided in a more direct manner; and
- The arrangement results in significantly less tax being paid compared to if the benefit had been provided more directly.
Disclaimer
This content is intended for general information in summary form on tax and legal matters at the time of first publication and is not intended to provide and should not be relied upon in place of appropriate professional advice. Please consult your tax, legal and accounting advisors before acting or relying on any content provided.
