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When it comes to trust distributions, the buck stops with accountants. In the first of two articles, here’s an outline of the salient points.
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How to plot a path through the s100A minefield
05 May 2023
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13 minute read
Despite the release of the ATO final tax ruling and practical compliance guidance on its interpretation and approach to section 100A, considerable uncertainty persists. This is a problem that affects hundreds of thousands of Australians. Accountants and tax agents are tasked with “solving” this most unsatisfactory situation.
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For accountants and tax agents, this is not something over which you can have a nice academic debate while consuming a glass of wine. For you, this is not light entertainment. With you, the buck stops! Accountants and tax agents in public practice know they have to make real decisions about real money that has a real impact on people. The sum total of s100A confusion falls in your lap to solve.
With 30 June rapidly approaching in this article and its sequel I offer concrete guidance on trust distributions and the policy decision that you must make about your clients. There has been a good deal of unclear “if, buts and maybes” in relation to this matter; I hope these pieces will be of real assistance.
Here, I make a number of statements about the s100A issue and quote my support for the statement. In the second article, I will discuss the policy decisions you need to make in relation to your clients.
Statements about s100A
Below, I make a series of statements about s100A that I believe encapsulate the salient points of the current position. This list cannot be, and is not intended to be, exhaustive. Nevertheless, I have tried to include most of what I consider to be the key points accountants and tax agents need to know.
(Abbreviations used in this list: TR 2022/4 – TR; PCG 2022/2 – PCG; Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust – Guardian.)
- Your trustee clients will not be at risk of an s100A created assessment if a beneficiary receives all of their present entitlement and spends the money on themselves alone or invests it for their benefit alone [100A(7)].
- Your trustee clients will not be at risk of an s100A created assessment if there is no “reimbursement agreement” [100A(1) & (2)].
- For s100A to have application, the distribution to the beneficiary must arise out of or be as a result of the reimbursement agreement. This means, for practical purposes, the reimbursement agreement (if there is one) must occur prior to the signing of the distribution of income minutes by the trustee for a particular income year [100A(1)(b) & (2)(b)] [Guardian (108)].
- A reimbursement agreement will not exist unless, broadly, there is a tax saving purpose in the agreement. This motivation only need be one of the purposes – no matter how minuscule. It need not be the sole or dominant purpose [100A(8)].
- If your client’s circumstances are within the facts of one of the green zone scenarios (see the TR and the PCG), the ATO will not commit compliance resources to investigating your client’s affairs, except to ensure that the features of the green zone are present. That is, even if your situation is in the green zone, the ATO may still ask questions about it [PCG (18)].
- If you decide that your client is within the green zone, you must document how the client’s circumstances meet the green zone requirements. This means that you must have a solid understanding of both the TR and the PCG [PCG (18)].
- A situation will be in the green zone if a beneficiary receives their entitlement within two years of becoming presently entitled and the beneficiary “uses the entitlement”.
Using the entitlement means the beneficiary (if an individual) keeps the entitlement or uses it to purchase goods or services, to meet liabilities or expenses, for the beneficiary, their spouse or dependents. It can also be invested for those people. Note: It is only for those people that the arrangement can be within the green zone [PCG (22) & (23)]. - A trustee may retain an individual beneficiary’s entitlement as an unpaid present entitlement for greater than two years and the arrangement can still be within the green zone. However, the “working capital conditions” and beneficiary conditions must be met under the ATO’s rules [PCG (26) & (27)].
- The above point is not applicable where one of the “exclusions from the green zone” is applicable [PCG (22) & (32)].
- If a company is a beneficiary of a trust and the trustee is to retain the funds, there are a number of conditions required before the arrangement can be said to be in the green zone. These include that the trust has made a family trust election, the company is within the family group, the unpaid present entitlement is put on a Division 7A complying loan agreement, the “working capital conditions” are satisfied and there is nothing that excludes the arrangement from the green zone [PCG (28), (29) & (32)].
- Where an individual beneficiary receives a trust entitlement and does not use the entitlement in such a way that it [1] benefits the beneficiary, their spouse or dependants, [2] is used to make personal superannuation contributions or [3] used to donate to a deductible gift recipient, the trust arrangement will not be in the green zone [PCG (20) & (32(b))].
- A person, designated as “you” in the PCG, is required to know how beneficiaries have spent the entitlements they have received from a trust. “You” (whoever that is) is required to have “a clear understanding as to why a beneficiary has chosen to deal with their entitlement in the way they have …”. Further, it is not possible to say that an arrangement is in the green zone when the beneficiary has received their present entitlement unless “you” can say how the beneficiary has spent or used the entitlement. There is no attempt in the PCG to grapple with the issue of how “you” is supposed to trace every dollar of trust distribution through to its use [PCG (20), (32) & (49)].
- Where a beneficiary is under a legal disability (e.g., a minor), s100A has no application [100A(1)(a) & (2)(a)].
- The majority of trust distribution scenarios will fall neither under the green zone nor under the red zone of the PCG [The opinion of the author].
- If there is an “ordinary family or commercial dealing”, there is no reimbursement agreement. What constitutes an “ordinary family or commercial dealing” remains unclear. The Full Federal Court decision in Guardian did not need to discuss the meaning of this phrase [100A(13)] [Guardian 126].
- There is no issue with an accountant (of themself) recommending to a client how a trust distribution should be made – even if for the purpose of saving tax. It would be necessary to find that the accountant had authority to act on behalf of a client in order to conclude that the accountant was involved in creating a reimbursement agreement [Guardian (121 - 125)].
- Trust documentation needs to be maintained fully and properly. The days of dealing with trust documentation in a loose manner are over. Documents need to be prepared on an arm’s-length basis and accountants, as a general statement, need to “pick up their game” when preparing and creating trust documentation. Among other things, there should be proper minuting of decisions, formal advice to beneficiaries of their entitlements and responses from beneficiaries giving instructions to trustees as to what the trustee should do with the beneficiary’s entitlement and so forth [The author’s opinion].
The above comments are my personal opinions of the current situation regarding section 100A. These comments do not constitute advice and are given trusting they will assist accountants and tax agents in public practice.
In the next piece, I turn to the policy decisions accountants and tax agents need to make in relation to their trust clients.
John Jeffreys is director of John Jeffreys Tax Pty Ltd.
The second article on how to deal with s100A will be published tomorrow, Saturday, 6 May.
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