What is section 100A and why does it matter?

Section 100A of the Income Tax Assessment Act is an anti-avoidance rule designed to prevent tax evasion through trust arrangements. It applies when one person benefits from trust income, but another is deemed presently entitled and assessed for the income. This situation often arises in reimbursement agreements or similar arrangements where a purpose of tax reduction or deferral is evident.

If Section 100A applies, the trustee is taxed on the beneficiary's share of the trust's income at the top marginal rate. This rule ensures that income entitlements and trust distributions align with the actual economic benefits received, avoiding reduced or deferred tax liabilities. The ATO devotes significant resources to ensure compliance, focusing on higher-risk trust arrangements and ensuring trust deeds and resolutions are properly managed.

For any trust-related tax issues or to ensure compliance with Section 100A, you can schedule a complimentary consultation using this link.

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When does section 100A apply to a trust distribution?

Section 100A targets specific trust arrangements known as "reimbursement agreements," which fall outside regular family or commercial dealings. These agreements result in a beneficiary being entitled to trust income without actually benefiting from it. The main aim of such arrangements is to reduce someone's tax liability.

For Section 100A to apply, the following conditions must be met:

1. The present entitlement to trust income is linked to an agreement, arrangement, or understanding.
2. A benefit is provided to someone else, which could be through a transfer of trust property, payment, loan of money, or provision of services.
3. At least one party intends to reduce or defer income tax.

This provision applies to all types of trusts, including discretionary, fixed, and unit trusts. A trust becomes a family trust when it makes a "family trust election," meaning it is controlled by a "family group."

Are there any exclusions to reimbursement agreements?

Section 100A includes important exceptions, especially for family trusts and their distributions. If a distribution meets the family control test and does not aim to reduce taxes, it may avoid triggering Section 100A. This is crucial for family trusts that aim to protect assets and optimise tax savings legally.

Key exclusions include:

1. Distributions that align with genuine family arrangements and purposes.
2. Trusts that pass the family control test.
3. Distributions without the primary intent of reducing or deferring income tax.

These exceptions help family trusts operate within the law while achieving their financial goals. For further guidance, consult tax professionals or the ATO's detailed resources on family trust distributions.

The beneficiary is under a legal disability

Section 100A does not apply when a distribution is made to a beneficiary who is under a legal disability, such as minors or individuals in bankruptcy. In these cases, the trustee assesses the distribution on behalf of the beneficiary. References to beneficiaries in subsequent sections pertain to those not under a legal disability unless explicitly stated otherwise.

There is no tax reduction purpose

Section 100A excludes any agreement that was not created with the intent to achieve a "tax reduction purpose." A tax reduction purpose refers to ensuring that an individual, regardless of their role in the agreement, pays less or no income tax compared to what would have been payable if the agreement had not been made.

The absence of tax reduction intent

If an agreement was not made to reduce income tax, Section 100A does not apply. This means that the agreement should not aim to ensure that any individual involved pays less or no tax than they would have otherwise.

The beneficiary is a 'trustee beneficiary'

When a beneficiary is a "trustee beneficiary," and the trust distribution is made to another trust that serves as a beneficiary, Section 100A does not apply if the distribution comes from that other trust. It's essential to consider the implications of Section 100A when making distributions, particularly in the context of family trust structures and their tax consequences.

Example of ordinary family or commercial dealing

Alex and Mia are a couple living with their two children and Alex's uncle, George. George contributes to some housekeeping, but relies on Alex and Mia for financial support.

Alex and Mia manage a grocery business through a discretionary trust, A&M Foods Trust. Alex is the trustee of the trust. In the 2023–24 income year, the trust distributes $25,000 to each of Alex and Mia. The funds representing the entitlements are deposited by the trustee into Alex and Mia's joint account. Alex withdraws funds from that account throughout the next year to pay for the mortgage and school fees. Alex and Mia have also provided George with a linked credit card that allows him to pay for his medication and groceries for the family.

Alex and Mia have shared financial responsibilities and enjoy the shared benefits of the distribution, using the funds to meet the expenses of their family and dependents. Based on these facts, this arrangement would generally be considered an ordinary family dealing.

What are the consequences of a reimbursement agreement?

When Section 100A applies to a family trust distribution, it triggers specific tax consequences:

Beneficiary’s entitlement nullified

The beneficiary is deemed never to have held present entitlement to the trust income retroactively.

Income recharacterisation

If the beneficiary's entitlement was based on income receipt or allocation, that income is treated as if it was never paid or assigned.

Trustee's tax obligation

The trustee must pay tax at a rate of 47%, which includes the top marginal tax rate and Medicare levy, on the beneficiary's share of the trust's net taxable income.

The ATO can retroactively invalidate trust distributions under Section 100A.

Affected beneficiaries can amend their tax returns to reclaim previously paid tax. These consequences apply universally, regardless of a default beneficiary clause in the trust deed and the type of trust income generated.

Section 100A can also impact capital gains or franked dividends allocated to beneficiaries, causing a reshuffling of income allocation. The trustee may face additional assessment under Section 99A in such cases.

While Section 100A affects tax matters, it does not nullify trust distributions under trust law. This distinction can create legal and practical challenges, including accounting complexities for both the trust and its beneficiaries.

Example scenario

Imagine a trust distribution has already been received by a family member beneficiary, and tax has been paid. If the ATO later deems the distribution invalid, the trustee is generally liable for tax at the highest rate on the beneficiary's share of income. While beneficiaries can seek tax refunds, trust law often doesn't require them to return received amounts, raising questions about managing the trustee's tax liability and family trust operations.

How does the ATO assess section 100A risk?

On 23 February 2022, the Australian Taxation Office (ATO) released PCG 2022/D1, which outlined their initial approach to compliance with Section 100A for family trusts and businesses. These guidelines faced significant criticism and controversy.

After months of consultation, the ATO published the final version of its Section 100A compliance guidelines on 8 December 2022, along with a compendium addressing feedback. PCG 2022/2 improved upon the initial guidelines by including more illustrative scenarios exempt from ATO compliance scrutiny. However, some concerns remain, particularly regarding trust distributions to adult children of the trust controllers.

These guidelines highlight the need for tax-effective trust structures to benefit future generations and protect family assets. The ATO's Section 100A Compliance Guidelines provide a structured approach to allocating compliance resources, focusing on trust distributions within family trusts and businesses.

The guidelines help taxpayers assess the level of "S.100A risk" associated with their trust distributions and take appropriate action. The ATO uses a Risk Framework to categorise trust distributions based on their risk profiles.

What records should you keep for section 100A compliance?

Keeping detailed records of your trust transactions is crucial. Understanding why entitlements were handled in a certain way supports your position and helps resolve any reviews by the ATO efficiently.

Key documents and details to maintain include:

• The trust deed (including any amendments), trustee resolutions, and contact details of the trustee.
• For inter-party loans, keep copies of loan agreements and records explaining the purpose of the loan.
• Evidence showing that a beneficiary has received or benefited from their entitlement.

Although intra-family arrangements often involve more informality compared to commercial dealings with unrelated parties, it is still important to keep contemporaneous records. These records should show the objectives of the arrangement and how they were achieved. Trustees or their registered tax agents should ensure these records are well-maintained to demonstrate the intended outcomes and compliance with tax laws.

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Disclaimer

Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.

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