The ATO has a renewed interest in reimbursement agreements,
confirmed in its list of '
what attracts our attention' dated 27 October 2015. This
follows the ATO's continued attention on reimbursement
agreements set out in its
guidance released in July 2014. However, this time around, the
ATO is arguing that certain trust distributions, which may be
construed as part of legitimate tax planning, actually fall within
the scope of the reimbursement agreement provisions – with
particularly harsh consequences.
What are reimbursement agreements?
In broad terms, a reimbursement agreement exists where:
a trust distribution is made to a specified beneficiary;
another person obtains the benefit of the distribution;
the arrangement is for the purpose of minimising income
A common example is a trust distribution to a beneficiary who is
either exempt or on preferential tax rates, but where the trust
funds are used either by the trustee in carrying on the trust's
business or by beneficiaries on higher tax rates.
Are there any exclusions?
There are exclusions for where an arrangement is done as part of
'ordinary family' or 'commercial' dealings. The ATO
has issued guidance on these issues, but that guidance provides
examples on cases that are obviously:
'ordinary family' dealings – a trust under a Will
for a beneficiary under the age of 18;
'commercial' dealings – an unpaid trust
distribution that is converted to a complying Division 7A loan;
not 'ordinary family or commercial dealings' – a
washing scheme designed to avoid income tax.
Importantly, in our audit experience, the fact that
distributions are made to family members may not be sufficient to
constitute 'ordinary family' dealings – where those
family members are on preferential tax rates. This will be a
particular concern for taxpayers distributing trust income to adult
children on low marginal rates or non-resident family members.
An area of particular concern for advisers should be around
clients who have adopted washing schemes. In the guidance provided
by the ATO, the following diagram highlights a particular
arrangement that the ATO considers to be a reimbursement
What are the risks of reimbursement agreements?
Section 100A is a deeming provision. It does not require the
Commissioner to make a determination in the way Part IVA
There is also no limitation period, which increases both the
number of years of assessment that the Commissioner can amend, with
a corresponding increase in the effect of interest.
What practical steps can I take?
For historical trust distributions, advisers should review
whether there is a risk that the reimbursement agreement provisions
If there is a risk, then a decision will need to be taken on
whether to collect evidence that the arrangement is excluded
(hopefully while that evidence can still be obtained) or make a
voluntary disclosure. The collection of evidence in these matters
is particularly important, because, while the Commissioner has no
limitation period, the taxpayer has the burden of proving its
For future trust distributions, advisers need to consider the
ATO's published position since 2014. Practically, this may mean
considering whether the pattern of previous distributions that were
made as part of a client's tax planning strategy can be
continued – or whether the risk of the ATO seeking to apply
the reimbursement agreement provisions is too high.
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The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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ATO has released 2 draft fact sheets relating to the 2010 amendments to corporate law and tax in relation to dividends.
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