S100A and Trusts – what is the ATO concerned with?

The Australian Taxation Office (ATO) has for many years expressed their disdain for discretionary trusts often labelling them as tax minimisation vehicles. Despite this, trusts still remain a popular structure for family businesses and groups, because of its inherent asset protection, flexibility and ability to pass assets to future generations with limited tax consequences. Of late, it's this flexibility that has been the target of ATO and they now have issued the following in relation to section 100A:

  • A taxation ruling which explains their views on how s100A works.
  • A taxpayer alert which explains the high risk areas which would trigger s100A in their eyes.
  • A practical compliance guideline which explains how they assess risk and their compliance approach.

What is the issue then?

Trust distributions are generally made "on paper" by passing a resolution before year-end, and on many occasions, the amount which is distributed on paper to one beneficiary may be used by another person. Generally, the scope of s100A is to capture agreements where someone has obtained a tax benefit by entering into such agreements. The ATO is specifically concerned with situations where the beneficiary receiving the distribution is a lower tax paying person/entity e.g., adult children working part time.

Section 100A gives the ATO powers to tax the trustee of a trust on "sham" distributions at a rate of 47%.

What is very high risk?

The ATO issued Taxpayer Alert (TA) 2022/1 and broadly, taxpayer alerts provide a summary of the ATO's concerns on certain transactions they consider may be bordering on the verge of tax avoidance. If you undertake the transactions within the Alert, it is likely they will go very hard at you in case of an audit.

In this alert, the ATO is targeting scenarios where parents benefit from distributions being made to children over the age of 18 and here are some examples of situations which would trigger s100A in the alert:

  • Trust distributions made to adult children are not paid "in cash" to them and the funds are instead used by the parents for their own personal purposes and the Trust's records show that the children's entitlements have been paid out. There is a s100A risk if the parents achieved a tax benefit by the Trust making distributions to the children.
  • Trust distributions made to adult children are not paid "in cash" to them. The children agree to forgo this amount in lieu of expenses the parents incurred for the child since they were minors e.g., secondary schooling, extracurricular expenses etc. The parents use the "cash" themselves. It is the ATO's views that these are expenses that would ordinarily be met by parents. There is a s100A risk if the parents achieved a tax benefit by the Trust making distributions to the children.

The ATO do take a concessional view where parents are contributing towards the expenses for adult children e.g., boarding, university fees and will not impose s100A in the following situation:

  • Trust distributions made to adult children. The parents have paid for fees and boarding for the child whilst they attend university. The Trust deducts the amounts paid for university fees and boarding and pays the remaining amount in "cash" to the adult child.

Exclusions from 100A

Accountants and advisers have historically relied on one of the exclusions from s100A; transactions entered within ordinary family or commercial dealings. Unfortunately, ordinary family or commercial dealings was not defined clearly and there is limited case law in relation to the application of section 100A. Taxation Ruling (TR) 2022/D1 provides the ATO's views on ordinary family or commercial dealings.

Here are some examples provided by the ATO on whether this exception could apply:

  • Distributions to spouses with mixed finances
    Trust distributions made to husband and wife who have mixed finances and shared financial responsibilities. They use the funds distributed by the Trust.

  • S100A would not apply in this situation.

  • Gifts from parents to children
    Trust distributions made to husband and wife. Their adult child needs to buy a house and the parents use the funds from the Trust distribution and gift it to their child.

  • S100A would ordinarily not apply in this situation unless the parents do this repeatedly and are on lower tax rates than their children.

  • Entitlements gifted back to Trust
    Trust distributions made to adult child to use their lower marginal tax rates. The child gifts the amount back to the Trust.

  • The ATO may look into this and question whether someone has achieved a favourable tax outcome. If this happens every year, the ATO may take the view that s100A applies. Furthermore, s100A would also apply if:

    • The child gifted the distribution to the parents.
    • The child tells their parents they would like them to have the money for all the costs the parents have incurred for them whilst they were a minor.
  • Entitlements held on separate trust
    Trust distributions made to adult child each year. The child has never received anything in cash from the Trust but is at liberty to call upon his entitlements. The Trust keeps the funds owed to the child aside and can be made available to them at any time.

  • S100A would not apply in this situation this unless instead of the Trust keeping the funds aside for the child, the parents (or someone else) use the funds on interest free terms.

Obviously whether s100A may apply comes down to a range to reasons but the above should give Trustees an idea on the kind of arrangements the ATO is targeting.

Our thoughts

The ATO have been putting out non-binding guidance on their website and some of these issues have been raised over the last few years as an area of concern. Some of these situations may seem familiar to various trustees but whilst advisors have always acknowledged a risk, this very much is a strong show of intent from the ATO to go after what they consider are "sham" distributions.

We also note that the ATO issued this ruling weeks after losing a s100A case (which they have since appealed to a higher court) and it will be interesting to see whether that will have any impact on their view. Common sense would indicate that they could have waited for some more time considering they have held back drafting and releasing these rulings for a number of years.

Next steps for Trustees

In the lead up to 30th June, the following should be on top of mind for Trustees:

  • This is not new law, and it is just the ATO's view on how the current law operates. Consultation is underway and we expect it may be a while before the ATO finalises this guidance
  • Where an amount is being distributed "on paper" to a beneficiary, ideally the money should follow
  • S100A has no amendment periods and the ATO can technically go after these arrangements as far as they want to.

If you are concerned or affected by these changes, contact your Moore advisor as soon as possible.

This article is issued as general commentary - please contact us about your specific circumstances.