Section 100A of the Income Tax Assessment Act 1936 (Cth) applies to trust reimbursements. Now over 40 years old and often forgotten, this provision is a very live issue, with the ATO intending to come out with their new views in early 2022. Client trusts that are subject to section 100A can result in a hefty tax bill. The time to act and manage the tax risk is now.
What is section 100A? Why is it important?
Originally, section 100A was introduced in 1978 as an anti-avoidance measure to target trust stripping arrangements. But its wording goes so much further. It allows the Commissioner to disregard trust distributions that form part of a "reimbursement agreement" and instead impose tax on the trustee at the top marginal tax rate (currently 47% including the Medicare levy). Worse, the Commissioner has an unlimited time to invoke section 100A. It can be applied to trust distributions back to 1978!
There are a few key issues to be aware of, the first is: What is a "reimbursement agreement"? This exists where:
- a beneficiary is made presently entitled to trust income (the trustee exercise of discretion is in their favour);
- the cash is not distributed to the beneficiary;
- someone other than the beneficiary benefits from the income (which could be through a payment or offset of money, including a loan, transfer of property, provision of services or provision of other benefits); and
- the beneficiary pays a lower amount of income tax than that someone who had benefited from the income would have paid.
The ATO is almost ready to act
Many "ordinary trust distributions" can fall into this area. In our dealings in managing ATO audits on trusts in recent times, we have seen the ATO raising section 100A more and more often with Part IVA as a backup to the tax claim. In our experience, the ATO is pre-emptively applying section 100A.
The recent ATO activity appears to evolve from a new thinking on this provision. Over several Court cases the ATO has won on some points but lost on others, but it now appears that the ATO is willing to further test and apply this provision. The ATO promised a draft taxation ruling on section 100A that was scheduled to be released in June 2021 and then October 2021 but this has now been delayed to early 2022.1They are certainly putting a lot of thought into section 100A. The ruling is to be applied immediately by the ATO audit teams.
The time to act is NOW
Section 100A is existing law and has current effect. As we close off 2021, section 100A should be on your priority list for review with your clients and as urgent priority in 2022. You should determine who has section 100A tax risks and put in place a plan to deal with it. If you are "papering" the 2021 trust distributions now, it is imperative that you keep section 100A in mind in recording any trustee resolutions.
We are already assisting a number of accountants with managing the section 100A tax risk and you should not leave the planning till the very last minute.
Over the next few weeks, we will be covering section 100A in further detail, when it can apply, what the various Court decisions have been about and the primary defenses that can be available. As is our style, we will take a practical look at the issues and discuss the options you can present to clients.
1See the Commissioner of Taxation's address to the Tax Institute's Tax Summit 2021 on 21 October 2021;
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.