Last week we introduced section 100A and recommended that those who are assisting with trusts act immediately to manage the section 100A tax risk, as it is very much a live issue.
This week, we continue our series and discuss the first primary defence to section 100A: “there was no beneficiary who had present entitlement to trust income or the presently entitled beneficiary was under a legal disability”. As section 100A applies in a case where a beneficiary, who is not under a legal disability, becomes presently entitled to a share of the income of a trust estate,1 a primary defence to section 100A is to show either that:
- the beneficiary who became presently entitled to the trust income was under a legal disability; or
- there was no beneficiary who became presently entitled to the trust income.
When is a beneficiary under a legal disability?
A beneficiary is under a legal disability if he or she was a minor, undischarged bankrupt or a person of unsound mind at the relevant time.
How do you determine present entitlement?
In assessing whether any beneficiary became presently entitled to trust income, it is necessary to start with the trust deed. You should locate a copy of the trust deed. If you cannot find a copy of the trust deed, ask other people such as the banker, former accountant, lawyer, financial adviser or deed provider. If the trust deed remains lost, please contact us as there can be ways to resolve this predicament.
Once you have located a copy of the trust deed, you should consider the trustee resolution that distributed the trust income and determine — having regard to the terms of the trust deed and the trustee resolution — whether the beneficiary was given an interest in the income that was both vested in interest and possession and a present legal right to call for the income. If the beneficiary was given such interest to the trust income, they would be presently entitled to the trust income. On the other hand, if the beneficiary's interest was merely contingent, they would not be presently entitled to the trust income.2
What can you do to prepare for this primary defence?
As the Commissioner has an unlimited period to review and invoke section 100A, you should consider the history of the trust's distributions of income and identify the distributions that should be assessed for section 100A risk. A good starting point is to consider the larger distributions of trust income.
The task then is to assess those distributions of trust income for section 100A risk. It could be that the beneficiary who was thought to be presently entitled to the trust income did not actually have present entitlement to the trust income. It could also be that no beneficiary was presently entitled to that trust income. If no beneficiary became presently entitled to the trust income, or the presently entitled beneficiary was under a legal disability, then section 100A should not apply.
Having said that, in the case where no beneficiary became presently entitled to the trust income, there is a question whether the correct amount of tax has been paid as the trustee would presumably be assessable for tax and the Commissioner may be within time to assess any unpaid tax.
Section 100A can apply even if the trustee resolution had failed
It is important to note that section 100A can apply even where a trustee resolution had failed to provide the intended beneficiary with present entitlement and another person (such as the default beneficiary) became presently entitled to the trust income.3
The task of assessing section 100A risk requires a holistic approach and may require further analysis even if the trustee resolution had failed to achieve its purpose.
Next week, we consider the second primary defence to section 100A: there was no “agreement” that provided benefits to a person other than the beneficiary.
1 Section 100A(1)(a) of the Income Tax Assessment Act 1936 (Cth).
2 Harmer & Ors v Federal Commissioner of Taxation (1991) 22 ATR 726.
3 This occurred in the case of Raftland Pty Ltd ATF the Raftland Trust v Federal Commissioner of Taxation  HCA 21.
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.