Many Australians, particularly running those businesses, have used family trust structures to build wealth for many years. The ATO took a closer look at distributions from trusts and their tax treatment but is now turning its attention back to section 100A, refund agreements. This can significantly impact the overall tax position of family trust distributions included in section 100A.
In particular, the new directives were applied retroactively from 2014 and are still subject to an ongoing and indefinite review period. It is currently at the “draft” stage and for discussion with the industry, and you expect a lot of lobbying and backlash. However, the far-reaching impact of leaving these updates in place is worth considering.
What is Section 100a “Refund Agreement”?
Section 100a is a consistency rule in the tax code that deals with situations where the income from a trust is allocated for the benefit of low-tax beneficiaries. Still, the financial benefits of the distribution are given to another person or entity. Distributions from trusts taken under Section 100A generally earn the trustee up to 47% (before interest and penalties are charged).
Earlier this year, the Australian Taxation Office (ATO) released a draft package of advice and guidance focusing on trustee rights arising from trust beneficiary repayment arrangements and the existing unpaid entitlement (UPE). This is Section 100A (Section 100A) for those who want to become technical.
The purpose of this release was to release revised guidance for public consultation and comment on how the ATO applies the legislation related to Section 100A. He certainly gets a lot of attention and a lot of attention from the local community.
What is the targeting?
Essentially, the guidance package is a revised version of the 2014 guidance, which focuses on situations where the trust’s income is distributed to adult children to take advantage of lower marginal tax rates, and then gets another benefit. Perhaps another beneficiary of the trust, such as a parent or trustee.
It is important to note that not all distributions from boxes to adult children are problematic. The ATO recognizes that most credit distributions and transactions are “legal” and will not be reviewed as part of the current guidance and will seek to identify and investigate transactions and arrangements that misuse profits.
New targeting details (100a)
Section 100a has been around since the late 1970s, and historically, the ATO has only been applied or enforced in explicit schemes involving loss units and circular distributions.
Notably, the new guidelines did not bring about changes in the existing tax rules. Instead, the guidance describes a wide range of examples where the ATO believes 100A applies, so that will be the focus of future compliance activities (such as audits). Ultimately, the ATO narrowed the range of “acceptable” arrangements to reduce statutory tax planning benefits accruing to family trusts.
Section 100a – Exemption
The updated ATO guidelines focus on distributions from trusts to grown children, company beneficiaries, and loss-making companies. The individual circumstances of each trust will ultimately determine the level of risk and potential section 100a review.
Agreements that constitute “ordinary family or business transactions” are exempt, even if there is an “agreement to pay” under 100A. The concept is currently being challenged in court, and the ATO’s appeal has yet to be successful. So while this article won’t go into detail, it does provide one way in which a 100A “reimbursement agreement” is exempt from adverse tax consequences.
from now on
It remains to be seen whether this updated guidance will hold up under the inevitable backlash and pressure.
- Structural review: New ATO guidance reinforces the need for periodic structural reviews to ensure financial targets are consistently met and consistent with legacy/will arrangements.
- Annual tax plan: There should be appropriate documentation showing how the funds in connection with distributions from the fund will be spent or used for the benefit of the recipients. This is best done as part of your annual tax planning review.
What does this mean for my confidence?
The 100A application is very specialised, but it is generally used in the following cases:
- Beneficiaries are now entitled to receive income from the fund.
- It has been agreed that another person benefits from the fund’s income. This is called a “refund agreement.”
- One of the objectives of this scheme was to reduce the tax paid by a person.
- The arrangement was not an “ordinary family business or corporation.”
The main limiting factor is when there is no clear purpose for the transaction other than tax benefits. As part of the guidance package, the ATO identified color-coded areas to highlight where the focus was.
Green Zone – Items in the Green Zone are considered “good” and do not require further investigation. These types of arrangements include ordinary family or business relationships. For example, when family members have different financial situations (such as joint bank accounts), gifts from parents to adult children, or money that trustees use for stock transactions or investment acquisitions. Assets and long positions.
Blue Zones: Repairs in Blue Zones usually require “further investigation.” If there is money from the trustee which does not fall within the green zone (the beneficiary grants a trust interest, waives the interest, or waives or relieves the trustee of the obligation to pay the interest), or expressly green if it does not fall within the zone or the red zone, the ATO will review the details of the repair.
Red zone: The ATO’s main focus is now on events and corrections in the red zone. Suppose the recipient lends or grants rights to another party or arrangements covered by TA 2022/1 Taxpayer Alert, applicable washing arrangements, misappropriation of losses, and similar situations. In that case, the ATO will investigate under the latest guidelines.
The area above shows some common fixes to check, but the key here is to enable p.100A. There may be cases marked for review in the blue or red zone, which do not trigger s.100A and therefore do not need to be investigated. The test of whether section 100A applies depends on whether there was a payment agreement when the beneficiary acquired rights to the trust’s income.
