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Section 100A – How the ATO’s Crackdown on Family Trusts Might Impact You

For years, many Australians, particularly those operating businesses, have used family trust structures as a wealth creation vehicle. The ATO has previously put trust distributions and their tax treatment under the microscope but have now refocused their attention to Section 100A ‘Reimbursement Agreements’. This could significantly impact on the overall tax position of any family trust distributions caught by Section 100A.

What’s more remarkable, is the new guidance will retrospectively apply back to 2014 and continue to have an unlimited period of review ongoing forward. This is currently in “draft” phase and subject to industry consultation, and we anticipate major lobbying and backlash. However, it is worth looking at the wide-ranging impact these updates will have if they remain unchanged.

What is Section 100A ‘Reimbursement Agreement’?

Section 100A is an integrity rule in tax legislation aimed at situations where income of a trust is appointed in favour of a lower taxed beneficiary, but the economic benefit of the distribution is provided to another individual or entity. Trust distributions that are captured under Section 100A generally result in the trustee as much as 47% (before interest and penalties are imposed).

New Guidance Details (s.100A)

Section 100A has been around since the late 1970’s. It was historically only applied / enforced by the ATO in blatant schemes involving loss entities and circular distributions.

Notably, the new guidance has not resulted in a change to the existing tax rules. Instead, the guidance outlines a wider range of examples where the ATO considers 100A will apply, and thus be the focus of more compliance activities moving forward (e.g. audits). Ultimately, the ATO has narrowed its view of “acceptable” arrangements, with the aim of reducing the legitimate tax planning benefits that are afforded to Family Trusts.

Section 100A – Exemption

The ATO’s updated guidance focuses primarily on trust distributions made to adult children, corporate beneficiaries, and entities with losses. The individual circumstances for each Family Trust will ultimately determine the level of risk and likelihood of a Section 100A review.

Even if a ‘reimbursement agreement’ exists under Section 100A, there is an exemption for any arrangement that constitute “ordinary family or commercial dealings”. This concept is currently being challenged in the Courts, with the ATO appeals being unsuccessful so far. So, whilst we won’t dive into the details within this article, it does provide an avenue for ‘reimbursement agreements’ under 100A to be exempt from any adverse tax consequences.

Moving Forward

Whether or not this latest guidance holds up under the weight of inevitable backlash and lobbying remains to be seen. We, therefore, leave you with a couple of pointers, that should be front of mind, given the change in ATO guidance on Section 100A:

• Review Structure: The new ATO guidance does reinforce the need to review your structures on a regular basis to ensure it continues to meet your financial objectives and align with your estate / succession arrangements.
• Annual Tax Planning: Appropriate documentation needs to be in place to demonstrate how funds relating to trust distributions are being used or applied for the benefit of beneficiaries. This is best undertaken as part of annual tax planning review.

The Taxation team at McKinley Plowman can review your structures, keep you up to date with changes from the ATO, and provide tax planning services that are compliant with the ever-changing Australian tax legislation landscape. If you are concerned about the impact this new guidance may have on you and your trusts, please contact us via our website or on 08 9301 2200.

References: Knowledge Shop 0322 Your Knowledge

written by:

Steven Lisle

Tax Manager Steven Lisle has been part of the McKinley Plowman team since 2007, and in that time has built his repertoire upon delivering industry leading, up-to-date international and Australian tax strategies and consulting services. Steve's clients enjoy the optimised tax outcomes he provides them, especially where complex structures could otherwise lead to significant tax obligations.