Navigating the ATO’s Section 100A Guidance

In 2022, The Australian Taxation Office (ATO) refocused its attention on the implementation of Section 100A ‘Reimbursement Agreements’, which could have a significant impact on the overall tax position of family trust distributions captured under this rule – in some cases this can even be applied retrospectively! Guidance was initially provided by the ATO in March 2022, and later finalised in December. Here is an overview of the guidance, and how it might affect your family trust structures.

What is Section 100A ?

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

Section 100A Guidance Details

Section 100A has been around since the late 1970s but the ATO previously only applied and enforced it with blatant schemes involving loss entities and circular distributions. The new guidance has not resulted in a change to the existing tax rules, but rather outlines a wider range of examples where the ATO considers 100A will apply and be subject to the focus of more compliance activities in the future. The ATO has narrowed its view of “acceptable” arrangements, with tax planning benefits afforded to family trusts being reduced as a result.

Section 100A Exemption

The primary focus of the ATO’s updated guidance is on trust distributions made to adult children, corporate beneficiaries, and entities with losses. The overall risk and likelihood of a Section 100A review will be largely dependent on the individual circumstances of each family trust. It is important to note that there is an exemption for any arrangement that constitutes “ordinary family or commercial dealings” even if a ‘reimbursement agreement’ exists under Section 100A. The core test that the ATO applies here is “to ask whether a dealing can be explained by, or is founded in, the achievement of family or commercial objectives” – as opposed to those dealings being for the purpose of tax avoidance.

Navigating Section 100A

Now that the ATO’s guidance is finalised, there are important steps you can take to ensure that your trust dealings are compliant.

  • Review Your Structures: This guidance reinforces the need to review your structures on a regular basis, ensuring they continue to meet your financial objectives and align with any estate/succession arrangements you may have.
  • Annual Tax Planning: In order to stay off the ATO’s radar relative to Section 100A, you need to ensure you have appropriate documentation in place demonstrating how funds relating to trust distributions are being used or applied for the benefit of beneficiaries. This should form part of annual tax planning.

The crackdown on family trusts and implementation of Section 100A ‘Reimbursement Agreements’ could have a significant impact on the overall tax position of any family trust distributions captured by the ATO under this rule. It is, therefore, important to understand the potential impact that these updates could have on your family trust. Reach out to the P + P team for a discussion and to take advantage of our tax planning service. You can reach us via our website, or on +61 2 9093 1311.

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