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21 March 2022

It Depends – Is the ATO coming to help with section 100A?

In this week’s edition of ‘It depends’, partner Fletch Heinemann talks about the ATO's recent guidance in relation to section 100A reimbursement agreements and how it applies to distributions of income from family trusts.


Welcome to today’s It depends. Today we’re talking about the ATO’s recent guidance in relation to section 100A reimbursement agreements and how it applies to distributions of income from family trusts.

What is Section 100A?

Section 100A is a specific anti-avoidance provision. So, it was introduced in the late 1970s to deal with a particular type of arrangement called trust stripping. But more recently the ATO has looked at applying section 100A to arrangements where there’s distributions of trust income from a family trust to include where distributions are made to members in that family.

Is the ATO coming to audit me?

Well, it depends. The ATO has released a PCG that sets out a series of zones. So, unsurprisingly the red zone is the arrangements that the ATO do not like. There’s also a series of arrangements that are categorised into a green zone where the ATO accepts that those type arrangements do fall within the scope of an ordinary family or commercial dealing. So, there’s an early example of where a grandson is made a beneficiary under a Will and then while he is presently entitled to the trust income for a number of years, he’s only entitled to be paid that trust income when he turns 25. So, the ATO concludes that this is an ordinary family dealing because it’s explicable by things that relate to an ordinary family transaction.

However, there are also arrangements that the ATO has categorised into a red zone and of particular interest to taxpayers and advisers will be distributions of trust income to adult children that has been made over a number of years. The arrangements that the ATO are particularly interested in are where there’s been distributions of trust income to adult children, but where some other person often, for example, mum and dad then get the benefit of that trust income and the children’s entitlement is now said to be waived or released or forgiven so that the children actually never call on their entitlement to their trust income. So, the ATO is particularly interested in looking at these arrangements together with a series of other types of arrangements that they’ve seen that have an avoidance purpose.

How should I deal with existing entitlements?

Advisers are going to face a difficult question in terms of dealing with the existing entitlements. But there’s a couple of questions that need to be dealt with, first to figure out the best way to move forward. The first is understanding that the ATO’s guidance sets out a compliance approach and sets out examples of circumstances that they consider high risk.

However, there’s a difference between the ATO’s compliance approach and the correct analysis at law. So, the first question is going to be understanding whether the particular circumstances of the case indicate that there’s actually a real risk of section 100A applying.

Once we understand the nature of the particular risk, the next step will then be identifying options for dealing with those historical risks and then working out options for dealing with future distributions of trust income going forward.

If you have any questions in relation to section 100A, applying to particular arrangements, or if you have any questions in relation to the ATO’s recent  guidance, please feel free to contact me or a member of our team.

We’d be happy to help.

Thank you for watching this edition of It Depends.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.

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