Am I at risk with my trust distributions ? What you need to know about section 100A?

Recently, the ATO has been reviewing and making changes to the requirements relating to distributions of trust income to adult children.

Trustees should review their circumstances, especially if the trust income has been appointed between members of the family group, however the parents are the ones that gain the economic benefit of the income. This is potentially the type of tax avoidance activity called ‘reimbursement agreements’ that the ATO wants to stamp out.

Before we start, let’s first understand what section 100A is and how it came about.

What is section 100A?

Section 100A is an anti-avoidance rule that applies where lower or concessionally taxed beneficiaries of a trust are made entitled to trust income by the trustee, while the income is enjoyed by another person who would otherwise have had to pay more income tax.

When does section 100A apply?

It applies to an agreement (called a ‘reimbursement agreement’) where one person receives a benefit from the trust, but another person is made presently entitled to income and assessed.

Each of the following must be satisfied for section 100A to apply:

  • The present entitlement is connected to an agreement, arrangement or understanding.
  • There is a benefit provided to someone else. A benefit can take the form of a transfer of trust property, a payment or loan of money called a ‘reimbursement agreement’
  • At least one party had a purpose of paying less or deferring tax.
  • A beneficiary is made presently entitled to trust income
  • The arrangement was not an ‘ordinary family or commercial dealing’.

When does section 100A not apply?

Section 100A does not apply to arrangements entered in the course of ‘ordinary family or commercial dealings’ or where no party to the arrangement has a tax avoidance purpose.

Importantly, also when the beneficiary receives and enjoys the benefit of the income distributed.

What is considered ‘ordinary family or commercial dealings’?

Although you may be part of a ‘family group’, the ATO does not automatically consider these arrangements to be ‘ordinary family or commercial dealings’. Some of the most common features that are considered not ‘ordinary family or commercial dealings” are when:

  • it appears that beneficiaries are unlikely to receive their entitlements
  • assets or funds representing the entitlement appear to be lent to others without any intention of being returned or repaid
  • beneficiaries are not informed of their entitlements (they have no understanding of the arrangements and what they are legally entitled to)

How does the ATO assess section 100A risk? What arrangements are most at risk?

The ATO has outlined several scenarios they consider to be a lower risk (Green zone) and a higher risk (Red zone) arrangements.

What records should I keep in the event of the ATO questioning the trust distribution.

We recommend that clients keep thorough records that explain the transactions that have taken place. Having a clear explanation in writing as to why entitlements have been dealt with (and distributed) in the way they have will help support your position should you be questioned by the ATO. Good record keeping will also assist in timely resolution in the event of an audit.

We understand that intra-family arrangements are typically conducted informally than commercial dealings. While each arrangement depends on its facts, the following record keeping will be important:

  • evidence to demonstrate that a beneficiary has received or enjoyed the benefit of their entitlement.
  • for an inter-party loan, copies of the loan agreements and records of the purpose for making the loan
  • the trust deed (including amendments), trustee resolutions, and contact details of the trustee

How can Morrows help?

The ATO’s recent review and changes relating to section 100A are still in draft, however, we believe they will become effective. Therefore, we thought it was essential to communicate the expected changes. We will keep you abreast of any updates as the ATO announces them.

If you have any questions, please reach out to your Morrows Tax and Business advisor.

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