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Guardian decision leaves key section 100A questions unanswered

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On 24 January 2023, the Full Federal Court handed down its long-awaited decision in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3. This is the latest in a series of recent cases considering the application of section 100A and Part IVA to private groups.

In Guardian the Commissioner sought to apply section 100A and Part IVA to arrangements whereby the Australian Investment Trust (the Trust) made a corporate beneficiary (AITCS) presently entitled to trust income, these present entitlements were then satisfied when AITCS paid the Trust fully franked dividends which, in turn, were streamed to Mr Springer, a non-resident beneficiary.

The Commissioner applied section 100A to assess the trustee, and applied Part IVA to issue alternative assessments to the non-resident beneficiary for the 2012 – 2014 income years.

The Federal Court at first instance

The taxpayer objected to these assessments and subsequently appealed to the Federal Court. In Guardian AIT Pty Ltd (as trustee of Australian Investment Trust) v Federal Commissioner of Taxation [2021] FCA 1619, Logan J decided in favour of the taxpayer.

In relation to section 100A, his Honour found that there was no evidentiary basis to conclude that there was a ‘reimbursement agreement’ which preceded the present entitlements of AITCS. Further, he found that the relevant arrangements were an ‘ordinary family or commercial dealing’. He noted that any such agreement extended only to AITCS’ present entitlements and not to the dividend paid to the Trust. These considerations led him to conclude section 100A could not apply to the relevant income years.

In relation to Part IVA, he found that the Commissioner’s counterfactual was unreasonable, and as a result there was no tax benefit to which Part IVA could apply. He observed that even if there was such a tax benefit, the scheme was not entered into for the dominant purpose of obtaining that tax benefit.

The Commissioner accepted the first instance decision in relation to the 2014 year. However, he appealed the decision to the Full Federal Court arguing that section 100A applied to the 2013 year and that Part IVA applied to both the 2012 and 2013 years.

The Full Federal Court on appeal

Section 100A

The Full Federal Court unanimously found that section 100A did not apply to the Trust for the 2013 income year because there was no ‘reimbursement agreement’.

In reaching their conclusion, they made the following observations about section 100A:

  • there must be a reimbursement agreement in place prior to the relevant present entitlement;
  • though it was not necessary for a reimbursement agreement to be enforceable, there must be some common intention or consensus between at least two parties;
  • where moneys are proposed to be paid by a beneficiary to a trustee, the beneficiary must be a party to the reimbursement agreement; and
  • an expectation that an arrangement would be entered into after the creation of a present entitlement is not sufficient to engage section 100A.

The Full Federal Court applied these principles to the arrangements in place for the 2013 year, ultimately finding that there was no agreement which involved the payment of a dividend from AITCS to the Trust. On this basis, there was no ‘reimbursement agreement’ and section 100A did not apply to the 2013 year.

While the Commissioner submitted that the intention of the group’s advisors should be attributed to the parties to the agreement, these submissions were rejected on the evidence. In doing so, the Court observed that, unlike Part IVA, an ‘agreement’ for the purposes of section 100A requires consensus and adoption by the parties. In this sense the scope for attributed intention is more limited.

The Court found it unnecessary to consider the ‘ordinary family or commercial dealing’ exception. However, it was observed that the mere inclusion of, and distribution to, a corporate beneficiary is insufficient to demonstrate that a dealing was not ‘an ordinary or commercial dealing’.

Part IVA

The Full Federal Court found that the Commissioner could not apply Part IVA in the 2012 income year, but that he was authorised to do so in the 2013 income year.

The Court found that the steps taken in each of the relevant years amounted to separate schemes for the purposes of Part IVA.

The Commissioner’s counterfactual in the original Part IVA determinations was that  the Trust would have distributed funds directly to the non-resident beneficiary, which would have been taxed at the top marginal rate. On this basis, he argued the taxpayer obtained a tax benefit when he received franked distributions from the trust.

In accepting the Commissioner’s argument, the Court observed that the taxpayer failed to establish an alternative counterfactual and that he bore the onus of doing so. The taxpayer argued that AITCS would have received and retained the present entitlement or invested it using a Division 7A loan. These arguments were rejected on the evidence as inconsistent with both the taxpayer’s preferences and the commercial outcomes of the arrangement, and that these options were considered and rejected by the taxpayer. Accordingly, the Court found the taxpayer obtained a tax benefit in the relevant years.

The Court went on to consider whether the schemes were entered into for the dominant purpose of obtaining the tax benefit.

They found that the scheme undertaken in 2012, the manner it was entered into and carried out, and its form, were the products of an evolving set of circumstances. They found it was not one in which any party could, objectively, be seen to have entered into for the dominant purpose of obtaining a tax benefit. Further, they found there was no objective basis for expecting that AITCS would declare a dividend to the Trust.

By contrast, they found that the scheme undertaken in 2013 was the implementation of a strategy that had been developed following the 2012 scheme. They found it commenced with AITCS’ present entitlement, the benefit of which would objectively be expected to be passed on to the non-resident beneficiary. On this basis they concluded the 2013 scheme was entered into for the dominant purpose of obtaining a tax benefit.

Further comments

Section 100A is drafted incredibly broadly and its boundaries are still, in the decades since its introduction, largely unclear. While this case provides important guidance it still leaves some questions unanswered.

The Guardian decision confirms that a reimbursement agreement must precede the present entitlement, must involve consensus and adoption between two or more parties, and that an expectation that an arrangement will be entered into after a present entitlement is insufficient.

However, many were expecting this case to provide clarity on the operation of the ‘ordinary family or commercial dealing’ exception. While there are comments supporting the view that the mere introduction of, and distribution to, a corporate beneficiary is insufficient to engage section 100A, these comments are brief. Accordingly, the exception remains opaque for taxpayers and the Commissioner alike.

Last year, the Commissioner finalised TR 2022/4 which sets out his interpretation of section 100A reimbursement agreements and PCG 2022/2 which sets out his compliance approach. While each of these products refer to the first instance decision, it will be interesting to observe how the appeal decision will, if at all, affect the Commissioner’s interpretation and application of section 100A.

In the meantime, arrangements involving family trusts continue to be a focus for the Commissioner, and taxpayers should continue to consider their potential section 100A and Part IVA risk.

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