ATO sharpens focus on trusts and income distributions
The Australian Taxation Office (ATO) has issued a suite of draft guidance documents and a Taxpayer Alert on the topics of Section 100A and Division 7A of the Income Tax Assessment Act 1936. The documents focus on arrangements commonly seen in family and private groups.
In our view, key parts of the guidance (e.g. the treatment of streamed taxable capital gains and beneficiaries with losses) smacks of ATO overreach and is likely to raise significant concerns among taxpayers and their advisors.
While the guidance documents are still in draft form and subject to further consultation, the approach has been closely considered by the ATO over a number of years and we anticipate that much of the content will make its way into the final versions.
Find out more about the draft changes to Section 100A and Division 7A below.
Section 100A
After almost 43 years, has it been worth the wait?
What is the purpose of Section 100A and who does it impact?
Section 100A is an anti-avoidance provision introduced in March 1979 that applies to certain trust distributions.
Broadly, it will apply in cases where:
- a beneficiary has become presently entitled to trust income but it has been agreed that another person will benefit from that income; and
- that agreement is made with the purpose that some person will pay less or no income tax as a result; and
- the agreement was entered into outside the course of ordinary family or commercial dealings.
If Section 100A applies, it deems the trustee (rather than the presently entitled beneficiary) to be liable for tax at the top marginal rate.
For a detailed history and analysis, see Paul Sokolowski’s paper: “Plato’s Cave: Trusts, s 100A and the reality behind the shadows”.
What is the ATO’s proposed view on Section 100A?
The new Section 100A documents released by the ATO, include:
- Draft Taxation Ruling TR 2022/D1: section 100A reimbursement agreements
- Draft Practical Compliance Guidance PCG 2022/D1: ATO compliance approach
- Taxpayer Alert TA 2022/1: Parents benefiting from the trust entitlements of their children over 18 years of age
Together, and by reference to each other, these documents set out the ATO’s view on the scope of Section 100A, with necessary cross-referencing to other ATO documents. The content is illustrated by examples grouped around different coloured ‘risk zone’ scenarios identified in the draft PCG. Indeed, the colours used in the draft PCG, while certainly patriotic, render it almost psychedelic. To view our summaries of each of the documents, please follow the links below.
Draft TR 2022/D1 and PCG 2022/D1 are intended to apply both before and after the date of issue, although (with some, arguably, broad exceptions) the ATO will generally not allocate compliance resources to pre 1 July 2014 arrangements.
Feedback was due to the ATO for Draft TR 2022/D1 and PCG 2022/D1 at the end of April 2022.
Unpacking the ATO’s section 100A draft guidance
TaxVibe Podcast — The Tax Institute
Episode 18 — Unpacking the ATO’s section 100A draft guidance
Release date: 6 May 2022
In this episode of TaxVibe, host Robyn Jacobson chats with Jonathan Ortner, Tax Director, Arnold Bloch Liebler, about section 100A of the Income Tax Assessment Act 1936 that deals with trust distributions and what the ATO’s recent draft guidance materials mean for you and your clients.
They explore:
- What section 100A is and why it’s in the spotlight at the moment
- The conditions under which section 100A applies and its requirements
Guidance from cases including East Finchley, Prestige Motors, Idlecroft and Raftland - Where to from here for section 100A, including the pending court appeal in Guardian
Division 7A
What is the purpose of Division 7A?
Division 7A operates to ensure private companies are not able to make tax-free distributions of profits to shareholders or their associates in the form of payments, loans or forgiven debts.
In relation to loans, a private company will be taken to pay an unfranked dividend in an income year if it makes a loan to a shareholder or their associates and the loan is not fully repaid by the lodgement day.
A loan, for the purposes of Division 7A, includes ‘a provision of credit and any other form of financial accommodation’.
What is the ATO’s proposed view on Division 7A?
Draft TD 2022/D1 – over a whopping 30 pages - describes when a private company provides financial accommodation where the company is made presently entitled to income of a trust and either:
- the entitlement remains unpaid; or
- the trustee sets aside an amount from the main trust fund and holds it on a new separate trust (or sub-trust) for the exclusive benefit of the private company.
The draft TD brings to an end the use of sub-trust investment arrangements created by, and permitted, under PSLA 2010/4. It is proposed that TR 2010/3 and PS LA 2010/4 will be withdrawn with effect from 1 July 2022 for trust entitlements arising on or after that time.
TD 2022/D1 is intended to apply to trust entitlements arising on or after 1 July 2022.
The deadline for feedback to the ATO on TD 2022/D1 is due by 29 April 2022.
Detailed summaries of the ATO’s draft guidance documents
Click the boxes below to view our summaries on the ATO's draft guidance documents and a Taxpayer Alert.
Questions or concerns about these updates?
Arnold Bloch Leibler will continue our robust engagement with the ATO in relation to the drafts and we encourage you to contact our team below if the material raises questions or concerns for you or your clients.
