SYDNEY, 23 February 2022: The ATO has released a long-awaited package of draft guidance materials on both section 100A and Division 7A – two key anti-avoidance rules that set out the tax treatment of income of a trust estate and deemed company dividends.
Robyn Jacobson, CTA, Senior Advocate at The Tax Institute, says, ‘This is the most significant guidance we’ve seen on trusts in more than 10 years, since the High Courtʼs decision in Bamford, which addressed a number of trust income issues.’
The new draft guidance sets out the ATO’s concerns about trust arrangements aimed at avoiding tax, particularly where adult children of a trustee are made beneficiaries, but it is not intended that they will retain any benefit of that income, and the arrangements are predicated on avoiding tax.
“It is not uncommon for adult beneficiaries to receive distributions from trusts controlled by their parents, but the ATO is being very clear that it will be watching these arrangements closely. Trustees may find that common set ups like using an adult child's trust entitlement to repay living costs and the cost of raising them as children are subject to tax under section 100A,’ says Robyn.
Section 100A contains an exemption for an ordinary family or commercial dealing. However, an arrangement does not fall within this exemption just because it is commonplace.
Key dates to note:
The ATO generally won’t review arrangements entered into before 1 July 2014 (with three exceptions)
For arrangements entered into before 1 July 2022, taxpayers can follow existing ATO web guidance if this is more favourable to their circumstances than today’s draft guidance.
The ATO concurrently issued draft guidance on Division 7A, which aims to prevent private company owners from avoiding tax by accessing company dividends in another form, such as through the use of a trust. The new draft guidance outlines that when trust income is owed but not paid to a private company beneficiary, it will be treated as a loan to the trustee. This includes certain sub-trust arrangements where the funds are used by the company’s shareholder or their associate.
‘This is a significant change from the ATO’s previous position. In effect, it means company shareholders and associates are more likely to wind up paying tax on a broader range of arrangements deemed to be dividends under Division 7A,’ Robyn says.
‘Tax practitioners will need to think through the new draft guidance materials and work through the implications for their clients. In some cases, this will mean big changes to common, longstanding ways of arranging trusts and distributing trust income each year.’
The Tax Institute will be working with our members seeking feedback to assist in the preparation of submissions to the ATO.
Section 100A is an anti-avoidance provision to combat trust arrangements aimed at avoiding tax. The provision applies where a trustee makes a beneficiary presently entitled to a share of trust income (and so is not required to pay tax on that income) under a ‘reimbursement agreement’ (which provides for the payment of money, transfer of property or provision of services to someone other than the beneficiary), and a purpose of entering into the agreement was to reduce someone’s income tax liability.
Section 100A could apply where a beneficiary is made presently entitled to income of a trust estate so that the trustee is relieved of any tax liability on the income, but the beneficiary also does not pay tax. This may be, for example, because the beneficiary’s income is exempt from income tax or there is another trust with sufficient deductible losses to absorb its share of income as a beneficiary of the first trust estate. Where Section 100A applies, the trustee pays tax on this payment at the top marginal tax rate (currently 45% + Medicare levy)