The Tax Institute welcomes the opportunity to make a submission to the Australian Taxation Office (ATO) in relation to the proposed updates to PCG 2022/D1 Section 100A reimbursement agreements – ATO compliance approach (draft PCG) contained in the document titled ‘Practical compliance guideline for section 100A: Additional draft green zone examples’ (updated guidance).
It is pleasing to see that the ATO has listened to and reflected on the feedback received during the earlier consultation on the draft PCG. In particular, the proposed additional green zone examples and removal of the blue zone indicate that the ATO has responded to some of our concerns. However, we note that there remain a number of matters of significant concern that were raised in our earlier submission which are still to be addressed by the ATO. We would be happy to work with the ATO to resolve these outstanding matters.
The Tax Institute broadly supports the inclusion of further examples in the draft PCG that will help taxpayers and tax practitioners better understand the perceived risk of their arrangements by the ATO. Clear examples that are based on underlying principles will provide clarity and certainty for taxpayers, likely assisting in greater voluntary self-compliance and identification of potential risks. We consider that the proposed examples in the updated guidance will assist with this objective. However, further modifications and additions to the draft PCG and proposed examples are suggested to improve clarity for taxpayers.
In particular, we consider that the proposed time lag for satisfying trust entitlements would benefit from being categorised as a safe harbour from an ATO compliance perspective. This will provide clearer guidance about the intended operation of the time lag. The proposed time lag should also have an easily identifiable start date to remove potential confusion about its scope and application.
The current scope of the green zone for distributions to loss entities requires further clarification in the draft PCG and proposed examples to ensure that it accurately reflects common market transactions and provides maximum guidance to taxpayers. In particular, the requirement for the loss beneficiary to continue to be solvent may be difficult for a taxpayer to demonstrate in practice, especially when related party loans are involved.
Some of the proposed examples could also benefit from minor clarifications to more accurately reflect commercial practices faced by practitioners each day and provide taxpayers and tax practitioners with greater certainty. For instance, the proposed example for testamentary trusts would benefit from further detail. The way in which it is currently drafted may not help taxpayers and tax practitioners in identifying aspects of an arrangement that may have a higher risk profile.
The Tax Institute supports the removal of the blue risk zone and considers that its removal will simplify the draft PCG for taxpayers and tax practitioners.