On 23 February 2022, the ATO released long-awaited guidance on the application and operation of Section 100A ‘reimbursement agreements’ in Draft Taxation Ruling TR 2022/D1 and Practical Compliance Guideline PCG 2022/D1.

Broadly, the purpose of s100A is to prevent and target arrangements where a beneficiary is presently entitled to trust income however the economic benefit is received by another person. Further, this arrangement is conducted with the purpose of reducing the overall tax liability.

This is an important issue as it affects anyone using a discretionary trust as part of their financial arrangements. Essentially, this covers a vast majority of taxpayers and their respective family groups.

A common example is where parents, who control discretionary trusts, resolve to distribute trust income to adult children within the family (over the age of 18), however the adult parents benefit economically from the profits rather than the children. It is commonly argued in this situation that the parents are utilising these funds for the payment of the children’s share in the family’s expenses and more specific expenses on behalf of the children (e.g. school fees).

Advisors and taxpayers have previously relied upon an exception to s100A where the arrangement constitutes an ‘ordinary commercial or family dealing’. It was hoped that this most recent ATO guidance would provide transparency about this exception and what it means, as there has been very little clarification provided in the past.

The main outtake is that an arrangement will not be an ‘ordinary commercial or family dealing’ if it has tax driven motives. It is also not appropriate to consider an arrangement ordinary because it is commonplace. Therefore, many of the common arrangements between parents and adult children will fall foul of this most recent ATO guidance.

The implications of the ATO deeming a distribution to be in breach of s100A is that the trustee is taxed at the top marginal rate (47%) on the full distribution, plus potential penalties.

The draft guidance released by the ATO is not law, but rather the Commissioners interpretation of the law.

The consultation period for the ATO regarding this matter will be open until 8 April 2022. During this period tax professionals will be able to submit their concerns, feedback and proposed changes to the ATO’s draft guidance.

Please stay tuned for updates.

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