www.findknox.com.au
MAY 2022 | FIND KNOX
ATO update on trust reimbursement agreements ACCOUNTANT By Warren Strybosch
In a media release on 5 May 2022, the ATO has “acknowledged there has been significant interest in its draft public advice and guidance relating to trust reimbursement agreements and unpaid present entitlements. In response to the level of community interest, the ATO said it will extend the public consultation period for the guidance, which ended on 29 April 2022. ATO Deputy Commissioner Louise Clarke said "the ATO is aware that the guidance – which has been long requested by the tax adviser community – has unsettled some in that community because it calls into question some practices which have been relatively longstanding". "The vast majority of small businesses operating through a trust are not operating in a way that will attract section 100A. A distribution to an adult child who has a low marginal tax rate will not attract section 100A where they simply receive or enjoy the benefit of their distribution". Ms Clarke clarified that the section can only apply where a distribution is made under an agreement where there will be a payment or other benefit provided to some other entity, that will typically have a higher tax rate than the beneficiary, where a purpose of that agreement is that someone will pay less income tax. "For example, where a full-time student receives an entitlement from a trust under an arrangement where they agree to immediately gift the entitlement back to the trustee". "The ATO does not make law. We have not changed section 100A; 100A remains as it always has been. What we have done is publish what is at this stage draft
guidance for consultation as to how we think the law applies,” Ms Clarke said. "The ATO's position is that if the beneficiary of the trust gets the benefit, 100A has no role to play. The ATO is not concerned about ordinary family trusts where the relevant family members benefit from the distributions". Similarly, Ms Clarke also noted that the ATO is not concerned when profits from the family business are distributed to members of the family who work in the management of the business and then that family member chooses to reinvest the profits in the business. The ATO will not be pursuing taxpayers that entered into arrangements between 1 July 2014 and 30 June 2022 where, in good faith, they concluded that section 100A did not apply to them based on the previous 2014 guidance. "I want to reassure the community - we won't have a retrospective element. We stand by our 2014 guidance for this interim period,” Ms Clarke said. The ATO will carefully consider all submissions received during the consultation period as it finalises the package of public advice and guidance. A compendium of our responses to the feedback will also be published. The question is whether this will mean the end of discretionary trusts as a taxeffective vehicle? Lawyers are reminding accountants and family groups that the ATO does not make law and whilst they have released further guidance on the subject, it is yet to be made law and tested. They argue that there are many ‘common’ family arrangements involving discretionary trusts that will continue to be low risk. Some lawyers are going so far as to say that as long as the funds being distributed to the adult children are indeed being
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distributed e.g., funds going into their bank account, and regardless of how those funds are being used, this should not incur s 100A and trustees should have nothing to worry about. Some lawyers are keen for the ATO to take this matter to court as they believe the ATO will lose. However, the ATO is off the opinion that just because something happens frequently, or is accepted as a common practice, doesn’t mean it is an ordinary commercial or family dealing for the purposes of s 100A, and may challenge distributions going to adult children. Now, we wait and see, and trustees will have to decide whether to distribute funds to adult children is worth the risk this financial year. Examples in the draft ruling include (but are not limited to) arrangements where: •
• • •
Distributions have been made to an adult child beneficiary and the entitlement to the funds representing those distributions have been applied for the benefit of another person (usually the parents), Where an entitlement to income has been ‘gifted’ back to the trustee (or a parent) or otherwise forgiven, Where there is a circular flow of funds (e.g., where the trust is a shareholder in a corporate beneficiary); and, Where a trust acquires an equity interest in a corporate beneficiary under a share buy-back arrangement involving members of the family group (often the parents).
The ruling, whilst still in draft form and has raised some concerns amongst taxation professionals given the ATO have been working on draft s 100A guidance for more than 6 years. The lack of certainty for trustees and beneficiaries around the ATO’s tax administration approach will no doubt cause concern and may leave trustees at risk of assessments arising from distributions that are made going forward. Trustees should consider speaking to their accountant or lawyer with regard to s 100A if they have any concerns or doubts about their current trust distribution arrangements.
At Find Accountant, we provide SMSF tax advice. Our senior accountant is also an award-winning financial advisor. If you require SMSF advice or are considering whether or not to wind up your SMSF, then speak to Warren Strybosch at Find Accountant Pty Ltd.
Warren Strybosch You can call them on 1300 88 38 30 or email info@findaccountant.com.au www.findaccountant.com.au MAY 2022 | FIND KNOX
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