TAX FILES
Trust distribution alerts JOHN TUCKER, DW FOX TUCKER LAWYERS
O
n 23 February, 2022 the Commissioner of Taxation issued a number of publications, some still drafts, that will impact on decisions regarding trust distributions that are required to be made by 30 June, 2022. Of the publications, three are concerned with reimbursements agreements under s100A of the Income Tax Assessment Act 1936, and the remaining one is concerned with Division 7A and its application to unpaid trust distributions from a trust to a company. The only publication of immediate effect is Taxpayer Alert TA 2022/1. In this Alert the Commissioner advised that his office is reviewing trust arrangements where trust income is appointed between members of a family group, including children over 18 years of age, but it appears in substance that the parents exercise control over and enjoy the benefit of the income. An example given of the circumstances being reviewed is where expenses benefitting the child are, in the Commissioner’s view, “properly understood to be parental expenses”, referring to costs of their upbringing as a minor, or for “the kinds of ongoing financial support parents would ordinarily provide for their children”. Allied with these circumstances is where the appointed income is seen to be “more properly explained by the tax outcomes detailed”, such as accessing the tax-free thresholds, than by “ordinary familial considerations”. The quoted expressions are imprecise. Some insight into them is contained in a list of features that the arrangements under review will, or mostly will, display. Among these are an application of the income distributed to meet expenses of the parents, possibly recorded as
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beneficiary loans from the trustee to the parents, which the children then actually, or purportedly, direct to be repaid. Also these might include expenses in the upbringing of the child, such as school fees or living at home expenses (as opposed to meeting reasonable rent for living away from home or car expenses), where there is no expectation of these being repaid by the children from any source of income other than the trust distributions. Tax Alerts are used by the Commissioner to express “concerns” generally on the basis of his assertion of perceived unlawful tax avoidance. Given the penalties applicable to any arrangement found to be that and the cost of any attempt to dispute such a perception, the expression of such concerns generally suffices to deter all from risking a challenge to the concerns stated by the Commissioner. In TA 2022/1, apart from the spectre of tax avoidance, the Commissioner also raises sham, sections 100A, 95A(1) and 97(1) of the 1936 Assessment Act, but only by reference and without any supporting explanation. With these sorts of arrangements being quite common, and the need by 30 June, 2022 for trustees to make decisions about the distribution of trust income, this Alert will, for many, require careful consideration. Of note in the concerns listed in the Tax Alert is mention of section 100A and that the arrangements described may constitute a “reimbursement agreement” for its purposes. Section 100A was introduced into the 1936 Act targeted against trust stripping, a practice, at its simplest, of vesting net income, otherwise taxable, in a beneficiary
who assumed all liability for tax on it and gave a non-assessable payment to another, usually another beneficiary or their related entity, in return. The section was however drafted in wider terms than if just focussed on this practice. It applies to any trust distribution that arises from a ‘reimbursement agreement’. There have been indications among tax practitioners that the Commissioner has held concerns about even such arrangements as a distribution being determined in favour of a beneficiary, not paid, and treated as owing, being encompassed by the wording of s100A. While the Commissioner has engaged in confidential consultation regarding these issues, for many months tax advisors have been waiting on the Commissioner to publish for public consultation a foreshadowed Taxation Ruling on this provision, which has now been done as draft Taxation Ruling TR2022/D1 and draft Practical Compliance Guide PCG 2022/D1, both of which were published contemporaneously with TA 2022/1. The single way out of s100A is the definition of ‘agreement’ which specifically excludes an agreement ‘entered into in the course of ordinary family or commercial dealing’. These words are the subject of discussion in draft ruling TR 2022/ D1. They have recently received judicial consideration in a judgement1, now under appeal by the Commissioner, in their application to a particular fact situation. While illustrative, the judgement stops short of any attempt to provide an expose on the universal application of the provisions, and it is unclear what reliance the Commissioner will place on the judgement given his appeal and the more
