Tax Files: Trust Distribution Alerts

Trust distribution alerts

JOHN TUCKER, DW FOX TUCKER LAWYERS

On 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 offi ce 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 benefi t of the income.

An example given of the circumstances being reviewed is where expenses benefi tting 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 fi nancial 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 benefi ciary 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 suffi ces 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 benefi ciary who assumed all liability for tax on it and gave a non-assessable payment to another, usually another benefi ciary 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 benefi ciary, not paid, and treated as owing, being encompassed by the wording of s100A.

While the Commissioner has engaged in confi dential 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 defi nition of ‘agreement’ which specifi cally 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

limited views expressed in the drafting ruling.

In TR 2022/D1 the Commissioner asserts that the word ‘family’ refers just to natural persons, and he draws a distinction between what is ordinary and what is common, with a focus on whether the arrangement is “capable of explanation as achieving normal or regular familial or commercial ends”.

For a dealing to be an ordinary commercial dealing the Commissioner requires it to advance the respective interests and commercial objects of the parties. If there are present in the agreement features which, to the Commissioner, appear tax driven, he says these will be relevant to the objective enquiry whether the agreement is entered into in the course of ordinary dealing.

The potential impact of the Commissioner’s views is very wide reaching. Advisors will need to consider TR2022/1 (when issued) very carefully with respect to the determination of trust distributions and the actions required to be taken in consequence of particular determinations. All this most likely before 30 June 2022.

The fi nal publication is draft Taxation Determination TD 2022/D1 entitled “Income Tax: Division 7A: When will an unpaid present entitlement or amount held on sub-trust become the provision of ‘fi nancial accommodation’”, which was released contemporaneously with a web page publication entitled ‘Unpaid Present Entitlement’ (with reference to Division 7A of ITAA 1936 relating to deemed dividends). The point of this draft determination is to warn that arrangements to distribute a share of net income to a company, not pay it and purport to hold it on a sub-trust, will need to comply with the Commissioner’s stipulation for a sub-trust if they are not to be deemed ‘fi nancial accommodation’ and result in a deemed dividend from the company to the trust. In this way, the determination looks at arrangements similar to those of concern under s100A, albeit with a view to Division 7A (given that the benefi ciary is a company) rather than s100A.

As mentioned, the Tax Alert is of immediate effect. The Ruling and Guidance are to apply on publication (once fi nalised) and the Determination (once fi nalised) from and after 1 July 2022.

Tax Files is contributed by members of the Taxation Committee of the Business Law Section of the Law Council of South Australia B

Endnotes 1 By Logan J in Guardian AIT Pty Ltd ATF

Australian Investment Trust v FCT [2021]

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A roundup of recent Society meetings & conferences

ROSEMARY PRIDMORE, EXECUTIVE OFFICER

9 December 2021 National statutory tort for invasion of privacy

Bec Sandford participated for the Society in an online roundtable meeting convened by the LCA to discuss its approach to a national statutory tort for invasion of privacy.

15 December 2021 The Honourable Connie Bonaros MLC and the Honourable Frank Pangallo MLC

Society representatives Bec Sandford, Justin Stewart-Rattray (President-Elect) and Nathan Ramos (Policy Coordinator) met with SA Best MLCs in relation to the Society’s Key Election Issues for the 2022, via videoconference.

17 December 2021 2022 Law Council of Australia President –

At a videoconference meeting with Tass Liveris, Bec Sandford and Stephen Hodder discussed the issues Mr Liveris intends to focus on during his presidency of the LCA in 2022.

27 January 2022 The Honourable Robert Simms MLC

Justin Stewart-Rattray, 2022 President and Nathan Ramos met with the Honourable Robert Simms MLC in relation to the Society’s Key Election Issues.

2 February 2022 Disability access to the Courts

In response to concerns raised by the Society via its Equality, Diversity and Inclusion Committee, Justin StewartRattray, Mark Douglas (Chair of the EDI Committee) and Michael Esposito (Communications Manager) met with the Honourable Justice Bampton and Con Koutsounis, Senior Facilities Officer of the Courts Administration Authority in relation to disability access to the Courts.

15 February 2022 The Honourable Frank Pangallo MLC

At the instigation of SA Best, Justin Stewart-Rattray and Nathan Ramos met with the Honourable Frank Pangallo MLC and his advisers to discuss elements of a State election submission by the Police Association of SA.

23 February 2022 Legal Services Commission

Justin Stewart-Rattray and Stephen Hodder attended a meeting of the Legal Services Commission (LSC), at the LSC’s invitation. They congratulated Peter Slattery upon his appointment as Chair of the LSC, advised of the Society’s Key Election issues relating to funding and raised a number of issues (including at the suggestion of the Criminal Law Committee).

24 February 2022 Federal Circuit and Family Court CEO and Principal Registrar and Deputy Principal Registrar

The Co-Chairs of the Family Law Committee, Ryan Thomas and Daphne Moshos and former Co-Chair of the Committee Jane Miller joined Justin Stewart-Rattray at a meeting with the CEO and Principal Registrar, David Pringle and Deputy Principal Registrar, Virginia Wilson of the FCFCOA.

A number of issues of interest were discussed and well received and open lines of communication were established. It is expected the Court will publish a summary or update relating to the problems experienced since September 2021 when the new court system was introduced and what has been done to date to try and rectify them.

3 March 2022 Joint Rules Advisory Committee

Various issues and suggestions for amendments to the Uniform Civil Rules were the subject of consideration at a meeting of the Joint Rules Advisory Committee that was attended by Justin Stewart-Rattray, Alexander Lazarevich and Philip Adams.

18 and 19 March 2022 Quarterly meetings of Law Council (LCA) Directors, Conference of Law Societies, CEOs of Law Societies; and joint CEOs

Justin Stewart-Rattray (as President and also as Society appointed Director of the LCA) and Stephen Hodder variously participated in the above quarterly meetings, which were held via videoconference. Key topics of discussion included the implementation of the new Australian Solicitors’ Conduct Rules; the results of a survey by the Law Society of NSW of the impact of COVID on the justice system; the LCA’s “Call to Parties” advocacy document for the upcoming Federal election; and mandatory reporting of the misconduct of other lawyers under consideration in Victoria. B