Tax Files: The Section 100A saga continues – By John Tucker

The Section 100A saga continues

JOHN TUCKER, DW FOX TUCKER LAWYERS

Much has been written about Section 100A of the Income Tax Assessment Act 19361 (ITAA) of late.

This is a section enacted in 1979, essentially as a counter to what were known at the time as “trust stripping” schemes, something, in the context of trust profits, akin to the better known “dividend stripping” schemes in relation to company profits.

Dividend stripping had been the subject of numerous attacks by the Commissioner and from legislative provisions, culminating in Section 177E of the ITAA. Both sets of provisions, sections 100A and 177E, turn on the attribution to participants of what can be summarised as a tax avoidance purpose in their dealings, though just what purpose and the criteria for determining it differs between them.

In the main across various provisions in the Assessment Acts, the identification of a tax avoidance purpose is to be determined applying objective criteria, but for s100A has been held to also engage subjective purpose. Much however remains in the eye of the beholder.

Historic statements such as that tax avoidance, meaning using or attempting to use lawful means to reduce tax obligations, is lawful,2 may offer hope of some legal endorsement for tax planners, but they face a raft of anti-avoidance provisions in the Assessment Acts, little appreciation of their efforts from the Commissioner, and a difficult to discharge onus of proof before the judiciary, particularly if required to negate any existence of a tax avoidance purpose in anyone.

The enactment of s100A successfully eliminated trust stripping schemes in the form they were known at the time3 but the provisions read more widely than to just these schemes. Litigants have sought to have the provisions read down in their application to wider circumstances, but their attempts have failed.4

Until recently, its object successfully achieved, s100A shrank in prominence for practitioners and the Commissioner alike. Attention turned to other issues concerning core provisions relating to the taxation of trusts, such as those concerning the proportional sharing of distributable income and a flow through of the character of components of income derived from different sources.

Now though, s100A has emerged as potentially something of far more universal application than has generally been understood since its elimination of trust stripping schemes.

Much comment has been made concerning the draft Taxation Ruling TR 2022/D1 published this year by the Commissioner, to be finalised subject to further consultation.

This draft was preceded by the decision of Logan J in Guardian AIT Pty Ltd,5 now on appeal, in which he refused to apply s100A, finding that the ‘reimbursement agreement’ required for an application of the section needed to exist before the present entitlement, to which the section was to be applied, was determined, which it did not. Also, he held on the facts that the agreement in question was one entered into in the course of ordinary family or commercial dealing.

Then on 19 September, 2022, the Judgment of Thawley J was delivered in the case of B Blood Enterprises Pty Ltd v Commissioner of Taxation.6

The case concerned a scheme calculated to apply provisions of Assessment Acts under which a corporate beneficiary of a trust estate, deemed presently entitled to the net income of the trust estate, including a franked dividend, is able to offset most of the tax liability on the entitlement by the franking credit, while the dividend, as capital under the trust deed, could be accumulated and added to corpus free of tax.

The BBlood scheme involved a share buyback, largely deemed a dividend for tax purposes, able to be fully franked, but capital for trust accounting purposes under the trust deed for the recipient trust fund. The desired outcome wasn’t seen to flow naturally under the terms of the relevant trust deed and they were amended.7 A new company was incorporated to be made presently entitled to all the trust’s net income. The historic pattern of distributions from the trust to receive the buyback consideration was changed to meet the requirements of the scheme.

The corporate beneficiary claimed franking credits attached to the dividend to which it was deemed presently entitled, to offset the tax liability on it.8 The trustee of the trust in receipt of the buyback proceeds claimed not to be assessable on the dividend deemed from them as it had made the corporate beneficiary presently entitled to all of the net income of the trust estate.

The Commissioner applied s100A to deem the corporate beneficiary not to have been presently entitled to the net income of the trust, the entitlement having arisen under a ‘reimbursement agreement’ and assessed the trustee.9

The elements of s100A relevant to the Commissioner’s position were whether there was a ‘reimbursement agreement’, not entered into in the ‘ordinary course of family or commercial dealing’, by ‘any party’ to it for a purpose, or ‘purposes that included’, that a person who, if the scheme had not been entered into, would not have been liable to pay income tax or been liable to pay less income tax in respect of the year of income if the agreement had not been entered into.10

The Court held that the various parties, including for this purpose their accounting and legal advisors, had entered into an overarching ‘agreement’ [as identified by the Commissioner] meeting the definition of ‘agreement’ in s100A(13).

The agreement, taken as a whole, was held not entered into in the course of ordinary family or commercial dealing. Nor was the agreement to implement each of the steps entered into in such a course. Their ‘complexity was not shown to be necessary to achieving a specific outcome sought to be achieved by a dealing aptly described as an ordinary family or commercial dealing’.

The criteria mentioned in relation to this conclusion included that the agreement was not explicable as entered into for family succession purposes, not entered into as part of an ordinary commercial dealing, not consistent with the historical behaviour of the parties, having a component not suggesting the agreement to implement it or its steps as ordinary, there not having been established a ‘sensible commercial or family rationale’ for what might otherwise be said to be an ordinary commercial transaction,11 and it not referable to simplifying a corporate structure.

These criteria contrast with the approach of Logan J in Guardian AIT, where steps that might have been viewed by some as complex and historically unusual were readily accepted as within the description of an ordinary family or commercial dealing.

As a practical matter, for advisors applying this decision, there will be difficult judgement calls to be made as to what agreements, as defined, can aptly be described as ‘entered into in the course of an ordinary family or commercial dealing’.

Another aspect of s100A receiving judicial consideration in BBlood was the exclusion from it12 of agreements not entered into with a tax avoidance purpose.13 The Court noted the reference to be to the actual purpose, including the subjective purpose, of any singular natural person entering into the agreement, including that of advisors, irrespective of whether predominant or co-existing with other purposes.

Identification of the specific amount of tax the subject of the purpose was determined not necessary, just that more tax would otherwise have been payable, not precisely what would have occurred if the agreement had not been entered into.

This is also a challenging finding. Prudence would suggest to any party to a prospective transaction potentially triggering taxation consequences that they seek expert advice. Where alternative means to effect the transaction may exist and different taxation consequences flow from them, advisors will need to be alert to the status of plans that are complex and their mindset about them if there is a potential exposure to s100A.

The Court relied heavily against BBlood on its onus to disprove any tax avoidance purpose, holding this onus not able to be discharged simply by it being able to point to some other transaction which realistically could have been entered into which would not have immediately caused a person to be liable to more tax.

The Court also reiterated that the definition of ‘reimbursement agreement’14 is not controlled by the word reimbursement. All agreements are captured, they are not to be read down to those referable to the specific, trust stripping, types of mischief identified in the 1978 Explanatory Memorandum to the Bill introducing s100A. The payment in s 100A(7) need not be, in substance, a reimbursement for a beneficiary being made presently entitled to the income of a trust. Here the agreement, as found, was for the trustee to retain as corpus of the trust estate the capital component of the buyback payment.

In the several writings about s100A, following the Commissioner’s enlivened attention to it, professional advisors have expressed concern, often frustration, about the wide ambit of the section and their uncertainty about its potential application to dealings, unrelated to trust stripping schemes as prevalent when s100A was introduced, and which they would regard as made in the course of an ordinary family or commercial dealing. Determining in such cases whether or not and at what point advice may be seen as crystallising a tax avoidance agreement is unfortunately uncertain.

In summary the judgment in BBlood applied s100A literally to where a party to an agreement, essentially the advisors, were held to have entered into the agreement for a purpose that included a tax avoidance purpose, and from what were seen as complex steps, an agreement not entered into in the course of ordinary family or commercial dealing.

To add to these concerns the Court added that, aside from its application of s100A, it considered the buyback was, and was in the nature of, a ‘dividend stripping operation’ to which s 207-150(1) of ITAA 1997 applied so as to deny any tax offset for the franking credits. A literal interpretation of the relevant provisions was applied free of any implications to restrict the width of their language. Here again the language of the relevant legislation is wide ranging in its scope…

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 ITAA1936. 2 As per Gleeson CJ in RV Meares (1997) 37 ATR 321, speaking in contrast to tax evasion. 3 Then something being touted by scheme promotes promising tax free receipts in exchange for the distribution to them of assessable profits. 4 See Commissioner of Taxation v Prestige Motors Pty Ltd [1994] HCA 39, (Prestige Motors), Idelcroft Pty Ltd v FCT [2005] FCAFC 141 and Raftland Pty Ltd v FCT [2008] HCA 21. 5 Guardian AIT Pty Ltd v Commissioner of Taxation [2021] FCA 1619. 6 [2022] FCA 1112 (BBlood). 7 Though it transpired unnecessarily. 8 While this example of a mismatch between entitlement to trust income and to trust funds was planned to favour the taxpayer, others can have the opposite effect, for example where a default beneficiary is deemed presently entitled to the income of a trust estate though not having received payment of any part of the trust income. 9 Under s99A of ITAA1936, at the maximum marginal rate of tax. 10 Reference should be made to the provisions, particularly the definitions in s100A(13), in connection with this summary. 11 Referencing the buy-back procedure. 12 In s100A(8). 13 In terms of the Section, not entered into for the purpose or for the purposes that included the purpose of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. 14 In s100A(7).