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Expedited Procedures
Audit risk here, need it be stated, may be high as the Beatrice Family Trust, when it files its tax return, is going to report the entities who have received the trust income. The ATO computer systems, one would imagine, would red-flag that a taxexempt entity has received a significant discretionary trust distribution. This is a clear-cut case of s. 100A applying and being applied by the Commissioner during audit: 1. There is a reimbursement agreement between Beatrice and Hightown
Private School. 2. The purpose is for the $60,000 of the
Beatrice Family Trust income to be taxed at $nil. 3. There is nothing ordinary in family or commercial terms about the dealing. 4. It cannot be said that the Hightown
Private School would have received any part of the distribution without the agreement. On the basis of the above, s. 100A would clearly be applicable. This example has assumed that the Hightown Private School would already be in the class of beneficiaries of the Beatrice Family Trust; if the trust deed was as part of the arrangement amended to add the Hightown Private School as a beneficiary, that would tend to make the application of s. 100A more compelling from an evidential perspective. As was stated by Prestige Motors, in the facts of that case, “that agreement or arrangement involved [a company] as a party, since in each case the trust deed was amended, with [the company]’s consent to alter its entitlements to distribution of income.”
A literal reading of the Commissioner’s website guidance?
Taken from the Commissioner’s guidance is arguably a less black and white situation, which might apply where, for example a literal reading might involve a trustee making her adult children presently entitled to some trust income (where those adult children have a lower marginal tax rate because they study full time at university) but not pay them the distribution and instead loans most the money to herself8: “Example 1: Trust estate
The trustee of a trust estate makes a beneficiary entitled to trust income.
Instead of paying the amount of trust income to the beneficiary, the trustee gives, or lends on interest-free terms, the money to another person. The other person benefits from the trust income, but is not assessed on any part of it.
The arrangement does not constitute ordinary commercial or family dealing.
This arrangement would generally constitute a reimbursement agreement if it was intended that the beneficiary who was made presently entitled to the trust income pays a lower amount of tax than would have been payable by the person who actually enjoyed the economic benefits of that income.
In this example, the presently entitled beneficiary may pay less (or no) tax because it:
… is otherwise subject to a lower rate of tax.”
Taken literally, if say Duke had a family trust, made his 18 year old adult son presently entitled to $20,000 of income but did not pay the distribution and then Duke borrowed $19,000 from the trust on interest free terms (without a repayment date), one might be left thinking that the Commissioner might seek to apply s. 100A.
The Commissioner’s foreshadowed guidance when provided will no doubt provide much needed clarity to this literal reading and comfort to accountants across Australia.
In the meantime, it is worth discussing issues that potentially arise should a matter become part of a tax controversy as between taxpayer and the Commissioner.
Issue: Natural beneficiary who is made presently entitled to a large sum but later gifts the distribution to his parent – is there an arrangement, and is there an “increased amount”?
In this type of situation, the natural beneficiary is the adult son (Archibald) of the trustee of a discretionary trust, his father (Duke). Several years after Archibald is made presently entitled to an amount, it is paid to him by the trust and Archibald then gifts it to Duke in Duke’s own capacity. Here, first, there is an open question whether there is any agreement in existence at all. If there is no agreement, then s. 100A does not apply. Of course, broadly stated, given the Commissioner can assert there to be one in his assessment and it is then up to the taxpayer to satisfy a court otherwise, evidential issues may arise. But where Archibald and Duke are available to give evidence, this evidential issue may be overcome. Unlike other income tax charging provisions, the Commissioner, at least theoretically, has no time limit when he might render such an assessment against the trust for s. 100A. Of course, if the pattern was repeated, whereby the adult son over several years was made presently entitled and then he always gifted the distribution two years later, then that may result in a Court looking at the evidence differently. Second, there will be an open issue whether the son has received an “increased” amount? There may be evidence that the amount would have been distributed to the son regardless. It may well be that in the intervening period the son has obtained a well-paid job and feels he no longer needs or wants the trust’s money. Third, an issue may arise whether the arrangement pertains to an ordinary family dealing. I look at this below.
Issue: Natural beneficiary who is made presently entitled to a large sum but later gifts the distribution to his parent – ordinary family dealing?
In the same example postulated, when will the gift be an ordinary family dealing? What if the son is the only child and the father is a widower in his late 70s? That may indicate that the son’s gift to his father, may well be, bluntly stated, all things equal, only temporary as sometime in the future he may receive a testamentary gift back. But then there may be other attributes which indicate a different flavour. For example, what if the father with his preoccupation with the possibility that his son’s marriage may collapse has separately loaned money to his son but made him sign an agreement that it is repayable with interest in the event of marriage breakdown or father-son relationship breakdown? Such a situation (where the father has a degree of financial control over the son) may indicate the existence of the necessary reimbursement arrangement and it may also indicate away from an ordinary family dealing. It may also be the case that a case is less likely to be an ordinary family dealing where there are sons-in-law or daughtersin-law who are made presently entitled to trust income. Such more distant relatives are less likely to be part of a close family economic unit. It also is worth noting, from the audit risk angle, need it be said, that the Commissioner may be given a compelling evidential advantage should such a marriage collapse, evidence as to what happened being put before a family court, and the Commissioner ultimately obtaining access to the family court file. Generally speaking, the law reports contain many, many tax cases where the taxpayer involved has been the subject of earlier civil or criminal litigation.
Ordinary family or commercial dealing in the case law
There has been consideration of the meaning of ordinary family or commercial dealing, particularly in Prestige Motors. Broadly, first it is noted from Prestige Motors that what is ordinary family or commercial dealing is to be viewed by reference to the overall arrangement, not a transaction “viewed in isolation, could be seen as an ordinary commercial dealing”. Second, whilst the words were taken from Lord Denning as used in Newton v CoT (1958) 98 CLR 1 at 8 in the Privy Council pertaining to s. 260 ITAA36, they do not necessarily operate the same. Prestige Motors leaves unanswered the question of ordinary dealing and its interaction with purpose:
“[In s. 260] a transaction was either stamped as one entered into to avoid tax or as one about which it could be predicted that it was entered into in the course of ordinary family or commercial dealing. In the former case the transaction was caught by s 260; in the latter case it was outside the section. We do not need to decide in the present case whether s 100A imports a similar dichotomy. In particular we do not need to decide whether if an agreement is shown to have been "entered into the course of an ordinary commercial dealing", the operation of s 100A is spent, regardless of whether the commercial purpose was subsidiary to the purpose of tax avoidance. In our view, none of the transactions was entered into in the course of ordinary commercial dealing.”
Conclusion
For those that fall within the cross hairs of the Commissioner under s. 100A, their defence to assertions made in the context of an assessment against a trustee, as indicated herein will turn on their ability to marshal admissible evidence to counter such assertions, a process which should begin at the earliest possibility. The more “out there” – or incredulous – or repetitive – or artificial – the arrangements, the more difficult it will be for a trustee to satisfy a Court that one or more of the necessary elements of s. 100A has not been met so that s. 100 does not operate. The reality is that the Commissioner’s audit activity will allow him, consciously or subconsciously to develop his view of a bell curve, and it is those cases in the extreme which he will be likely to raise assessments against and then resist settlement on his view that he will be successful in litigation.
Endnotes
1 http://classic.austlii.edu.au/au/legis/cth/consol_act/ itaa1936240/s100a.html 2 http://classic.austlii.edu.au/cgi-bin/sinodisp/au/cases/ cth/FCAFC/2005/141.html 3 http://classic.austlii.edu.au/cgi-bin/sinodisp/au/cases/ cth/FCA/2017/819.html 4 See https://www.ato.gov.au/General/Consultation/Indetail/Matters/Matters-under-consultation/?anchor=BK _201935#BK_201935 5 See https://www.ato.gov.au/General/ATO-advice-andguidance/Advice-under-development-program/Adviceunder-development---trust-specific-issues/. 6 See https://www.ato.gov.au/General/Trusts/In-detail/ Distributions/Trust-taxation---reimbursementagreement/. 7 See https://www.ato.gov.au/General/Trusts/In-detail/ Distributions/Trust-taxation---reimbursementagreement/. 8 See https://www.ato.gov.au/General/Trusts/In-detail/ Distributions/Trust-taxation---reimbursementagreement/.
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