Australia: Section 100A and professional practice profit distribution – A timely reminder for tax advisers

Although COVID-19 stimulus measures have consumed so much time and attention for virtually all tax advisers, the financial year is rapidly drawing to a close, and many tax agents are finalising returns for the 2019 financial year.

One issue that continues to vex tax practitioners is that of trust distributions – particularly in light of dramatically increased audit activity with respect to section 100A of the Income Tax Assessment Act 1936 and reimbursement agreements.

Section 100A is a relatively old provision in the 1936 Act that has recently received increased attention as the Commissioner has redeployed it as a weapon in his ongoing war against discretionary trusts. In particular, the Commissioner is paying close scrutiny to arrangements whereby named beneficiaries are presently entitled to trust income (and the consequent tax liability), but do not receive the money associated with that distribution. Instead, the funds are retained in the trust, or used for some other purpose by a different beneficiary.

In 2014, the Commissioner released guidance which outlines his preliminary views on reimbursement agreements, which are the subject of section 100A. In particular, the Commissioner provides examples of arrangements that do and do not constitute ordinary commercial or family dealings. Furthermore, more recently, there have been a number of tax conferences where senior ATO officers have presented case studies regarding the possible application of section 100A to what would normally be considered ordinary family tax planning e.g. a trust distribution to adult children where the amount remains unpaid and the distribution is loaned to other family members by the trust.

The application of section 100A depends on the existence of a reimbursement agreement, which exists where:

In such circumstances, the provisions deem the beneficiary not to be, and never to have been, presently entitled to the share of the income. Critically, a reimbursement agreement is not an agreement made in the course of ordinary family or commercial dealings.

As financial year 2020 draws to a close, we are still without clear guidance from the Commissioner as to what he believes the legislature meant (30 years ago) when excluding ordinary family or commercial dealings. The Commissioner has prepared a draft ruling, but has not yet released it for public consultation. In the meantime, audits continue, and will likely escalate in the new financial year.

Although many ATO officers are currently redeployed into stimulus related activities, this issue will not go away and is likely to be at the forefront of ATO activity in the SME area once again.

In the meantime, advisers should very carefully consider how to assist trustees with year end trust distributions.

We have assisted a number of advisers with preparing trust distributions and advising the types of activity that we have seen as the Commissioner's main focus. We have also documented a number of arrangements to ensure trust distributions will not cause the Commissioner undue excitement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.