February 24, 2022

ATO Draft Guidance Released on Trust Reimbursement Arrangements

ATO Draft Guidance Released on Trust Reimbursement Arrangements (Section 100A) & Unpaid Trust Distributions to Private Companies (Division 7A)

As alluded to in our Newsletter on Tuesday, the ATO released on late Wednesday afternoon its long-awaited draft guidance on the application of both Section 100A (reimbursement arrangements) and further guidance on Unpaid Present Entitlements and Financial Accommodation (Division 7A deemed dividend rules).

There were a number of documents, which for the most part are draft documents, to facilitate consultation with intended application from July 1 2022.

However, the Taxpayer Alert 2022/1 “Parents benefitting from the trust entitlements of their children over 18 years” is extremely concerning given that their intended future administrative approaches is subject to this Taxpayer Alert not being applicable to the relevant taxpayer.

Essentially, their view is that unpaid distributions to adult children (and gifts and loans back by them) can’t be explained by ordinary familial considerations.

It is important to note that:

There has been no law changes;
The ATO’s guidance is in draft form and will be the subject of significant and robust industry consultation prior to its final release; and
It provides guidance on how the ATO wishes to address otherwise permitted distributions.

Section 100A Trust Reimbursement Arrangement

Section 100A is an anti-avoidance section contained within the Income Tax Assessment Act 1936 that is intended to capture trust arrangements that are entered into with the purpose of reducing or avoiding someone’s tax liability.

An important exclusion is that this section does not apply to arrangements entered into in the course of “ordinary family or commercial dealings”.

Where Section 100A applies, the trustee pays tax on the distribution at the top marginal tax rate, instead of that income being assessed in the hands of the beneficiary.

What Income Years will be the ATO’s focus?

It is important to note that the ATO has an unlimited power to amend prior year assessments to which Section 100A applies (i.e., there is not the normal 2- or 4-year time limit on which the ATO can amend prior year assessments).

However, the ATO has advised as follows:

The Draft Guidance sets out its proposed compliance approach in relation to beneficiary entitlements conferred on or after 1 July 2022;
For beneficiary entitlements conferred before 1 July 2022, the ATO’s previous administrative position (as released in 2014) continues to apply and taxpayers can apply that guidance if it is more favourable to their circumstances;
The ATO generally won’t review arrangements entered into before 1 July 2014. This is subject to a number of exceptions including:
- They are otherwise considering your income tax affairs for those years;
- You have entered into an arrangement that continues before and after that date;
- The trust and beneficiary tax returns that were required to be lodged for those years were not lodged before 1 July 2017; or
- You are not subject to a Taxpayer Alert (noting the broadness of TA 2022/1).

Relevant links:

PCG 2022/D1
https://www.ato.gov.au/law/view/view.htm?docid=%22DPC%2FPCG2022D1%2FNAT%2FATO%2F00001%22

TR 2022/D1
https://www.ato.gov.au/law/view/print?DocID=DTR%2FTR2022D1%2FNAT%2FATO%2F00001&PiT=99991231235958

TA 2022/1
https://www.ato.gov.au/law/view/view.htm?docid=%22TPA%2FTA20221%2FNAT%2FATO%2F00001%22

2014 Administrative Guidance
https://www.ato.gov.au/law/view/print?DocID=SGM%2Ftrusttaxation&PiT=99991231235958

Division 7A and Financial Accommodation

The ATO has concurrently issued a draft Tax Determination on Division 7A (TD 2022/D1 – link below).

This draft Determination revises that ATO’s administrative arrangements on the application of Division 7A to Unpaid Present Entitlements that has been in place since December 2009.

The draft Determination confirms that the ATO will consider the following arrangements as loans to which Division 7A has application:

Trust income that is owed but not paid to a private company beneficiary (“circumstance one”); and
Certain interest only complying sub-trust arrangements where the funds held on sub-trust are used by the company’s shareholder or their associate (“circumstance two”)

As a consequence, both TR 2010/3 and PS LA 2010/4 will be withdrawn with effect from 1 July 2022.

An increased number of company shareholders and their associates will now need to comply with the new guidance and this may require increased dividends and complying loan agreements.

As to the rest of the Treasury reforms on Division 7A arising from their 2018 Consultation Paper, we await further guidance.

Relevant links:

TD 2022/D1
https://www.ato.gov.au/law/view/doument?docid=DXT/TD2022D1/NAT/ATO/00001

PS LA 2010/4
https://www.ato.gov.au/law/view/document?Docid=PSR/PS20104/NAT/ATO/00001

TR 2010/3
https://www.ato.gov.au/law/view/document?Docid=TXR/TR20103/NAT/ATO/00001