What is S.100A?

Section 100A (S.100A) is a provision in the Income Tax Assessment Act 1936 and is an anti-avoidance rule. It applies to a situation where one person receives a benefit from a trust, but another person is made presently entitled to income and assessed. This rule is triggered when the present entitlement is connected to an agreement, arrangement or understanding, a benefit is provided to someone else, and at least one party had a purpose of reducing or deferring income tax.

If section 100A applies, the beneficiary’s entitlement is disregarded and the trustee is assessed on the beneficiary’s share of the trust's taxable income at the top marginal rate.

Where does S.100A apply?

Section 100A (S.100A) applies when there's an arrangement, often termed a 'reimbursement agreement,' conducted outside the scope of ordinary family or commercial transactions. This arrangement leads to a situation where a beneficiary, granted present entitlement to trust income, does not actually benefit from that income. The primary objective of such arrangements is typically to diminish someone's tax liability and applies when the following conditions are met:

• The present entitlement is connected to an agreement, arrangement or understanding.
• There is a benefit provided to someone else. A benefit can take the form of a transfer of trust property, a payment or loan of money or provision of services.
• At least one party had a purpose of reducing or deferring income tax.

Section 100A (S.100A) can apply to any type of trust (discretionary trusts, fixed trusts, unit trusts, etc.) A trust becomes a family trust when the trustee of the trust makes a 'family trust election'. To make the election, the trust must be controlled by a 'family group'. If you want to learn more about what a family trust election is, see our article here.

What exclusions apply to S.100A?

Considerable exceptions apply within Section 100A, especially regarding family trust distribution tax and family trust structures. Notably, if a distribution aligns with the family control test and lacks a tax reduction purpose, it may not trigger Section 100A. This is particularly relevant for family trusts aiming to protect family assets and optimise tax savings while staying within the bounds of tax law. These key exclusions include the following.

The beneficiary is under a legal disability

S.100A does not apply when a distribution is directed to a beneficiary facing a legal disability, such as minors or individuals in bankruptcy. In such instances, the distribution is evaluated by the trustee on behalf of the beneficiary. It is important to note that references to beneficiaries in the subsequent section pertain to those not under a legal disability unless explicitly mentioned otherwise.

There is no tax reduction purpose

S.100A excludes from its scope any agreement that was not established with the intent of achieving a 'tax reduction purpose.' Specifically, a tax reduction purpose refers to the aim of ensuring that an individual, regardless of their involvement in the agreement, pays a reduced or zero amount of income tax compared to what would have been payable had the agreement not been enacted.

The absence of tax reduction intent

S.100A excludes from its scope any agreement that was not established with the intent of achieving a 'tax reduction purpose.' Specifically, a tax reduction purpose refers to the aim of ensuring that an individual, regardless of their involvement in the agreement, pays a reduced or zero amount of income tax compared to what would have been payable had the agreement not been enacted.

The beneficiary is a 'trustee beneficiary'

If the beneficiary is considered a 'trustee beneficiary,' and a trust distribution is directed to another trust (which serves as a beneficiary), with the condition that the distribution emanates from the other trust, S.100A does not apply in this particular scenario. It's important to emphasise that when contemplating distributions made by the receiving trust, one should carefully consider the implications of S.100A, especially in the context of family trust structures and their potential tax consequences.

The agreement is an 'ordinary family or commercial dealing’

Section 100A(13) excludes from the scope of Section 100A any agreement that is made as part of 'routine family or commercial transactions.'

Consequences of S.100A applying to a distribution

When Section 100A is applied to a family trust distribution, it invokes specific tax consequences:

• The beneficiary is retroactively deemed never to have held present entitlement to the trust income.
• If the beneficiary's entitlement was based on income receipt or allocation, that income is treated as if it was never paid or assigned.

This triggers an obligation for the trustee to pay tax at a rate of 47%, encompassing the top marginal tax rate and Medicare levy, on the beneficiary's share of the trust's net taxable income.

The ATO can retroactively invalidate trust distributions under Section 100A. Nevertheless, affected beneficiaries have the option to amend their tax returns to reclaim previously paid tax. These consequences apply universally, irrespective of a default beneficiary clause in the trust deed and the type of trust income generated.

Section 100A can also impact capital gains or franked dividends allocated to beneficiaries, leading to a reshuffling of income allocation. The trustee may face additional assessment under Section 99A in such cases.

It's vital to note that while Section 100A affects tax matters, it doesn't nullify trust distributions in terms of trust law. This distinction can pose legal and practical challenges, including accounting complexities, for both the trust and its beneficiaries.

Consider a scenario where a trust distribution has already been received by a family member beneficiary, and tax has been paid. If the ATO later deems the distribution invalid, the trustee is generally liable for tax at the highest rate on the beneficiary's share of income. While beneficiaries can seek tax refunds, trust law often doesn't require them to return received amounts, raising questions about managing the trustee's tax liability and family trust work.

Australian Taxation Office (ATO) finalised compliance guidelines

It's important to highlight the Australian Taxation Office (ATO) introduced PCG 2022/D1 on 23 February 2022. This release outlined the ATO's initial approach to compliance with Section 100A within the framework of family trusts and businesses. These preliminary guidelines generated controversy and faced significant criticism due to their content.

Fast forward to 8 December 2022, after extensive consultations spanning several months, the ATO unveiled the final version of its Section 100A compliance guidelines. The ATO concurrently published a compendium that includes their response to feedback received regarding the preliminary compliance guidelines.

PCG 2022/2 signifies an improvement over PCG 2022/D1, as it incorporates additional illustrative scenarios exempted from ATO compliance scrutiny under Section 100A. However, as we will explore shortly, certain aspects still raise concerns for trustees, particularly when executing trust distributions, especially those involving adult children of the controller(s) of the discretionary trust. This emphasises the need for tax-effective trust structures, considering the potential benefits for future generations, and safeguarding family assets while optimising the family trust distribution tax landscape.

The S.100A Compliance Guidelines issued by the Australian Taxation Office (ATO) provide a structured approach to allocating compliance resources, with a particular focus on trust distributions within family trusts and businesses. These guidelines enable taxpayers to gauge the level of "S.100A risk" associated with their trust distributions and take appropriate action.

The ATO employs a defined Risk Framework to categorise trust distributions based on their risk profiles, as outlined below.

Green zone = LOW risk

Trust distributions falling within the green zone receive a measure of assurance. The ATO's compliance resources are typically not directed toward these distributions under S.100A, except for confirming that the arrangement aligns with the taxpayer's specifics. Trustees are encouraged to document compliance with the green zone criteria.

Red zone = HIGH risk

Trust distributions situated in the red zone trigger a priority analysis by the ATO. In cases where high-risk elements are identified, the ATO may proceed with an audit. While the guidelines do not explicitly address arrangements outside the green or red zones, the ATO provides principles for evaluating the likelihood of compliance resource allocation:

• Extending benefits to individuals beyond the present beneficiary.
• Engaging in complex or contrived provisions.
• Opportunities for more direct benefit provision.
• Resulting in substantially reduced tax payments compared to more direct methods.

Trust arrangements that fall outside the green or red zones are not automatically deemed high risk for S.100A. The ATO may engage with taxpayers to gain insight into these arrangements, evaluate S.100A applicability, and encourage documentation of reasons for any exemption. Alternatively, trustees may explore adjustments to align their arrangements with the green zone criteria.

Importantly, the guidelines encompass considerations for family trusts, family members, and businesses, accounting for potential tax advantages, and emphasising the need for tax-effective trust structures. They are applicable before and after their issue date. Moreover, transitional relief provisions are extended for trust distribution arrangements involving income years ending before 1 July 2014 (the WHITE zone), and partial relief is provided for trust distributions made prior to 1 July 2022.

These guidelines serve as a valuable resource for understanding the ATO's approach to compliance with S.100A, ensuring that trust distributions are effectively managed within the context of family trusts, family businesses, and their associated tax implications, thereby optimising the family trust distribution tax landscape.

Next steps

Section 100A is designed to address situations where tax avoidance occurs through trust structures. It triggers when a beneficiary is made presently entitled to trust income but doesn't ultimately benefit from it due to certain arrangements.

While this may appear complex, our team of highly experienced professionals specialises in navigating the intricacies of Section 100A, offering expert guidance and ensuring compliance, so you can focus on achieving your financial goals with confidence. Contact us today.