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  • Managing trust reimbursement agreement risks

    The Australian Taxation Office (ATO) has released further guidance for tax professionals and trustees to help them manage their obligations for 30 June 2022 in light of the draft guidance on trust reimbursement agreements where section 100A of the Income Tax Assessment Act 1936 may apply.

    Section 100A is an anti-avoidance rule, that applies to an agreement (called a 'reimbursement agreement') where one person receives the benefit from the trust but another beneficiary is made presently entitled to income and assessed. The person receiving the benefit will typically have a higher tax rate than the beneficiary and a purpose of the agreement is that someone will pay less income tax. Where section 100A applies, the beneficiary’s entitlement is taken to be disregarded with the trustee then assessed on that income at the top marginal rate.

    ATO Deputy Commissioner Louise Clarke said for trust entitlements arising in the current income year ending 30 June 2022, trustees should:

    • Consider the ATO’s draft guidance to help understand the ATO’s view of ‘what is an 'ordinary family or commercial dealing’ and the instances where there is a potential risk that section 100A may apply.
    • Refer to the ATO’s 2014 website guidance which sets out examples for when section 100A may or may not apply.
    • Maintain good records to evidence arrangements.

    Trustees who think section 100A may apply to their affairs should speak to their registered tax professional for advice. They can also apply for a private ruling or contact the ATO using the process set out in the draft practical compliance guidelines.

    Ms Clarke noted the ATO has not ramped up compliance activities to specifically review the application of section 100A. “However, we may review a taxpayer’s arrangement if in the ordinary course of our review programs a section 100A risk is identified.”

    "I also want to reassure the community - we don't have a retrospective change to our interpretation of section 100A. We stand by our 2014 guidance for this interim period, up to 30 June 2022” Ms Clarke said.

    Ms Clarke also acknowledged that there has been significant interest in its draft public advice and guidance relating to trust reimbursement agreements and unpaid present entitlements. In response to the level of community interest, the ATO extended the public consultation period for the guidance, which ended on 29 April 2022. The ATO is now considering the submissions received.

    Note to journalists

    Please refer to our media release from 5 May 2022 Update on draft guidance on trust reimbursement agreements and unpaid present entitlements for more information.

    Last modified: 21 Jun 2022QC 69902