ATO Interpretative Decision

ATO ID 2005/145

Income Tax

Assessable income: tax exempt beneficiary and reimbursement agreement
FOI status: may be released
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Status of this decision: Decision Current
CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Is a trustee of a family trust liable to be assessed under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) as a consequence of the application of section 100A of the ITAA 1936, where trust income is distributed to a tax exempt beneficiary of the trust, in return for services provided by the tax exempt beneficiary to another beneficiary or an associate?

Decision

Yes. The trustee is liable to be assessed under section 99A of the ITAA 1936 where trust income is distributed to a tax exempt beneficiary of the family trust, pursuant to a reimbursement agreement as defined in section 100A of the ITAA 1936.

Facts

The family trust which derives its income exclusively from interest and dividends was established for the maintenance, education and advancement of family members.

The discretionary beneficiaries of the trust include family members and any school, college or university which the beneficiaries attend.

The trustee entered into an arrangement with a school attended by some of the family trust's beneficiaries.

The school agreed to accept distributions from the family trust in lieu of the equivalent annual fees and other educational costs payable to the school during the year of income.

The school is exempt from income tax under Item 1.4 of the Table in section 50-5 of the Income Tax Assessment Act 1997.

Reasons for Decision

Section 100A of the ITAA 1936 provides that where a beneficiary of a trust estate who is not under a legal disability, is presently entitled to trust income, and that present entitlement is linked either directly or indirectly to a reimbursement agreement, the beneficiary is deemed not to be presently entitled to the income. Trust distributions which fall within section 100A of the ITAA 1936 are assessed to the trustee under section 99A of the ITAA 1936.

Subsection 100A(7) of the ITAA 1936 defines a reimbursement agreement to include,    


...the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or persons.

Further, the term 'agreement' is defined in subsection 100A(13) of the ITAA 1936 to include any agreement, arrangement or understanding, whether formal or informal, express or implied, and either enforceable or unenforceable. However, the term does not include any agreement entered into in the course of ordinary family or commercial dealings.

In Federal Commissioner of Taxation v. Prestige Motors Pty Ltd (1998) 82 FCR 195; 98 ATC 4241; (1998) 38 ATR 568, the court said that the wording of the exclusion in subsection 100A(13) was derived from the judgment of Lord Denning in Newton & Ors v Federal Commissioner of Taxation(1958) 98 CLR 1; (1958) 11 ATD 442; (1958) 7 AITR 298, which referred to the application of section 260 of the ITAA 1936, as follows:    


In order to bring the arrangement within the section one must be able to predicate of it, by looking at the overt acts by which it was implemented, that it was implemented in that particular way so as to avoid tax. If one has to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, the arrangement does not come within the section.

In this case the school which provides educational services to family members has become presently entitled to trust income, arising from the agreement with the trustee to accept discretionary trust distributions, in lieu of payments for school fees and other educational expenses. It is considered that this arrangement goes beyond ordinary family or commercial dealings and is a reimbursement agreement as defined in subsection 100A(7) of the ITAA 1936.

However, the definition of a reimbursement agreement in subsection 100A(7) of the ITAA 1936 is also subject to a purpose test which is outlined in subsections 100A(8) and 100A(9) of the ITAA 1936. Those subsections require that one of the purposes for which the reimbursement agreement was entered into by any of the parties to the agreement, must be the reduction or elimination of a tax liability that would have existed had the reimbursement agreement not been entered into.

If no trust distributions had been made to the school under this arrangement, one or more of the family beneficiaries or the trustee would have been liable for tax on the total net income of the trust. Therefore, it is considered that the arrangement was entered into at least partly for the purpose of reducing the tax liability of family beneficiaries or the trustee.

Thus, it is concluded that the distribution by the trustee, of trust income to the school under the arrangement, was a consequence of a reimbursement agreement as defined.

Accordingly, section 100A of the ITAA 1936 will apply to the above arrangement and due to the operation of subsection 100A(4) of the ITAA 1936 the trustee will be assessed on the trust income distributed to the school under section 99A of the ITAA 1936.

Amendment History

Date of amendment Part Comment
30 January 2015 Facts Substitute reference to paragraph 23(e) ITAA 1936 to section 50-5 ITAA 1997
Reasons for Decision Correct quote from Lord Denning and citations
Add reference to subsection 100A(4) in the last paragraph
Legislative references Add reference to 100A(4) ITAA 1936 and 50-5 ITAA 1997
Case references Correct citations

Date of decision:  23 May 2005

Year of income:  Year ended 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   section 99A
   section 100A
   subsection 100A(4)
   subsection 100A(7)
   subsection 100A(8)
   subsection 100A(9)
   subsection 100A(13)
   section 260

Income Tax Assessment Act 1997
   section 50-5

Case References:
Federal Commissioner of Taxation v. Prestige Motors Pty Ltd
   (1998) 82 FCR 195
   98 ATC 4241
   38 ATR 568

Newton & Ors v. Federal Commissioner of Taxation
   (1958) 98 CLR 1
   (1958) 11 ATD 442
   (1958) 7 AITR 298

Keywords
Present entitlement
School fees & levies
Tax avoidance
Trust distributions
Trust income
Trust reimbursement agreements

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  3 June 2005

ISSN: 1445-2782

history
  Date: Version:
  23 May 2005 Original statement
You are here 30 January 2015 Updated statement