Edited version of private advice

Authorisation Number: 1052183004371

Date of advice: 31 October 2023

Ruling

Subject: CGT - implications of loan arrangements

Question 1

Did the Lender make a deductible loss under section 230-15 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of its loans to the Borrower?

Answer

No

Question 2

Did the Lender make a capital loss from CGT event C2 under Part 3-1 of the ITAA 1997?

Answer

Yes

Question 3

In the circumstances will the Lender be subject to the family trust distribution tax (FTDT) under Division 271 of Schedule 2F of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 4

Will the circumstances give rise to the application of the indirect value shifting rules to the Lender for the purposes of Division 727 of the ITAA 1997 which results in an adjustment to the values of affected interests?

Answer

No

Question 5

Did the Lender make a capital loss in respect of the circumstances under Part 3-1 of the ITAA 1997?

Answer

Yes

Question 6

Will the circumstances give rise to a reimbursement agreement under section 100A of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20YY

Income year ended 30 June 20ZZ

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The subject of this private ruling request concerns the income tax and CGT implications in respect of certain circumstances regarding the loans advanced by the Lender to the Borrower.

2.    The Lender does not meet the turnover or asset thresholds for the purposes of the Taxation of Financial Arrangements (TOFA), nor has it made any elections for TOFA.

3.    The Lender accounts for income on a cash basis for income tax purposes.

4.    The Lender and the Borrower have separate independent tax and accounting advisors.

5.    The Lender has a family trust election in force.

6.    The Lender mainly holds passive investments and was not carrying on a money lending business.

Relevant legislative provisions

Family Trust Distribution Tax (Primary Liability) Act 1998 section 4

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 100A

Income Tax Assessment Act 1936 Division 16E

Income Tax Assessment Act 1936 section 159GP

Income Tax Assessment Act 1936 schedule 2F Division 271

Income Tax Assessment Act 1936 Schedule 2F section 272-60

Income Tax Assessment Act 1936 Schedule 2F section 272-87

Income Tax Assessment Act 1936 Schedule 2F section 272-90

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 108-20

Income Tax Assessment Act 1997 section 110-25

Income Tax Assessment Act 1997 section 110-55

Income Tax Assessment Act 1997 section 116-20

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 section 230-15

Income Tax Assessment Act 1997 section 230-45

Income Tax Assessment Act 1997 section 230-50

Income Tax Assessment Act 1997 section 230-455

Income Tax Assessment Act 1997 Division 727

Income Tax Assessment Act 1997 section 727-15

Income Tax Assessment Act 1997 section 727-100

Income Tax Assessment Act 1997 section 727-105

Income Tax Assessment Act 1997 section 727-110

Income Tax Assessment Act 1997 section 727-125

Income Tax Assessment Act 1997 section 727-150

Income Tax Assessment Act 1997 section 727-470

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Question 1

Summary

The Lender did not make a deductible loss under section 230-15 in respect of its loans to the Borrower.

Detailed reasoning

The TOFA rules

39.          Division 230 which is referred to as the TOFA rules is about the tax treatment of gains and losses from certain financial arrangements. Financial arrangement has the meanings given by sections 230-45 and 230-50. Broadly, you have a financial arrangement under section 230-45 if you have a cash settleable right or obligation under an arrangement.

40.          Broadly, under section 230-15 your gain from a financial arrangement is your assessable income and your loss from a financial arrangement made in gaining or producing your assessable income is an allowable deduction, subject to the exceptions in Subdivision 230-H.

41.          Section 230-455 excludes the TOFA rules from applying to a list of qualifying entities in specified circumstances. The list includes:

(a)          individuals (subparagraph 230-455(1)(a)(i));

(b)          superannuation entities, superannuation funds, managed investment schemes or similar schemes under a foreign law if the value of the entity's assets is less than $100 million;

(c)          authorised deposit-taking institutions (ADIs), securitisation vehicles or financial sector entities with an aggregated turnover of less than $20 million;

(d)          any other entity (except an individual) that has an aggregated turnover of less than $100 million, assets of less than $300 million, and financial assets of less than $100 million.

42.          Regardless of the TOFA thresholds outlined above, the TOFA rules apply to the qualifying securities of all entities that end more than 12 months after the entity starts to have the qualifying security, or where an election is made for the TOFA rules to apply under subsection 230-455(7).

Qualifying security

43.          Security is defined in subsection 159GP(1) of the ITAA 1936 and includes a secured or unsecured loan or any other contract under which a person is liable to pay an amount or amounts, whether or not the liability is secured.

44.          Qualifying security is defined in subsection 159GP(1) of the ITAA 1936. Broadly, a qualifying security is any security that

(a)          is issued after 16 December 1984,

(b)          is not part of an exempt series under subsection 159GP(9A) of the ITAA 1936,

(c)          at the time of issue, will, or is reasonably likely to, exceed one year,

(d)          has an eligible return, meaning at the time of issue, the security is reasonably likely, by reason that the security was issued at a discount, bears deferred interest or is capital indexed or for any other reason, having regard to the terms of the security, to result in the sum of the payments (excluding periodic interest payments) exceeding the issue price (subsection 159GP(3) of the ITAA 1936), and

(e)          where the precise amount of the eligible return is able to be ascertained at the time of issue, this eligible return is greater than 1.5% of the sum of the payments multiplied by the number of years in the term of the security.

45.          Pursuant to subsection 159GP(6) of the ITAA 1936, periodic interest includes an amount of interest payment where the period between the commencement of the period in respect of which the interest is expressed to be payable and the time at which the interest is payable is less than or equal to one year.

46.          Under subsection 159GP(9A) of the ITAA 1936, where securities are issued in a series (i.e. they are all issued on the same terms and conditions) and the first security in the series is not a qualifying security, a subsequent security issued in that series will also not be a qualifying security even if its terms are such that it would otherwise be a qualifying security.

47.          The Explanatory Memorandum to the Taxation Laws Amendment Act (No.2) 1986 explains that with the exception of periodic interest payments, the sum of all payments to be made in respect of a security throughout its term, which were contemplated at the date the security was issued, needs to be reasonably likely to exceed the issue price of the security for there to be an eligible return.

The term 'reasonably likely'

48.          The term 'reasonably likely' is not defined within Division 16E or subsection 6(1) of the ITAA 1936 and reference must therefore be made to its ordinary meaning.

49.          The Macquarie Dictionary does not define the meaning of the term 'reasonably likely'. However, it is useful to observe that the Macquarie Dictionary defines:

'likely' as:

probably or apparently going or destined (to do, be, etc.): likely to happen. OR seeming like truth, fact, or certainty, or reasonably to be ... expected

'reasonable' as:

agreeable to reason or sound judgement OR not exceeding the limit prescribed by reason OR endowed with reason

and 'reason' as:

sound judgement / good sense - it stands to reason - it is obvious or logical.

50.          While not determinative, these definitions suggest it is 'reasonably likely' a particular payment will be made under a security if:

a)    it is certain the payment will be made, or

b)    where it is not certain the payment will be made, there exists sound and/or logical reasons for expecting that it will be made.

51.          Further, the ordinary meaning of 'reasonably likely' and similar phrases has been discussed in a number of cases within various statutory context.

52.          In Department of Agriculture and Rural Affairs v. Binnie (1989) VR 836, the meaning of 'reasonably likely' was judicially discussed in the context of freedom of information legislation. The Court held at page 842 the meaning of the term is to be determined in the context in which the phrase is used. The meaning accorded to 'reasonably likely' by the Court in that case did not mean an event that is more than likely to occur, or has a greater than 50% chance of occurring, nor something which has only a remote or fanciful chance of happening. Rather, the Court accepted that 'reasonably likely' means there is a real chance of that event happening.

53.          In Sheen v. Fields (1984) 51 ALR 345, the High Court discussed the meaning of the term 'likelihood' in the context of a workers compensation statute. The High Court accepted that:

'likelihood' meant a real, but not remote chance of an event occurring.

54.          In Federal Commissioner of Taxation v. Peabody (1994) 181 CLR 359; 94 ATC 4663; 28 ATR 344, the High Court discussed the meaning to be attributed to the term 'reasonably expected'. The Court explained that:

...A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.

55.          It therefore can be concluded from the judicial discussion that the objective criteria where it is 'reasonably likely' that an event will take place, or in the context of Division 16E of the ITAA 1936 that a particular payment will be made under a security, is where both the following criteria are satisfied:

(a)          there is a real chance the payment will be made - but not so unlikely that it can be classified as remote or fanciful; and

(b)          a 'reasonably reliable' prediction can be made as to the amount of the payment. A prediction will be 'reasonably reliable' where there is a sound and logical basis for making it, for example, because the quantum of the payment is fixed or readily calculable.

Conclusion

In the present circumstances, the Lender did not make a deductible loss under section 230-15 during the income year ended 30 June 20XX, because:

(a)          the loans were not qualifying securities,

(b)          the Lender has not met the relevant aggregated turnover or asset thresholds for the TOFA rules to apply on a mandatory basis, and

(c)           the Lender has not made an election for the TOFA rules to apply.

Question 2

Summary

The Lender made a capital loss from CGT event C2 under Part 3-1 of the ITAA 1997.

Detailed reasoning

56.          A debt owed to a lender is a CGT asset for the purposes of section 108-5. CGT Determination Number 2 TD 2: Capital Gains: What are the CGT consequences for the lender (Creditor) when a debt is waived? specifically states that a debt is an asset of the lender and the debt is disposed of when the lender waives the debt. As such a CGT event will happen to the lender.

57.          Relevantly, subsection 104-25(1) provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied. The time of the event is:

(a)          when you enter into the contract that results in the asset ending; or

(b)          if there is no contract - when the asset ends.

58.          Under subsection 104-25(3), you make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

59.          Whether the lender makes a capital gain or capital loss from the CGT event will depend on the consideration (capital proceeds) received for the forgiveness of debt and the appropriate cost base of the asset which is the debt.

Capital proceeds

60.          Pursuant to subsection 116-20(1), the capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening; and the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event).

61.          The market value substitution rules contained in subsection 116-30(1) will apply if no capital proceeds are received from a CGT event, under which you are taken to have received the market value of the CGT asset that is the subject of the event.

62.          Pursuant to subsection 116-30(3A), the market value of a debt that is the subject of CGT event C2 is worked out as if the CGT event (i.e. the execution of the Deed of Forgiveness) had not happened and was never proposed to happen.

63.          Taxation Ruling TR 2001/9 Income Tax: agency development loans considers the taxation treatment of agency development loans in the circumstances where the loans are forgiven or written-off. TR 2001/9 at paragraphs 45 and 139 both state that:

The market value of the debt will be greater of the excess of expected recoverable funds over expected recovery expenses, or nil. This will depend upon the facts of each individual case. Where the debt is written off by reason of the suspected insolvency of the debtor, the market value of the debt is expected to be less than its full face value. If the debt is released or cancelled because it is worthless, then the market value will be nil, despite subsection 116-30(3A) of the ITAA 1997 Act (subsection 160ZD(2A) of the 1936 Act), as the disposal itself is not considered to affect the market value.

Cost base

64.          Paragraph 3 of TD 2 states that:

Generally, the cost base of the debt to the lender is the amount of the loan. The indexed cost base and the reduced cost base will be appropriately adjusted.

65.          Pursuant to subsections 110-55(2) and (3), the reduced cost base of a CGT asset consists of five elements and all of the elements (except the third element) of the reduced cost base of the CGT asset are the same as those for the cost base.

Personal use asset

66.          Section 108-20 provides that any capital loss made from a personal use asset is disregarded. In broad terms, personal use assets include CGT assets used or kept mainly for personal use or enjoyment, certain options or rights, and certain debts arising from CGT assets for personal use or enjoyment or otherwise than in the course of gaining or producing assessable income or from carrying on of a business.

67.          Paragraphs 108-20(2)(c) and (d) are intended to ensure that essentially private or domestic debts will be treated as personal use assets.

68.          Taxation Ruling TR 96/23: Income tax: capital gains: implications of a guarantee to pay a debt at paragraph 47 states:

The test of what is a 'personal-use asset' ... requires a finding that the debt came to be owed for a primary purpose other than that of gaining or producing income or in the carrying on of a business.

Application to your circumstances

69.          In the circumstances of the present case, the Lender made a capital loss.

Question 3

Summary

In the circumstances the Lender will not be subject to FTDT under Division 271 of Schedule 2F of the ITAA 1936.

Detailed reasoning

70.          Division 271 of Schedule 2F of the ITAA 1936 sets out the circumstances in which FTDT is payable. In broad terms, FTDT is payable where:

a)    a trustee of a family trust has made a family trust election or the partners in a partnership, a company or a trustee of a trust have made an interposed entity election to be included in a family group in relation to a family trust, and

b)    the trust, partnership or company distributes, or confers a present entitlement to, income or capital to a person outside the family group.

71.          FTDT is imposed by the Family Trust Distribution Tax (Primary Liability) Act 1998 at the top marginal rate plus Medicare levy (section 4).

72.          A family group is defined in section 272-90 of Schedule 2F of the ITAA 1936 and includes:

(a)          members of the primary individual's family (as defined in section 272-95);

(b)          certain former family members of the primary individual;

(c)          the trust in respect of which the family trust election is made;

(d)          other family trusts with the same primary individual;

(e)          entities covered by interposed entity election; and

(f)           entities owned by the family.

73.          A trustee cannot make a family trust election unless the trust passes the family control test in subsections 272-87(1) and (2) of Schedule 2F to the ITAA 1936. Broadly, the trust passes this test if a group that is made up of some or all of the primary individual and/or one or more members of that individual' s family, and a family professional or legal adviser and certain family trusts, is able to control the trust in certain ways that include control of the trust' s income or capital or the power to remove or appoint the trustee.

74.          Section 272-60 of Schedule 2F to the ITAA 1936 extends the meaning of a "distribution" beyond distributions in the ordinary sense to cover a wide range of benefits, such as loans, the use of property and the forgiveness of debts. Subsection 272-60(2) provides that the value of the benefit will only be caught to the extent that it exceeds any consideration given in return. Further, under subsection 272-60(3), any distribution will be taken to be a distribution of income, unless it is clearly a capital distribution.

75.          In respect of subsection 272-60(2) of Schedule 2F to the ITAA 1936, paragraph 13.56 of the Explanatory Memorandum to the Taxation Laws Amendment (Trust Loss and Other Deductions) Bill 1998 states that:

3.56 As indicated, a distribution may not always be in the form of money or money equivalent. If the distribution takes the form of property or some other benefit, it will be necessary to obtain a monetary equivalent of the property or other benefit provided. The valuation should be made by reference to all relevant matters affecting the value of the property or benefit, for example, its market price (if any).

76.          Taxation Determination TD 2017/20: Income tax: is a person who is not a beneficiary of the trust capable of having a distribution made to them for the purposes of section 272-60 of Schedule 2F to the Income Tax Assessment Act 1936? provides that a person who is not a beneficiary of the trust is capable of receiving a distribution for the purposes of section 272-60 of Schedule 2F to the ITAA 1936.

Application to your circumstances

77.          The Lender has a family trust election in force and is a family trust under section 272-75 of Schedule 2F to the ITAA 1936.

78.          Based on the specific facts of the present case, the circumstances will not give rise to the application of the FTDT under Division 271 of Schedule 2F of the ITAA 1936.

Question 4

Summary

The circumstances will not give rise to the application of the indirect value shifting rules to the Lender for the purposes of Division 727 of the ITAA 1997.

Detailed reasoning

79.          Generally, a value shift occurs in situations where, in doing something, the value of one thing increases and the value of another thing decreases. The general value shifting regime mainly affects interests in companies and trusts that meet the control or common ownership tests. Entities dealing at arm's length or on market value terms are not subject to the value shifting rules.

80.          The indirect value shifting provisions under Division 727 operate to prevent an inappropriate loss or gain from arising on realisation of an interest. The Division may result in reduction of realised losses or gains, or adjustment to the interest's value for income tax purposes taking into account the indirect value shift.

81.          Pursuant to subsection 727-150(1), one or more indirect value shifts will only arise from a scheme if one or more economic benefits have been, are being, or are to be, provided in connection with the scheme.

82.          Further, subsection 727-150(3) provides that a scheme results in an indirect value shift from one entity (the losing entity) to another entity (the gaining entity) if the total market value of the one or more economic benefits (the greater benefits) that the losing entity has provided, is providing, or is to provide, to the gaining entity in connection with the scheme exceeds:

(i)            the total market value of the one or more economic benefits (lesser benefits) that the gaining entity has provided, is providing, or is to provide, to the losing entity in connection with the scheme; or

(ii)           if there are no economic benefits covered by paragraph (a) - nil; and

that excess is the amount of the indirect value shift.

83.          Pursuant to section 727-100, an indirect value shift will have consequences when:

(a)          the losing entity is at the time of the indirect value shift a company or trust (except one listed in section 727-125 (about superannuation entities)); and

(b)          in relation to either or both of the following

(i) the losing entity providing one or more economic benefits to the gaining entity in connection with the scheme from which the indirect value shift results;

(ii) the gaining entity providing one or more economic benefits to the losing entity in connection with the scheme;

the 2 entities are not dealing with each other at arm's length; and

(c)          either or both of sections 727-105 (ultimate controller test) and 727-110 (common ownership nexus test) are satisfied; and

(d)          no exclusion in Subdivision 727-C applies.

84.          The ultimate controller test in section 727-105 looks at whether the losing entity and the gaining entity have the same 'ultimate controller' at some point during the IVS period. IVS period for a scheme starts immediately before the scheme is entered into and ends at the IVS time (subsection 727-150(7)). The IVS time is the earliest time at which it is reasonable to conclude that:

(a)          all the economic benefits that have, are being or will be provided under a scheme can be identified; and

(b)          the parties providing and receiving the economic benefits under the scheme can be identified; and

(c)          the economic benefits under the scheme are not contingent on something occurring. (subsection 727-150(2)).

85.          The common ownership nexus test in section 727-110 is satisfied where both the losing and gaining entities are closely-held and have a common-ownership nexus at some time during the IVS period. The concept of common-ownership nexus is explained in section 727-400 and broadly refers to common ownership between the entities of at least 80%.

86.          To reduce compliance costs, subsection 727-15(8) provides that interests owned by small business entities and entities that meet the CGT small business net asset threshold ($6m) are not affected by the indirect value shifting rules in Division 727 (also see subsection 727-470(2)).

Application to your circumstances

87.          For there to be an indirect value shift under section 727-150, there must be a scheme under which the total market value of the economic benefits that the losing entity has provided, is providing, or is to provide, to the gaining entity exceeds the total market value of the economic benefits that the gaining entity has provided, is providing, or is to provide, to the losing entity, or nil if there are no such economic benefits.

88.          On the specific facts of this case, there is no unequal exchange of economic benefits between the parties to the scheme. There is no losing entity or gaining entity in connection with the circumstances for the purposes of subsection 727-150(3). The circumstances will not result in an indirect value shift under section 727-150 and will not have any consequences for the purposes of Division 727 under section 727-100.

Question 5

Summary

The Lender made a capital loss in respect of the circumstances under Part 3-1 of the ITAA 1997.

Detailed reasoning

89.          Section 104-25 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

(a)          being redeemed or cancelled

(b)          being released, discharged or satisfied

(c)          expiring; or

(d)          being abandoned, surrendered or forfeited; or....

90.          The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, when the asset ends per subsection 104-25(2).

91.          Pursuant to subsection 104-25(3), you make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

92.          General rules about cost base are provided in section 110-25. Subsection 110-25(1) states that the cost base of a CGT asset is made up of five elements.

93.          Subsection 110-25(2) provides that the first element is the total of:

a)    the money you paid, or are required to pay, in respect of acquiring it; and

b)    the market value of any other property you gave, or are required to give, in respect of acquiring the asset

94.          There are a number of modifications to the general rules about cost base. The market value substitution rule in section 112-20 modifies the general rule by replacing the first element of the cost base and reduced cost base of a CGT asset acquired from another entity with its market value (at the time of acquisition) where:

a)            you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from:

(i) CGT event D1 happening; or

(ii) Another entity doing something that did not constitute a CGT event happening; or

b)            Some or all of the expenditure you incurred to acquire it cannot be valued; or

c)            You did not deal at arm's length with the other entity in connection with the acquisition.

95.          The market value substitution rules contained in subsection 116-30(1) will apply to the capital proceeds from a CGT event under which you are taken to have received the market value of the CGT asset that is the subject of the event, if you received no considerations from the CGT event.

Application to your circumstances

96.          In the circumstances, as the capital proceeds are less than the reduced cost base, the Lender made a capital loss from CGT event C2.

Question 6

Summary

The circumstances do not give rise to a reimbursement agreement under section 100A of the ITAA 1936.

Detailed reasoning

97.          Section 100A of the ITAA 1936 is an anti-avoidance provision that was enacted in 1979. Broadly, and subject to the exception for an agreement entered into in the course of ordinary family or commercial dealing, section 100A of the ITAA 1936 applies in cases in which a beneficiary has become presently entitled to trust income where it has been agreed that another person will benefit, and that agreement is made by any of its parties with a purpose that some person will pay less or no income tax as a result. Unlike the general anti-avoidance provisions in Part IVA of the ITAA 1936, section 100A of the ITAA 1936 does not require the making of a determination by the Commissioner; it is a self-executing provision which operates according to its terms.

98.          According to the Explanatory Memorandum, section 100A of the ITAA 1936:

... look[s] to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust. ...

Sub-section (8) will effectively exclude from the scope of section 100A any agreement that was not entered into or carried out for a purpose of securing for any person a reduction in that person's liability to income tax in respect of a year of income, i.e., section 100A is only concerned with tax avoidance arrangements.

99.          As set out in paragraph 5 of Taxation Ruling TR 2022/4 Income Tax: section 100A reimbursement agreements, there are 4 basic requirements for the operation of section 100A:

•                    the connection requirement (see paragraphs 57 to 76 of TR 2022/4)

•                    the benefits to another requirement (see paragraphs 77 to 82 of TR 2022/4)

•                    the tax reduction purpose requirement (see paragraphs 83 to 89 of TR 2022/4), and

•                    the ordinary dealing exception (see paragraphs 90 to 113 of TR 2022/4).

100. The consequences of section 100A of the ITAA 1936 applying are that the trustee of the trust will be liable for income tax on amounts that would generally otherwise be included in the assessable income of the beneficiary in respect of the beneficiary's present entitlement (or the amount of income paid or applied for their benefit).

The Connection Requirement

101.       To satisfy the connection requirement, there needs to be a relevant connection between:

•                    all or part of a beneficiary's present entitlement, or all or part of the income paid to or applied for the beneficiary, and

•                    an agreement (that meets the requirements to be a reimbursement agreement).

102.       For subsection 100A(1) of the ITAA 1936 to apply, it must be the case that the present entitlement:

... arose out of a reimbursement agreement or arose by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement ....

The Benefits to Another Requirement

103.       For an agreement to be a reimbursement agreement, it must provide for the payment of money (including via loans or the release, abandonment, failure to demand payment of or the postponing of the payment of a debt), transfer of property to or provision of services or other benefits for one or more persons other than the beneficiary alone.

104.       Subsection 100A(7) of the ITAA 1936, provides that:

Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for 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.

105.       The reference to 'persons other than the presently entitled beneficiary' can be anyone, including the trustee, another beneficiary of the trust or any other person.

106.       The meaning of 'payment of money' is extended by subsections 100A(10) and (12) of the ITAA 1936 to include a payment by way of loan and to the release, abandonment, failure to demand payment or postponement of payment of a debt. It follows that there is a payment of money where a beneficiary loans the amount of their entitlement to the trustee. The inclusion of the words 'or other benefits' means that condition could be satisfied in the case of an agreement where funds are not distributed but retained in the trust.

The Tax Reduction Purpose

107.       For an agreement to be a reimbursement agreement, one or more of the parties to the agreement must have entered into it for a purpose (which need not be a sole, dominant or continuing purpose) of securing that a person would be liable to pay less tax in an income year than they otherwise would have been liable to pay in respect of that income year (a tax reduction purpose).

108.       Subsection 100A(8) of the ITAA 1936 provides that:

A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into.

The Ordinary Dealing Exception

109.       Agreements entered into in the course of ordinary family or commercial dealing are not reimbursement agreements. This 'ordinary dealing' test is an objective test applied, at least principally, from the perspective of the persons whose purposes are relevant to the operation of section 100A of the ITAA 1936.

110.       The exception to the operation of section 100A of the ITAA 1936 is contained in subsection 100A(13):

agreement ... does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.

111.       The exception is satisfied where the relevant agreement is entered into in the course of ordinary family or commercial dealing. While it can be relevant to consider whether individual steps were entered into in the course of an ordinary family or commercial dealing, that is not the statutory test. It is the whole of the agreement, not those individual steps, that must be characterised as having been entered into in the course of ordinary family or commercial dealing.

Conclusion

112.       The circumstances in the present case will not give rise to a reimbursement agreement under section 100A of the ITAA 1936.