Edited version of private advice

Authorisation Number: 1052189667605

Date of advice: 14 November 2023

Ruling

Subject: Debt forgiveness and section 100A

Question 1

Does the proposed forgiveness of the amount described in the financial statements of the Family Trust as 'Beneficiary Entitlement - individual A' qualify as forgiveness of a debt under section 245-35 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is the proposed forgiveness excluded from the provisions of Division 245 of the ITAA 1997 as the forgiveness of the debt will only be triggered in the event of the death of individual A in accordance with their Will?

Answer

Yes.

Question 3

Is the proposed forgiveness excluded from the provisions of section 100A of the Income Tax Assessment Act 1936 (ITAA 1936) by virtue of the fact that it is not a reimbursement agreement as defined by section 100A(13) of the ITAA 1936?

Answer

Yes.

Question 4

Is the proposed forgiveness excluded from the provisions of section 100A of the ITAA 1936 by virtue of the fact that it is not a benefit to another in accordance with section 100A(7) and section 100A(12) of the ITAA 1936?

Answer

Yes.

Question 5

Is the proposed forgiveness excluded from the provisions of section 100A of the ITAA 1936 by virtue of the fact that it is 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 and therefore excluded by virtue of section 100A(8) of the ITAA 1936?

Answer

Yes.

Question 6

Is the proposed forgiveness excluded from the provisions of section 100A of the ITAA 1936 by virtue of the fact that it is an ordinary family dealing as defined by section 100A(13) of the ITAA 1936?

Answer

Yes.

This private ruling applies for the following periods:

Year ending 30 June 2024

Year ending 30 June 2025

Year ending 30 June 2026

Year ending 30 June 2027

Year ending 30 June 2028

The scheme commenced on:

1 July 2023

Relevant facts and circumstances

Individual A owns 100% of the shares in a company.

Individual A is a director of the company which is the trustee the Family Trust.

The child of individual A is also a director of the company.

The child is named as executor of the estate of Individual A in the Will signed in 2023. The child is named as a preferred beneficiary in the Statement of Wishes of Individual A signed in 2023.

Another child is also named as an executor of the estate of in the event the other is unwilling or unable to fulfil the role.

This child is named as a preferred beneficiary in the Statement of Wishes signed in 2023.

At the time of singing the Will and Statement of Wishes Individual A's assets included the following:

•         principal place of residence

•         a portfolio of listed shares

•         an unpaid present entitlement from the Family Trust.

In discussing the recent updates to the Will with legal advisors, individual A expressed concerns that there were individuals who may be unhappy with the contents of the Will and may seek to mount a legal challenge.

Apart from the potential cost of defending such an action, individual A was most anxious that the administration of the estate should not become stress or burdensome.

The advisors advised that should the prospect of a legal challenge be likely it would be prudent to maximise the assets held in Family Trust.

Included in this advice was a recommendation that the beneficiary entitlement owed by Family Trust to individual A be forgiven upon their death. This was agreed to and a clause to this effect was included in the Will signed in 2023.

Based on current valuations, the assets of the estate, excluding the unpaid present entitlement, will be sufficient to pay all quantified distributions to beneficiaries named in the Will. The residual assets of the estate are to be divided equally between the children.

The Statement of Wishes requests that the income and capital of Family Trust be distributed equally between individual A's children.

All relevant parties are Australian residents.

Relevant legislative positions

Income Tax Assessment Act 1997 Division 245

Income Tax Assessment Act 1997 section 245-35

Income Tax Assessment Act 1997 subsection 245-40(d)

Income Tax Assessment Act 1936 section 100A

Income Tax Assessment Act 1936 subsection 100A(7)

Income Tax Assessment Act 1936 subsection 100A(8)

Income Tax Assessment Act 1936 subsection 100A(12)

Income Tax Assessment Act 1936 subsection 100A(13)

Reasons for decision

Question 1 and 2

Under section 245-35 of the ITAA 1997 a debt is forgiven if and when the debtor's obligation to pay the debt is released or waived, or is otherwise extinguished other than by repaying the debt in full. However, section 245-40 of the ITAA 1997 explains that Subdivisions 245-C of the ITAA 1997 to 245-G of the ITAA 1997 do not apply to a forgiveness of a debt if the forgiveness is effected by will.

In this case, when individual A dies their will contains a clause that will trigger the forgiveness of the UPE. Therefore, we consider the transaction to be excluded from Division 245 of the ITAA 1997.

Question 3, 4, 5 and 6

Section 100A of the ITAA 1936 is an anti-avoidance rule. It applies to an agreement (called a 'reimbursement agreement') where one person receives a benefit from the trust but another person is made presently entitled to income and assessed.

Each of the following must be satisfied for section 100A of the ITAA 1936 to apply:

• 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.

There cannot be a reimbursement agreement where either:

• the arrangement is 'entered into in the course of ordinary family or commercial dealing' (further details below)
• the beneficiary is a child under 18 years old or under a legal disability
• at the time the beneficiary became presently entitled, there was no agreement, arrangement or understanding to provide a benefit to someone else. However, a repeated pattern may lead to an inference there was an understanding.

To the extent a beneficiary's entitlement arises out of a reimbursement agreement, section 100A disregards it. This means that the net income that would otherwise have been assessed to the beneficiary (or trustee on their behalf) is instead assessed to the trustee at the top marginal tax rate.

Reimbursement agreement

Taxation Ruling 2022/4 Income Tax: section 100A reimbursement arrangements (TR 2022/4) states that:

10. An 'agreement' is defined widely for section 100A purposes to include arrangements and understandings. Those terms have their ordinary and legal meaning in the context in which they appear. An agreement can be formal or informal, express or implied, and need not be enforceable or intended to be enforceable. An agreement may be inferred from the surrounding circumstances or the conduct of the parties.

11. While an agreement requires 2 or more parties, an exact understanding of the nature and extent of the agreement (or of the benefits to be provided under it) is not required between all of its parties.

12. An agreement can cover a range of things, including a series of steps or concerted action towards a purpose.

Practical Compliance Guideline PCG 2022/2 sets out the ATO compliance approach to section 100A reimbursement agreements. PCG 2022/2 states that:

10. There is no reimbursement agreement and section 100A will not apply to a beneficiary's present entitlement to trust income where any of the following apply:

a)    The beneficiary is under 18 years of age or otherwise under a legal disability.

b)    Only the beneficiary benefits from their trust entitlement and no one else benefits from the beneficiary's share of trust net income and trust capital gains.

c)    There was no agreement, arrangement or understanding to provide a benefit to someone other than the beneficiary at the time the beneficiary became presently entitled.

Benefit to another

TR 2022/4 states that:

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.

Tax reduction purpose requirement

TR 2022/4 states that:

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).

Ordinary Family Dealing

An agreement will not be a reimbursement agreement if it is entered into in the course of ordinary family or commercial dealing. Broadly, an arrangement is entered into in the course of ordinary family or commercial dealing, if the purpose of the arrangement is to achieve family or commercial objectives.

TR 2022/4 notes that if the objective of a dealing can properly be explained as the payment of less tax to maximise group wealth, rather than some other objective which is a family or commercial objective, it is not an ordinary family or commercial dealing.

Features indicating that a dealing may not be ordinary family or commercial dealing include:

• the arrangement is artificial, contrived, is overly complex or contains steps that might be explained by objectives different to those said to be behind the ordinary family or commercial dealing
• circumstances or conduct that is inconsistent with the legal or economic consequences of the beneficiary's entitlement, such as

˗   appearing unlikely that the beneficiaries will receive their entitlements when the assets or funds representing the entitlement are purportedly paid or lent to others without any intention of being returned or repaid

˗   funds representing the entitlement are dealt with in a way that is inconsistent with the beneficiary's right to demand the entitlement

˗   beneficiaries are not informed of their entitlements

Application to the circumstances

In this case, having consider the circumstances and the will of individual A, we accept that the arrangement has been entered into 'in the course of an ordinary family dealing'. Therefore, section 100A of the ITAA 1936 will not apply in the circumstances.