One last chance to tell the ATO how you feel about s100A

The ATO sparked a great deal of discussion and concern among taxpayers and advisers in February this year when it released four publications giving long-awaited draft guidance addressing its concerns on the tax consequences of a range of common trust distribution arrangements. The major professional bodies lodged submissions during the extended consultation period ended 29 April. For more detail see this link.

Senior ATO representatives have presented on this topic at several public seminars and other events, and the ATO also issued a release in late June summarising the issues relevant to the 2022 tax year.

This article summarises the current state of play as well as highlights a recent opportunity from the ATO for advisers to provide their feedback, through the relevant professional bodies, on some additional draft guidance proposed to be incorporated into the final Practical Compliance Guide (PCG). This will be possibly the last chance to have your say before the ATO guidance is finalised.

Distributions to corporate beneficiaries

It is first worth noting that, on 13 July, the ATO finalised its tax determination dealing with distributions to corporate beneficiaries as TD 2022/11. The original draft TD 2022/D1 included a controversial provision that would have brought forward the requirement to take corrective action (i.e. for the trustee to pay the entitlement to the company in full, or for the company to enter into a qualifying Division 7A loan agreement with the trustee) by one year in certain cases.

Fortunately, the ATO has now agreed to the suggestions by many parties during the consultation process that it would be unreasonable for the tax treatment to vary merely because the corporate beneficiary’s entitlement to trust income is calculated in a certain way (specifically, depending on whether the entitlement is expressed as a dollar amount or a percentage of trust income).

The current situation that has existed since 2010 will therefore remain in all cases, being that the entitlements will fall within the provisions of Division 7A in the year after the trust distributions are made (year two), and that the entitlement must either be repaid in full by the company’s lodgement due date for year two, or a qualifying Division 7A loan agreement entered into by that date.

Consultation document on PCG 2022/D1

On 19 September the ATO released for consultation via the major professional bodies a 10-page document outlining proposed changes to be incorporated into the final PCG, with a request for feedback by 4 October.

See for example the relevant link for CA ANZ, asking for feedback by 29 September, or a request by the Tax Institute to email feedback to This email address is being protected from spambots. You need JavaScript enabled to view it. by 30 September.

The key points covered in the document, and some associated observations, include:

• The ATO stated that it “will make it clear that section 100A does not apply where there is no agreement, or where the beneficiary simply receives and enjoys the benefit of the distribution they are liable to tax on”.

While that certainly sounds encouraging, the term “agreement” is defined very broadly in section 100A(13), and this is reinforced by the ATO’s statements at paragraph 7 of TR 2022/D1. It would be helpful if the ATO was able to provide more detailed guidance as to situations when it considers that there may be no agreement for section 100A purposes.

It is also worth noting that the ATO has appealed the recent Full Federal Court decision in Guardian AIT Pty Ltd v FC of T, and the outcome of the appeal should help in this regard.

• As was requested in the submissions by professional bodies and other groups, the ATO said it will expand the number of safe “green zone” examples, with the document providing five, and reduce complexity by eliminating the ambiguous “blue zone”.

As the “white zone” is only for arrangements entered into in years prior to 1 July 2014, this leaves just two zones — an arrangement will either be green (low risk) or red (high risk).

One consequence of eliminating the blue zone is that there will no longer be a medium-risk grouping where the ATO may seek to review the arrangements to gain a better understanding without necessarily intending to apply s100A. It may not take much for a particular arrangement to “cross the line” from being a safe one in the green zone that the ATO would not even look at to being viewed as a high-risk arrangement in which the ATO could be expected to take compliance action, raising concerns for taxpayers and their advisers.

Such classifications would often involve subjective judgements as to the intentions of the relevant parties and could be highly susceptible to changes in and/or interpretation of the relevant facts. The new examples are welcome, but each situation must still be evaluated on an individual basis, and it is critical to ensure that common sense prevails.

• The additional green zone examples cover the following areas:

– A trust carrying on a business managed by two generations of a family with unpaid entitlements retained in the trust for use in the business.

– A trust making distributions to a related loss company that are subsequently placed under the terms of a qualifying Division 7A loan.

– A time lag of up to 22 months from the date of a resolution to distribute income to an individual beneficiary for the entitlement to be paid in full.

– A time lag of up to five months from the date of a resolution to distribute income to a loss trust for the entitlement to be paid in full (each trust having made a family trust election with the same specified individual).

– A testamentary trust created for the benefit of an individual already aged over 18, with a portion of the income entitlements retained in the trust and reinvested for her future benefit, with her absolute entitlement to the trust assets due to be triggered at age 30.

Conclusion

While the ATO’s statements in the document are encouraging and the additional examples will be helpful in illustrating more situations that it will view as low risk, that still leaves scope for many other common scenarios that are either likely to be treated as high risk under the ATO’s draft guidance issued to date, or where the correct treatment is still unclear.

It would also be very useful if the ATO could provide further guidance as to what it believes represents an “ordinary family dealing” that would fall outside section 100A, which is an aspect that has not been covered extensively in the guidance materials released to date.

Overall this document does not indicate a significant softening in the ATO’s stance on these matters, but the fact that it is still consulting through the professional bodies is a positive sign.

Peter Bembrick, tax partner, HLB Mann Judd Sydney