Section 100A: why so much attention?

By Melinda Peters, Partner, Tax, McCullough Robertson

In its 2020-21 Federal Budget in October last year, the Government announced that $1 billion would be provided over 4 years to extend the ATO Tax Avoidance Taskforce.

The ATO has also recently announced its “Next 5,000 program“, designed to see the ATO undertaking “streamlined assurance reviews” of relevant taxpayer groups over a 4-year period (mirroring the approach undertaken in the Top 1,000 tax performance program that applied to public and multi-national companies).

Both announcements come in the context of a global pandemic expected to result in a budget deficit of $213.7 billion and net debt (at its peak) of 43.8% of GDP at 30 June 2024 (Budget Paper No 1, 2020-21 Federal Budget).

It therefore comes as no surprise that ATO review and audit activity is expected to increase over the coming years – with an accompanying rise in the number of disputes.

– Melinda Peters, Partner, Tax, McCullough Robertson

As a result, now is an opportune time to “gear-up” with a view to ensuring we are best placed to manage any upcoming compliance activity. 

One of the areas of particular interest to the ATO is s 100 of the ITAA 1936. This article looks at what s 100 is, why it has garnered significant attention in recent years, and respective guidance for tax advisors.

Section 100A – what’s all the fuss?

Section 100A has attracted significant attention amongst tax advisors in recent years. While the section has been a part of the Australian taxation landscape since 1979, it appears only fairly recently that it has become an area of significant focus within the ATO.

While the Commissioner is yet to release a draft tax ruling setting out the ATO’s views as to what circumstances might be excluded from the operation of s 100A (latest information from the ATO suggests it will be released in June 2021), there are a number of ongoing audits in this space, where the Commissioner is contending that s 100A applies – all in varying circumstances.

With this in mind, the following is aimed at explaining the context of s 100A, shining a spotlight on the type of arrangements that might become subject to review and providing tips as to what to expect if subject to a s 100A review.

What is s 100A?

When introduced, s 100A was designed to counter tax avoidance arrangements which were aimed at ensuring that a beneficiary was presently entitled to income of the trust estate (relieving the trustee from paying tax on that income) in circumstances where the presently entitled beneficiary would also be relieved from paying tax on the income received (eg an income tax exempt entity, or another entity with tax losses that could absorb the income received).

For s 100A to apply, there are a number of key requirements:

  • a beneficiary must be presently entitled to income of a trust estate;
  • the beneficiary’s entitlement must arise out of a “reimbursement agreement” – ie an agreement that provides for the payment of money, transfer of property or provision of services or other benefits to a person other than the beneficiary, in circumstances where the purpose of one of the parties to the arrangement was to ensure that the tax liability of the person who would otherwise have received the income (ie absent the arrangement) was reduced.

Where s 100A applies, the beneficiary is deemed not to be entitled to the income distributed to it, rather the trustee is assessed on that income at the top marginal rate.

One important outcome of s 100A is that there is no limited amendment period in relation to assessments made pursuant to the section. While in our experience the Commissioner will often only seek to apply s 100A in relation to a 4 or 5 year period, there is no statutory impediment to further assessments should the ATO consider it appropriate in the circumstances. Therefore, not only is the applicability of the section extremely wide, it can potentially result in significant financial detriment.

However, s 100A does not apply to a reimbursement agreement which is entered in the course of “ordinary family or commercial dealings”.

So exactly what are “ordinary family or commercial dealings”?

This appears to be the million dollar question. While the Commissioner’s public statements to date indicate that an “ordinary family or commercial dealing” will depend on an analysis of all relevant facts, what is apparent is that in order to be a “reimbursement agreement”, there must be a tax avoidance purpose.

Some common examples of where the Commissioner may contend a reimbursement agreement exists include where a discretionary trust makes a distribution:

  • to a foreign resident (in circumstances where the net income of the trust includes foreign sourced income, or is otherwise subject to withholding tax in Australia);
  • to an entity with tax losses;
  • to an individual on a low tax rate – particularly if that individual subsequently gifts the funds to another beneficiary on a higher tax rate;
  • to a company, of which the shareholder is the trustee (in its capacity as trustee of that trust), meaning that the company has no option other than to distribute the income it receives back to the discretionary trust.

What can advisors do?

Perhaps the best recommendation for advisors at this stage is – be conscious that an ATO audit may in fact be focusing on s 100A, together with its potential breadth of application. Arrangements which might have been considered commonplace may not be viewed by the Commissioner as such.

We have recently assisted an accountant in responding to an ATO request for information on behalf of one of his clients. While the accountant had undertaken a detailed review of the entities in question and anticipated a number of potential issues with transactions in prior years, upon review of the correspondence, it became clear that the ATO review was focusing on the potential application of s 100A. With this information, the responses could be framed so as to address s 100A by describing in detail the nature of the arrangements in question, as opposed to simply answering the questions that had been asked without providing that context.

It may be that the Commissioner is seeking from amongst the group of s 100A audits to identify an appropriate test case to litigate, but in the meantime, those taxpayers in the midst of a s 100A review remain “on the hook” and unable to either convince the ATO that the arrangements under review are ordinary family or commercial dealings, nor able to settle or otherwise compromise the audit (potentially due to concerns that the resulting settlement may prejudice the outcome in other matters, or be seen as the Commissioner treating taxpayers inconsistently). Section 100A remains very much a “live issue”.

This article was first published in Thomson Reuters’ Weekly Tax Bulletin.

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