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generations of family

CLIENT UPDATE: ATO provides guidance on ITAA 1936 sec. 100A for Tax Agents and Trustees dealing with Trust Distributions for 2021-22

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It is reasonably well-known that on 23 February 2022 the ATO issued a package of draft guidance on sec. 100A of the Income Tax Assessment Act 1936—in particular, providing the ATO’s view on the meaning of “ordinary family or commercial dealings”, which are outside the reach of sec. 100A: see ATO’s draft ruling on sec. 100A represents the most significant development for trust taxation in almost 40 years.

On 20 June 2022, the ATO issued further guidance for tax agents and trustees dealing with trust distributions for 2021/2022, entitled: “Managing section 100A for the 2021-22 income year”.

Unfortunately, the ATO guidance appears simply to confirm the ATO’s previous view that arrangements will be considered:

Low risk (GREEN ZONE) where either:

(a)  a beneficiary simply uses their entitlements to benefit themselves, their spouses and dependents; or

(b)  the beneficiary’s entitlement is retained by the trustee for use in commercial or income earning operations of the trust, provided either: the beneficiary is employed in managing the business conducted by the trustee, the beneficiary (or spouse) controls the trustee, or the beneficiary is a private company that enters into a complying Div. 7 loan agreement;  or

High risk (RED ZONE) where they have:

“elements of contrivance, undue complexity, or other features that do not show a commercial or family-based reason, but instead a motivation to shelter income from higher rates of tax”.

The examples in the 20 June 2022 publication are similar to those in the 23 February 2022 draft guidance.

The ATO acknowledges that intra-family arrangements are typically conducted with a greater level of informality than commercial dealings conducted by unrelated parties; but nevertheless suggests contemporaneous records should be maintained “that demonstrate the objectives an arrangement was intended to achieve and how it helped to achieve them”.

It appears the ATO continues not to accept the suggestion that—in Australia in 2022—the gifting, sharing and pooling of assets between family members is an “ordinary family dealing” and that doing things “for the benefit of the family” is something families typically, ordinarily and regularly do: see ATO’s draft ruling on sec. 100A represents the most significant development for trust taxation in almost 40 years.

At least as a result of the guidance on 23 February and 20 June 2022, advisors and their clients can be in no doubt as to the ATO’s views on this extremely important issue.

If you would like to discuss your trust and tax affairs on a strictly confidential basis, please do not hesitate to contact Michael Butler on (08) 8235 7407.