Section 100A – the devil is in the detail

by | Jan 24, 2018

“Sometimes when I consider what tremendous consequences come from little things, I am tempted to think there are no little things.” Bruce Barton (1886-1967)[i]

The above quote can apply to many pursuits. Tax advising is just one; both the ATO and taxpayers have lost cases and audits because of the little things.

An example of this that we recently came across related to how trust distributions to members of a family had been dealt with, and what the ATO did when they looked at the situation.

The young adult children were living at home with their parents, as is common. Their family was lucky enough to have an income-producing family trust which distributed some of its income to them. They had agreed to contribute some of this income towards the household expenses. This was brought to account by the agreed amount being transferred from their beneficiary account to that of their parents, but was not formally documented via a written agreement. They drew on the rest of their beneficiary account for other personal expenses.

I imagine that variations of this situation will not be uncommon.

What does Section 100A do?

Section 100A is an anti-avoidance provision. Broadly, if the following tests are met this section applies. The tests are:

  1. a beneficiary becomes presently entitled to a share of trust income;
  2. the present entitlement arises out of the understanding that there was an agreement which the beneficiary was a party to that another party would enjoy the benefit of the distribution such that the beneficiary did not access some or all of the distribution; and
  3. the arrangement does not satisfy the ordinary family or commercial dealing exclusion.

If section 100A applies the amount that is not enjoyed or used by the beneficiary is treated as having never been distributed by the trust and so the trustee is taxed upon it. This would usually attract taxation at the top marginal rate as the assessment would be via section 99A ITAA 1936.

This section shot to prominence back in July 2014 when the ATO released an information paper regarding ‘washing machine’ arrangements (discussed in our newsletter article Division 7A & Trusts – The Round Robin ends!). As this article shows, the ATO believe it has wider application.

Impact of section 100A to this scenario

We have all heard trust and tax advisors say that a distribution made to a beneficiary is owned by that beneficiary. This example shows that care should be taken if anything is done other than just pay the distribution out to the beneficiary.

The tremendous consequence arising from the above situation is that the ATO believe that the contribution of the young adults towards the costs of their family’s household is a reimbursement arrangement and that the trustee should pay tax at 47% on the contributions rather than the individuals paying tax at their own marginal rates.

Obviously this example is not a commercial dealing. More surprisingly, apparently young adults contributing to the costs of running the household they live in is not an ordinary family dealing!

[i] Bruce Barton co-founded the multinational advertising company that became BBDO; he is credited with inventing the Betty Crocker brand and both the name and the logo for General Electric.

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