The word is that next week (beginning 21.2.22), the ATO will release draft guidance on the anti-trust stripping s100A and the dreaded ‘deemed dividend’ provisions in Division 7A. We expect the following, for public consultation: (1) Draft Ruling on s100A; (2) Draft PCG on s100A; and Draft Determination on Division 7A. In the Tax Institute’s weekly member new email: TaxVine (4, 18.2.22), their Senior Advocate, Robyn Jacobson, CTA, reflects on the past, that represents the pathway to this anticipated guidance.
Section 100A
Background
Section 100A was originally inserted into the ITAA 1936 upon the introduction of a uniform income tax by the Commonwealth in 1942 to ensure that a rebate that applied to the making of gifts to public hospitals, public benevolent institutions and certain other classes of organisations also covered cases where such gifts were made by the trustee of a trust out of trust income. This version of s 100A was repealed in 1950 when a system of deduction replaced the system of rebates.
The Income Tax Assessment Amendment Act 1979 (Act No. 12 of 1979) reinserted s 100A into the ITAA 1936 on 13 March 1979 to apply to assessments in respect of the 1977–78 and later income years (i.e. from 1 July 1977). However, s 100A(3) operates to ensure that the provision applies only to arrangements where trust income is paid to or applied on behalf of a beneficiary after 11 June 1978, the day on which the government announced its intention to introduce legislation to overcome certain tax avoidance arrangements designed to enable trading profits and other income derived by trusts to escape taxation.
As the Explanatory Memorandum to the Income Tax Assessment Bill (No. 5) 1978 (the Bill was enacted as the Income Tax Assessment Amendment Act 1979) explains:
The particular tax avoidance arrangements rely on a nominal “beneficiary” being introduced into the trust and being made presently entitled to income of the trust, thus relieving the trustee of any tax liability in respect of the income. However, it is a feature of the arrangements that the introduced beneficiary also escapes tax by one means or another, e.g., as a tax-exempt body or organisation. This “beneficiary” retains only a minor portion of the trust income, while the group in whose favour the trust in substance exists effectively enjoys the major portion, but in a tax-free form. For example, a corresponding amount may be gifted to form the corpus of a further trust for the group’s benefit.
The amendment proposed will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under which present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of benefits to some other person, company or trust. In those circumstances, the amendment will treat trust income dealt with under the “reimbursement agreement” as not being income to which any beneficiary is presently entitled but as having been accumulated by the trustee, who will then be liable to pay tax on the income under section 99A at the prescribed tax rate (61.5 per cent for 1978-79).
The Explanatory Memorandum has a more detailed explanation of this at Clause 18:
Key points of s 100A:
- Section 100A applies where a beneficiary who is not under any legal disability becomes presently entitled to a share of the income of a trust estate under (or as a result of) a reimbursement agreement (ss(1)).
- Where s 100A applies, the beneficiary is no longer treated as ‘presently entitled’ (and thus assessable) under s 97 of the ITAA 1936 and; instead, the trustee is assessed on the trust’s tax law ‘net income’ under s 99A (ouch). It treats the trusts trust law ‘income’ as no longer paid to or applied for the benefit of the beneficiary (which feeds into the critical ‘presently entitled’ wording, in s97 (ss(2)).
- Section 100A(6) provides that a notional calculation is made of the increased amount — i.e. the extent to which the amount actually paid or applied exceeds the amount that would or could be expected to have been paid or applied, to or for the beneficiary in the absence of the reimbursement agreement. The increased amount is taken to be the sum that is treated as paid or applied as a result of the reimbursement agreement.
- The expression ‘reimbursement agreement’ is defined in s 100A(7) as being an agreement, whether entered into before or after the commencement of s 100A, that provides for money to be paid, property transferred, or services or other benefits provided to someone other than the beneficiary or to the beneficiary and some other person or persons (this includes natural persons, companies and trustees).
- Section 100A is concerned only with tax avoidance arrangements. This is apparent by s 100A(8) which effectively requires a ‘reimbursement agreement to have as a ‘purpose’ reducing some person’s tax (less than it would have been, had the agreement not been entered into).
- Section 100A(13) also excludes arrangements that are ‘ordinary or family or commercial dealing‘ (the counterpoint to ‘tax avoidance’ in the famous House of Lords ‘predicated’ test in Newton’s case). This provides the equivalent counterpoint, to establish ss(8) as attacking classic tax avoidance.
- Section 100A(13) clarifies that the term ‘agreement’ includes arrangements or understandings that are not legally enforceable.
Key guidance to date
The current ATO web guidance on s 100A was first issued in 2014. This material provides limited guidance on:
- What is a reimbursement agreement
- What is an ordinary family or commercial dealing and some other exclusions
- The interaction of s 100A with Div 7A
- Other integrity provisions in the tax law.
Against a backdrop of cases before the courts that have considered and applied s 100A, such as FCT v Prestige Motors Pty Ltd [1998] FCA 221, Idlecroft Pty Ltd v FCT [2005] FCAFC 141 and Raftland Pty Ltd as trustee of the Raftland Trust v FCT [2008] HCA 21, the Federal Court recently held that s 100A did not apply to the taxpayer’s arrangement in Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619. Our summary of this decision was set out in TaxVine 1 on 28 January 2022. The Commissioner has appealed Logan J’s decision to the Full Federal Court.
Proposed guidance
The ATO’s Advice under development webpage advises that a new draft Taxation Ruling, Income tax: section 100A: reimbursement agreements – purpose and ordinary dealing exclusions, is expected to issue in February 2022. Its purpose is to set out the Commissioner’s preliminary views on the exclusions from a ‘reimbursement agreement’ for:
- agreements not entered into with a purpose of eliminating or reducing someone’s income tax; and
- agreements entered into in the course of ordinary family or commercial dealings.
In developing this guidance, targeted consultation on this issue has been undertaken and feedback has been considered. The draft Ruling is expected to be released in conjunction with new guidance on unpaid present entitlements (UPEs) of private company beneficiaries (see below).
Division 7A
Since the introduction of Division 7A of Part III of the ITAA 1936 on 4 December 1997, the provisions have been amended or added to by 23 different enacted bills in a little over 24 years — that’s nearly one a year, every year. Additionally, in that period, the ATO has issued 23 taxation rulings, including practice statements and practical compliance guidelines, on Div 7A — again, roughly one a year, separate from web guidance. This illustrates the complexity of Div 7A and the need for genuine simplification of the rules.
Status of proposed reforms
It is now nearly 10 years since the then Labor Assistant Treasurer, David Bradbury, commissioned a review by the Board of Taxation on 18 May 2012. The Board’s report which recommended changes be made to improve the integrity and operation of Div 7A was delivered to the Government in November 2014. As part of the Federal Budget 2016–17 in May 2016, the Government committed to making targeted amendments to Div 7A, with a proposed start date for the reforms of 1 July 2018. The start date was deferred to 1 July 2019, then to 1 July 2020, then to income years commencing on or after the date of Royal Assent of the enabling legislation.
The only consultation materials on the reforms that the Government has issued to date is a consultation paper released on 22 October 2018 by Treasury outlining the proposed changes.
While many in the profession are keen to see more detail on the reforms, the deferral of the proposed measures is sensible. It will allow a reasonable period for design and implementation of the new rules, whatever form they take.
Key guidance to date
The ATO has been reviewing the current guidance in the form of:
- Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements
- Law Administration Practice Statement PS LA 2010/4 Division 7A: trust entitlements
- Practical Compliance Guideline PCG 2017/13 Division 7A – unpaid present entitlements under sub-trust arrangements maturing in the 2017, 2018, 2019, 2020 or 2021 income years.
Proposed guidance
The ATO’s Advice under development webpage advises that a new draft Taxation Determination, Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become ‘any other form of financial accommodation’? is expected to issue in February 2022.
The draft Determination will set out the Commissioner’s preliminary view on when the UPE of a private company beneficiary will be treated as a loan for which there can be dividend consequences under Div 7A, as that beneficiary has provided ‘any other form of financial accommodation’ to the trustee.
The ATO advises that the draft Determination will be the product of a review of existing guidance in TR 2010/3 and PS LA 2010/4. To the extent that any view in the draft Determination is different to that existing guidance, the view in the draft Determination will be prospective and will apply to present entitlements created on or after 1 July 2022. The existing guidance will continue to apply to current arrangements.
Closing
I have posted on this topic in our member-only Community hub. Join the conversation and share your thoughts and ideas on the challenges and issues you face when it comes to advising on s 100A and Div 7A.
Robyn Jacobson, CTA