By Paul Goldin on Monday, May 24th, 2021 in 2021.

The rumour mill is running rampant that the Commissioner of Taxation (Commissioner) is due to release long-awaited guidance materials regarding section 100A of the Income Tax Assessment Act 1936 (S100A).

1. Section 100A
   • S100A is designed to target certain tax avoidance arrangements where:
     • A beneficiary who is not under a legal disability is presently entitled to a share of the income of the trust estate; and
     • The present entitlement of the beneficiary to that share arose out of a reimbursement agreement.
   • A reimbursement agreement exists where a person other than the presently entitled beneficiary actually benefits from the distribution and there is a purpose to minimise tax.
   • S100A operates to disregard the beneficiary’s entitlement that arises out of a reimbursement agreement and instead assesses the trustee on the distribution at the top marginal rate of tax.
   • However, it doesn’t apply to ordinary family or commercial dealings or to a presently entitled beneficiary that is under a legal disability.
   • The wording of S100A is exceedingly wide, and as has been acknowledged, draws within its ambit many transactions that were, arguably, never intended to be subject to its provisions.

2. The Commissioner’s Undertakings
   • Having regard to the overly broad ambit of S100A and the possibility that transactions outside of its intended scope might be subject to its provisions, the Commissioner has on numerous occasions acknowledged that in certain circumstances both Section 100A and Division 7A may apply to an arrangement.
   • However, the Commissioner has advised that it will not devote compliance resources to the application of Section 100A where:
     • the funds are retained in the trust as working capital; or
     • The arrangement is considered to be in the course of an ordinary family or commercial dealing; or
     • It relates to unpaid entitlements created before 16 December 2009.
   • The Commissioner has stated that arrangements that concern him and in which in his view a reimbursement agreement will arise are those in which the family trust owns all the shares in a private company and in where the perpetual circulation of funds between the trust and the company arise resulting in the reduction in tax that would otherwise be payable by the trustee.
   • Of grave concern to the broader tax profession and to private business is if the Commissioner will seek to change his view and delegate his undertakings to history.
3. ATO Guidance
   • It is hoped that the Commissioner will take this opportunity to provide clarification around the concept and the ambit of an “ordinary family or commercial dealing” (Ordinary Dealings) to provide a measure of certainty as to which transactions might fall afoul of S100A.
   • However, as noted above, there is widespread concern that the Commissioner, will use this opportunity to curtail the ambit of Ordinary Dealings and going forward seek to use S100A to attack family groups who have sought to rely on being in compliance with Division 7A and the Commissioner’s undertakings.
   • It is submitted that this would place an unnecessary burden on both the tax profession (in particular tax agents who are at the coal face of assisting taxpayers with their compliance) and on private businesses in maintaining their tax affairs in good manner. All the more, where such taxpayers have sought to operate within the confines of Division 7A (and historically with the Commissioner’s S100A assertions).
   • Further, it is my concern that the potential impact of a change in S100A policy might not be fully comprehended or understood by many, in the profession or in private business and the changes might result in significant changes to standard operation protocol.
   • In many instances, where there is an awareness, the result might be the unintended consequence (by the Commissioner) of generating significant fees for the taxation and broader professional community due to the necessity to undertake restructures and other group changes so as to comply rather than generating (I submit, the hoped-for) additional revenue to the fisc. All this at a time when many private businesses are navigating the other side of a difficult period post-2020.
   • An example (alluded to above) that highlights a potential concern, is:

Assume discretionary family trust (DFT) with a corporate beneficiary (Bucket Co). A complying Division 7A agreement is in place and being managed between Bucket Co and DFT. Amounts are traditionally paid/ applied to Individual A. Would the Commissioner seek to apply S100A to this scenario?

• One pragmatic solution might be to allow transactions within a family group (for the family trust election rules).

4. Commissioner’s Remedial Powers
   • The statutory power, which is contained in Division 370 of the Taxation Administration Act 1953, enables the Commissioner to modify the operation of the taxation laws to ensure that their purpose or object is met.
   • It is submitted that S100A:
     • is a prime example of a legislative section that would benefit from the exercise of the Commissioner’s remedial powers.
     • is uniquely suited to the remedial power to ensure that that section is limited to achieve intended outcomes (or to avoid unintended outcomes) and where changes to the law itself are not practical due to time constraints or uncertainty as to whether the legislative process will deliver the desired amendments.
   • Further, it is submitted that doing so would accord with the Commissioner’s views that the remedial power would be suited where the Commissioner considers it to be reasonable, having regard to both the intended purpose or object of the provision and whether the costs of complying with the provision are disproportionate to achieving the intended purpose or object.
   • I have not been privy to the consultation had been the ATO and representatives of the profession, but it would be strongly hoped that this has been raised and addressed as a possible alternative.

This is not intended to be a comprehensive discussion of S100A; nor is it intended to be advice and should not be relied upon as advice. The views expressed are the author’s personal views.