On 23 February 2022, the Australian Taxation Office (ATO) issued guidance on discretionary trusts and the application and operation of section 100A of the Income Tax Assessment Act 1936 (ITAA 1936).
The guidance issued by the ATO is comprehensive and the implications far too complex to address adequately in a short article. The key takeaway is that the ATO’s administrative approach to discretionary trusts is now clear and there may be common family arrangements that are now not acceptable under the Commissioner’s compliance approach. Clients who have discretionary trusts within their family groups are encouraged to contact both their taxation and legal advisors to assess risk and take remedial action where required.
Section 100A was introduced in 1978 as an anti-avoidance measure to deal with ‘trust stripping’ and tax avoidance and applies to ‘reimbursement arrangements’. The scope of s100A is however extremely broad, and in the context of discretionary trusts may generally have application where a trust beneficiary (usually with a low marginal tax rate) is made specifically entitled to income of the trust, but another person or entity enjoys the benefit of the funds representing the income distribution. An exception to s 100A being where the ‘arrangement’ is an ‘ordinary commercial or family dealing’.
It is apparent from the guidance (Draft PCG 2022/D1) issued by the ATO on s100A that in the absence of clear and current case law on what constitutes an ‘ordinary commercial or family dealing’ for the purposes of s 100A the ATO intend to target arrangements where a trustee has made an adult child or corporate beneficiary presently entitled to income of the trust estate, but another person has the actual benefit of the funds representing the income distribution. The ATO expressing the view that just because something happens frequently, or is a common practice, doesn’t mean it is an ordinary commercial or family dealing for the purposes of s 100A.
Where the Commissioner of Taxation (Commissioner) applies s 100A, it will be an unlimited period of review for the ATO and could result in the trustee being assessed on part or all of the trust income at the highest marginal tax rate.
The contents of this article are general in nature. For advice specific to your circumstances, please contact your legal practitioner.
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