Caution with Trust Reimbursements

On 2 July 2014, the ATO released guidance on how it intends to apply section 100A of the Income Tax Assessment Act 1936 regarding trust reimbursement agreements.

Section 100A was originally introduced as an anti-avoidance measure to address what was referred to as ‘trust stripping’.

Broadly, section 100A of the ITAA 1936 provides that where a present entitlement to trust income is conferred, yet is linked (either directly or indirectly) to a ‘reimbursement agreement’, the beneficiary is deemed not to be presently entitled to the income.  Instead, section 100A assesses the trustee to tax at the highest marginal rate under section 99A on that income.

In general terms, the four key requirements for section 100A to apply are:

  • a beneficiary is presently entitled to trust income under an arrangement;
  • the arrangement provides for the provision of benefits to a person other than the beneficiary;
  • the arrangement is entered into essentially for the purpose of payment of a lower amount of tax; and
  • the arrangement is not entered into in the course of ordinary family or commercial dealings.

A common example of the first two points above is where the trust owes an unpaid present entitlement (‘UPE’) to a company or individual beneficiary and retains the UPE funds for some other purpose.

It is clear from the publication that the ATO regard section 100A as being potentially relevant to a broad range of circumstances where trust income is distributed but not paid to a beneficiary (one might say potentially broader than its original intent).

A number of examples are given in the publication as to when section 100A would not ordinarily be applied.  As always, the examples are termed to be dependent on the specific facts of each case.  Aside from that uncertainty, the guidance issued by the ATO is inadequate as the examples do not properly explore what the ATO will accept as within the ambit of the ‘ordinary family or commercial dealing’ exclusion.

Hopefully some more targeted guidance will be issued if the ATO intends to start active compliance activity in the area.

For more information please contact contact  Marc Romaldi