The ATO computer systems, one would imagine, would red-flag that a tax-exempt entity has received a significant discretionary trust distribution.
Audit risk here, need it be stated, may be high as the Beatrice Family Trust, when it files its tax return, is going to report the entities who have received the trust income. The ATO computer systems, one would imagine, would red-flag that a taxexempt entity has received a significant discretionary trust distribution. This is a clear-cut case of s. 100A applying and being applied by the Commissioner during audit: 1. There is a reimbursement agreement between Beatrice and Hightown Private School. 2. The purpose is for the $60,000 of the Beatrice Family Trust income to be taxed at $nil. 3. There is nothing ordinary in family or commercial terms about the dealing. 4. It cannot be said that the Hightown Private School would have received any part of the distribution without the agreement. On the basis of the above, s. 100A would clearly be applicable. This example has assumed that the Hightown Private School would already be in the class of beneficiaries of the Beatrice Family Trust; if the trust deed was as part of the arrangement amended to add the Hightown Private School as a beneficiary, that would tend to make the application of s. 100A more compelling from an evidential perspective. As was stated by Prestige Motors, in the facts of that case, “that agreement or arrangement involved [a company] as a party, since in each case the trust deed was amended, with [the company]’s consent to alter its entitlements to distribution of income.” A literal reading of the Commissioner’s website guidance? 22 | BRIEF JUNE 2021
Taken from the Commissioner’s guidance is arguably a less black and white situation, which might apply where, for example a literal reading might involve a trustee making her adult children presently entitled to some trust income (where those adult children have a lower marginal tax rate because they study full time at university) but not pay them the distribution and instead loans most the money to herself8: “Example 1: Trust estate The trustee of a trust estate makes a beneficiary entitled to trust income. Instead of paying the amount of trust income to the beneficiary, the trustee gives, or lends on interest-free terms, the money to another person. The other person benefits from the trust income, but is not assessed on any part of it. The arrangement does not constitute ordinary commercial or family dealing. This arrangement would generally constitute a reimbursement agreement if it was intended that the beneficiary who was made presently entitled to the trust income pays a lower amount of tax than would have been payable by the person who actually enjoyed the economic benefits of that income. In this example, the presently entitled beneficiary may pay less (or no) tax because it: … is otherwise subject to a lower rate of tax.” Taken literally, if say Duke had a family trust, made his 18 year old adult son presently entitled to $20,000 of income but did not pay the distribution and then Duke borrowed $19,000 from the trust on interest free terms (without a repayment
date), one might be left thinking that the Commissioner might seek to apply s. 100A. The Commissioner’s foreshadowed guidance when provided will no doubt provide much needed clarity to this literal reading and comfort to accountants across Australia. In the meantime, it is worth discussing issues that potentially arise should a matter become part of a tax controversy as between taxpayer and the Commissioner. Issue: Natural beneficiary who is made presently entitled to a large sum but later gifts the distribution to his parent – is there an arrangement, and is there an “increased amount”? In this type of situation, the natural beneficiary is the adult son (Archibald) of the trustee of a discretionary trust, his father (Duke). Several years after Archibald is made presently entitled to an amount, it is paid to him by the trust and Archibald then gifts it to Duke in Duke’s own capacity. Here, first, there is an open question whether there is any agreement in existence at all. If there is no agreement, then s. 100A does not apply. Of course, broadly stated, given the Commissioner can assert there to be one in his assessment and it is then up to the taxpayer to satisfy a court otherwise, evidential issues may arise. But where Archibald and Duke are available to give evidence, this evidential issue may be overcome. Unlike other income tax charging provisions, the Commissioner, at least theoretically, has no time limit when he might render such an assessment against the trust for s. 100A. Of course, if the pattern was repeated, whereby the adult son over several years
