ATO compliance guidelines section 100A

Practical compliance guideline for section 100A

Additional draft green zone examples

Practical

Introduction

for section 100A additional draft green zone

1. The ATO intends to finalise the draft public advice on section 100A before the end of this year. When we finalise the advice, we will also publish a compendium of the feedback we received from the public consultation earlier this year, together with our response to each submission

2. In the final guidance we will make it clear that section 100A does not apply where there is no agreement, or where the beneficiary simply receives and enjoys the benefit of the distribution they are liable to tax on.

3. Some of the specific changes we are making to the Practical Compliance Guideline PCG 2022/D1 (PCG) include:

• expanding the green zone scenarios, which cover low risk cases to which the Commissioner does not intend to apply compliance resources

• reducing complexity by removing the blue zone which covers arrangements for which more information is required to determine if there is a risk that the section applies, and

• include more practical examples in the Guideline to illustrate the operation of the green and red zone scenarios.

4. In this document we share with you five additional examples which we propose to include in the green zone. The situations covered by these examples include where:

• a loss trust or company beneficiary(s) are presently entitled to trust income and those beneficiaries are members of the same family group (as defined in the tax law) as the distributing trust Where there is a loss beneficiary(s), it must continue to be solvent, particularly if the loss beneficiary(s) use the trust entitlement to fund an equity distribution

• there is a time lag between when a beneficiary becomes entitled to trust income and that entitlement being satisfied this is provided the lag does not exceed two years

• there is a testamentary trust that is maintained for the benefit of an individual where the trustee reinvests income to which the individual is presently entitled, and

• there is a business carried on by a trust where two generations of the same family manage that business.

5. Each example assumes that there are no additional features that either causes the example to be in the red zone or stops the example being within the green zone (i.e., the features outlined in paragraph 26 of the draft PCG).

6. You can share these examples with your members. We request that any feedback you receive be provided to us by 4 October 2022.

New green zone scenario 3A – distributions involving a trustee undertaking a farming business

7. The McDonald Family Trust is a discretionary trust controlled by Old McDonald.

8. The trustee of the McDonald Family Trust carries on a farming business.

9. The management of the farming business is undertaken by Old McDonald and his daughter Young McDonald.

10. It is intended that Young McDonald will take control of the McDonald Family Trust when her father passes away.

11. During the year ended 30 June 2023, Old McDonald and Young McDonald each draw on funds from the trust bank account to meet their private outgoings.

12. On 30 June 2023, the trustee of the McDonald Family Trust makes Old McDonald and Young McDonald each presently entitled to a 50% share of the income of the trust for that year.

13. The entitlements of both Old McDonald and Young McDonald are first set off against the amounts each drew throughout the year with the balance remaining unpaid. The funds representing the unpaid entitlements are retained by the trustee and used to maintain and improve the farm.

14. It is intended that Old McDonald and Young McDonald will each call on so much of their trust entitlements to meet future private outgoings, with funds representing any unpaid entitlements used by the trustee in the farming business which benefits them through future profitability of the enhanced business.

15. The arrangement does not have any features described in paragraph XX. We would not dedicate compliance resources to this arrangement as it meets the conditions in green zone scenario 3A of this Guideline.

16. The diagram on the next page illustrates the circumstances in this example.

1. Present entitlement

Old McDonald Family Trust

3. Maintain and improve asset

Farm business

Old McDonald & Young McDonald

2. Unpaid entitlements

New green zone scenario 3B – distributions to a loss company

17. Ms Willow controls the Black Trust and her spouse Mr Willow controls Red Pty Ltd.

18. The trustee of the Black Trust carries on a manufacturing business.

19. Red Pty Ltd has prior year tax losses as a result of operating a business venture that continues to operate.

20. On 30 June 2023, the trustee of Black Trust makes a determination to appoint 100% of the trust income to Red Pty Ltd, being $300,000.

21. Red Pty Ltd includes $300,000 in its assessable income, being the net income of the Black Trust. After deducting tax losses of $300,000 the taxable income of Red Pty Ltd is nil.

22. The funds representing Red Pty Ltd’s trust entitlement were retained by the trustee of the Black Trust for the purpose of funding the working capital for the manufacturing business. The trustee of the Black Trust and Red Pty Ltd subsequently enter into a loan agreement in respect of the $300,000 that meets the requirements of section 109N of the ITAA 1936.

23. The diagram below illustrates the circumstances in this example.

Black Trust

3. Working capital Manufacturing business

Present entitlement

109N loan agreement satisfied

Red Pty Ltd

Applies prior year operating losses

Practical compliance guideline for section 100A additional draft green zone examples

24. The trustee of Black Trust uses the receipts from the business to make interest and principal payments to Red Pty Ltd in fulfilling its obligations in complying with Division 7A.

25. The arrangement does not have any features that excludes it from the green zone under paragraph 26. We would not dedicate compliance resources to this arrangement as it meets the conditions in green zone scenario 3B of this Guideline.

New example for additional green zone scenario – time lag between a beneficiary becoming entitled and that entitlement being satisfied

26. The Tortoise Trust holds a number of investment assets and is controlled by Mr Hare Senior.

27. On 30 June 2023, the trustee of Tortoise Trust makes a determination to appoint 100% of the trust income to Mr Hare Junior.

28. On 15 March 2024, the trustee of the Tortoise Trust finalises its accounts for the year ended 30 June 2023. In doing so, the trustee ascertains the quantum of the income to which Mr Hare Junior is presently entitled to for the year ended 30 June 2023 is $120,000.

29. On 18 March 2024, Mr Hare Junior is informed by the trustee of the Tortoise Trust as to the amount of his trust entitlement.

30. On 31 March 2024 Mr Hare Junior lodges his 2023 income tax return and includes his trust entitlement of $120,000 from the Tortoise Trust in his assessable income. That same day he calls for a $30,000 part payment of his trust entitlement, which is then paid by the Tortoise Trust so that Mr Hare Junior can pay his tax liability.

31. By 30 April 2025, Mr Hare Junior has received full payment of $120,000 from the trustee of the Tortoise Trust in satisfaction of Mr Hare Junior’s trust entitlement for the 2023 income year.

32. Mr Hare Junior uses the funds represented by his trust entitlement to invest in a new florist business he has commenced as a sole trader.

33. Prior to satisfying Mr Hare Junior’s trust entitlement, the $120,000 income receipts had been retained by the trustee of the Tortoise Trust as part of the investment portfolio maintained by the trustee.

34. The arrangement does not have any features that excludes it from the green zone under paragraph 26. We would not dedicate compliance resources to this arrangement as it meets the conditions in the new green zone scenario of this Guideline.

compliance

for section 100A

draft green zone

New example for additional green zone scenario 4 concerning time lag between a loss trustee beneficiary becoming entitled and that entitlement being satisfied

35. Doctor Evergreen controls the Top Trust and the Bottom Trust.

36. Doctor Evergreen is the specified individual in the Family Trust Elections made by each of the trustees of the Top Trust and the Bottom Trust.

37. The Top Trust undertakes investment activities.

38. The Bottom Trust undertakes a business that has made tax losses, with the trustee of the Bottom Trust indebted to other parties the debts arose in the course of carrying on the business.

39. During the year ended 30 June 2023, the trustee of the Top Trust appoints all the income of that trust to Bottom Trust.

40. On 30 September 2023, the trustee of the Top Trust finalises its accounts for the year ended 30 June 2023 and ascertains that the unpaid trust entitlement owing to the trustee of the Bottom Trust is $250,000 for that year. The trustee of the Bottom Trust is informed of the quantum of its trust entitlement on the same day.

41. On 31 October 2023, the trust tax return is lodged for the Bottom Trust. In that return, the trustee returns the $250,000 as assessable income. The Bottom Trust has nil taxable income as its deductions exceed its assessable income.

42. On 1 December 2023, the trustee of the Top Trust receives cash in respect of a 6 month interest bearing term deposit that has matured. $250,000 is transferred by the trustee of Top Trust into the bank account of the Bottom Trust in satisfaction of the entitlement.

43. The trustee of the Bottom Trust uses the $250,000 in first repaying debts incurred in carrying on the business it undertakes and uses the balance to make a capital distribution to the beneficiaries.

44. The arrangement does not have any features that excludes it from the green zone under paragraph 26. We would not dedicate compliance resources to this arrangement as it meets the conditions in the new green zone scenario of this Guideline.

New example for green zone concerning a testamentary trust

45. A trust established under a will provides that Gwen, the daughter of the deceased, is entitled each year to all of the trust income and to receive the trust corpus once she reaches 30 years of age or, if she dies before attaining the age of 30, to her estate.

46. Gwen is 18 years of age at the time the trust is created.

47. Gwen’s entitlement to trust income is not immediately satisfied in full each year. Instead, the trustee pays Gwen a weekly allowance of $500 with the balance of funds representing Gwen’s income entitlement retained by the trustee.

48. Gwen uses her allowance to pay her personal living expenses. This includes paying $250 per week to her aunt for food and board.

49. The funds representing so much of Gwen’s income entitlement that is retained by the trustee is invested in income producing assets by the trustee for the future identifiable and direct benefit of Gwen.

50. The arrangement does not have any features that excludes it from the green zone under paragraph 26. We would not dedicate compliance resources to this arrangement as it meets the conditions in the new green zone scenario of this Guideline.