The ATO have now released Draft Taxation Ruling TR 2022/D1 Income Tax: Section 100A Reimbursement Agreements.
If you operate within a trust structure, it’s vital you know about this ruling. While it’s complex information, we will try to break it down for you as much as possible. Read on…
What is Section 100A?
Section 100A is an anti-avoidance rule that applies to the distribution of profits and use of funds in a trust.
How does distribution of profits and use of funds work?
When distributing profits from a trust, the agreements must be entered into during an ordinary or commercial dealing. If the ATO considers the agreement to be entered into for tax benefit, it may be considered a Section 100A Reimbursement Agreement. A reimbursement agreement is essentially where someone who is not the presently entitled beneficiary benefits from trust income.
What is draft tax ruling TR 2022/D1?
TR 2022/D1 provides the Commissioner of Taxation’s view where a beneficiary is made presently entitled to trust income arising from a reimbursement agreement.
What is the ATO’s proposed Compliance Approach?
Accompanying the draft rulings are a set of guidelines outlining the proposed compliance approach, conferred on or after 1 July 2022. The compliance approach categorises four zones of risk, (white, green, blue and red).
The administrative position of the Commissioner, (outlined in Trust Taxation - Reimbursement Agreement (July 2014) will continue to apply for beneficiary entitlements conferred before 1 July 2022.
This doesn’t limit reviews of reimbursement agreements, however, as the ATO have an unlimited period to assess under section 100A.
What does this mean for you?
The draft guidelines set out how the ATO differentiates the risk for a range of trust arrangements where section 100A may apply.
Of particular note, the ATO have categorised distributions of trust income to adult children over a number of years into a red zone. The ATO are particularly interested where the distributions of income to adult children result in Mum and Dad getting the benefit with the adult child’s entitlement waived/released/forgiven.
It’s important for trustees and taxpayers to consider the risk of section 100A when making trust distributions. Remember the responsibility falls to the taxpayer themselves and section 100A allows the Commissioner of Taxation to impose tax at the highest marginal tax rate on that distribution.
How we are navigating the tax ruling regarding Section 100A: Reimbursement Agreement at Smith Shearer
We are taking the new rulings very seriously, as this will affect many farming businesses who operate under a trust structure.
We will speak with you if we have concerns about your previous years’ distributions, and we are proactive in educating trustees and taxpayers about the new rulings going forward.
Reach out to us via the form below and we'll be in contact.
