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Decisions around trust distributions were made under a cloud of ambiguity by 30 June as 100A had not provided clarity, says a Melbourne specialist.
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Accountants still in ‘quandary’ over ATO’s 100A
29 September 2022
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11 minute read
John Jeffreys Tax director John Jeffreys said ahead of the Accountants Daily Strategy Day 2022 that the ATO’s tax time guidance on section 100A released in June (which updated the draft ruling in February) “really hasn’t assisted at all in clarifying what people need to do”.
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Additionally, he noted that despite the lack of clarity, accountants and clients had to make decisions on trust distributions by 30 June.
“People have made decisions based on whatever information they were able to glean, and will have to live with the decisions they made that day,” Mr Jeffreys told Accountants Daily.
“But I consider that most of the accounting profession is still in a quandary as to what to do with 100A.”
Mr Jeffreys’ comments preceded the upcoming Accountants Daily Strategy Day at the end of the year, where he will unpack the ATO’s 100A guidance and the steps accountants could take to mitigate its potential effects on clients.
Mr Jeffreys explained that clients could escape the operation of 100A where they have ordinary family and commercial dealings but that grey areas remained around how to define them, a point echoed by many in the accounting industry.
“With the Tax Office draft rulings and the things that they have said about that, they are narrowing the scope of what that means,” Mr Jeffreys said.
“So, the big problem here is that accountants have done things a certain way for many years since 100A came out in the late 1970s thinking certain things were ordinary family or commercial dealings.
“But now, and a little bit back in 2014, the Tax Office indicated in their information that they were narrowing what they thought that meant. Accountants are now questioning quite closely whether the things they thought were ordinary family and commercial dealings are in fact ordinary dealings in the eyes of the Tax Office.
“And that is what has caused confusion. It is a very difficult issue to grapple with, given some of the examples that the Tax Office has said are not ordinary dealings, when we previously thought they were.”
While clarity around 100A would be beneficial, Mr Jeffreys said the “real problem” is not only that the ATO is shifting the policy of the law from what it was originally intended to achieve, it “may very well be wrong in what it is saying”.
“So, there’s no sense in the ATO clarifying its position, which we considered to be wrong. Sure, they can put out more information around what is and isn’t acceptable and provide more examples but the real issue is whether the ATO is right in what it’s saying,” Mr Jeffreys said.
To reduce risk and avoid triggering 100A, Mr Jeffreys highlighted some exclusions, including “simply doing what the Tax Office wants you to do”.
The ATO has said that 100A would not be an issue if the beneficiary is paid all of the money that they are entitled to because one of the preconditions of falling within 100A is that the beneficiary does not receive the money they are entitled to, he added.
“But the problem with this is that many family businesses and investments don’t just pay money out to the beneficiaries. They hold the money and reinvest it and do all sorts of other things with it. Before, we used to think that’s an ordinary family dealing and as such, don’t have to worry about it,” he said.
“But these draft rulings have caused us to question whether doing things like retaining money within the trust or allowing other family members to use the money is an ordinary family or commercial dealing in the view of the ATO.”
Having a reimbursement agreement is another way to avoid 100A, which is required to occur prior to the distribution being agreed upon by the trustee.
“Typically, the trustee will decide on 30 June who’s going to be distributed the money,” Mr Jeffreys said.
“For s100a to apply, there must be a reimbursement agreement prior to that occurring. And the ATO has to be able to assert that that has occurred.
“What you can do in relation to documentation is to try and give yourself the best chance of arguing that the reimbursement agreement has not occurred prior to the trustee making the beneficiary presently entitled.”
Conversely, Mr Jeffreys warned clients against creating documentation prior to 30 June that details what is going to occur with the beneficiaries’ distribution.
“If the trustee instructs the beneficiary prior to the distribution being agreed upon how the money should be used and they’ve got a reimbursement agreement, then it’s there in writing and you’ve got no room to move,” he said.
“So, you should not create certain documents like emails and file notes or other notes that indicate that a reimbursement agreement has been entered into.”
Mr Jeffreys concluded that the final ATO rulings could be delayed until there is a verdict in the Guardian AIT case, which is currently on appeal in the Full Federal Court.
To hear more from John Jeffreys about how accountants could mitigate risk and provide the best guidance to their clients around their trusts and how 100A could impact them, come along to the 2022 Accountants Daily Strategy Day.
It will take place on 29 November at Grand Hyatt, Melbourne, and 1 December at Parkroyal Parramatta in Sydney.
Click here to book your tickets and make sure you don’t miss out!
For more information about the conference, including speakers and agenda, click here.
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