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Why accountants must be alert to 100A agreement traps


Advisers run the risk of being party to a reimbursement agreement under the ATO’s trust ruling.

By John Jeffreys 13 minute read

Can an adviser, such as an accountant or a lawyer, be involved with the making of an agreement covered by section 100A ITAA 1936? The answer is “yes”, and it is important for advisers to understand how this can happen and how the ATO might approach this issue.

The “reimbursement agreement”

For section 100A to operate in relation to a trust distribution to a beneficiary, the present entitlement of the beneficiary must arise out of a “reimbursement agreement”. The present entitlement of the beneficiary can also arise by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement.

The term “agreement” is very widely defined to include any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.

This means the concept of a “reimbursement agreement” has a very broad reach. But how far does it reach when considering the role of an adviser?

The ATO’s preference

As a general statement, I consider that when the ATO raises an assessment on a trustee due to the application of section 100A, it would prefer that the actions and motivations of an adviser be included with defining the “reimbursement agreement”. 

It is very often that the advice of an adviser is central to the making of trust distribution decisions by trustees. Accordingly, if the ATO can connect the motivations of an adviser to the motivations of a trustee, I think this would often strengthen the ATO’s case. 

This is particularly in relation to the tax saving condition of section 100A. The adviser’s advice is often motivated by tax saving considerations. If this can be connected to the trustee’s decision-making process, the tax saving condition of section 100A is then established. This doesn’t mean that section 100A will thereby apply, but it does mean one of the conditions is satisfied.

Purpose v agreement

I consider it important, with regard to the operation of section 100A, for the distinction to be clearly seen between the purpose of the agreement (and related acts) and what actually constitutes the agreement.

The purpose of the agreement has bearing on the issue of the tax-saving pre-condition of section 100A. That is, it must be concluded that at least some part of the purpose of the “reimbursement agreement” was to reduce the income tax liability of some person or entity (whether or not connected to the trust). This purpose need not be the sole or dominant purpose. Indeed, it can be less than an incidental purpose for the condition to be satisfied.

But the purpose (and related acts) is not the agreement. The conflation of the purpose with the actual agreement is something that I think the ATO attempted in the relatively recent BBlood Enterprises case [BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112].  (I note that the decision in this case has been appealed by the taxpayer).

Some comments in the judgement of Mr Justice Thawley in BBlood Enterprises are instructive in this regard.

In the BBlood decision there was a dispute between the ATO and the taxpayer as to whether the “initiation” of and “planning” for the steps in the agreement could form part of the agreement. The Commissioner contended that the initiation of and planning for the steps in the agreement comprised an agreement.

The court said, “I am unable to see how ‘initiation’, ‘planning’ or ‘implementation’ can be said to comprise an “agreement” as opposed, for example, to those things comprising evidence from which it might be inferred that an agreement or understanding came into existence or existed.” [paragraph 85].

Justice Thawley went on to say at paragraph 90: “There either is or is not an “agreement” … If the Commissioner contends that there is one, he should identify it. A statement that the “agreement” includes “initiation” and “planning” says nothing about what the contended “agreement” is. Such statements, unaccompanied by an identification of what negotiation, initiation or planning is contended to constitute a part of the agreement or understanding, and in what way, is conducive to loose thinking in administering the legislation, and to an increase in cost and delay for the parties, and ultimately to a waste of judicial resources in addressing unnecessary argument.”

The point here is that the initiation and planning stages of what happened was instructive as to the purpose of the agreement. However, it was not the agreement itself. The agreement occurs when two “minds” enter into an agreement “that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person…other than the beneficiary…”. (see also paragraph 11 of TR 2022/4).

The adviser and the agreement

I noticed that there was a subtle difference between the draft of TR 2022/4 [TR 2022/D1] and the final version when referring to the involvement of an adviser in an agreement. I am not sure whether this change was intentional, but I suspect it was.

The final ruling (TR 2022/4) refers to “where the adviser is a party to the agreement”. This idea was not in the draft. The draft merely referred to the purpose of the adviser being imputed to another party.

While it is technically possible for an adviser to be party to a reimbursement agreement, the profession must resist the idea that this is the norm. Advisers advise. It is clients and related parties that agree. Yes, the purpose behind the adviser’s recommendations can be “taken on” by the client, but it is the client (usually), or someone connected to the client that actually takes the action – that is, engages in the agreement.

The steps leading up to the agreement very often involve advisers. Discussions are had. Emails are exchanged. Advice is sought. But all of this is not the agreement with which section 100A concerns itself. All of these actions are preliminary to the meeting of (at least) two “minds” that constitutes the agreement.

A warning to advisers

As we saw in the BBlood Enterprises case, the ATO argued that the things done in the lead up to the agreement, which included the involvement of advisers, were part of the agreement. The Federal Court rejected that submission, but I think it is an indication of what accountants and lawyers might expect from the ATO in tax audits. Advisers must be on guard against the ATO conflating the idea of purpose (and related acts), which is very often initiated by advisers, and the actual agreement which is, in most situations, the domain of the client.

Professional indemnity insurance

A related, but important issue is the coverage of professional indemnity insurance. While an adviser engages in the provision of advice and the creation of documents which the client finalises, generally professional indemnity insurance will cover negligent acts by the adviser (one hopes).

However, if the adviser enters into the realm of being involved in the making of the reimbursement agreement itself, has the adviser entered into an act for which he or she is not insured? Has the adviser become a party to an anti-avoidance act as opposed to merely advising on something to which the ATO has applied section 100A?

This is why I consider advisers need to be alert to situations where it is being argued by the ATO that an adviser has gone beyond providing the purpose of a transaction, to actually engaging in the transaction for taxation purposes.

John Jeffreys is director of John Jeffreys Tax Pty Ltd.

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