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What the Guardian case tells us about following advice


The court’s view differs from the approach of the ATO in its s100A ruling.

By Andrew Gardiner 13 minute read

In FCT v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3, the Full Federal Court examined a series of transactions in which trust income was distributed from a discretionary trust to a corporate beneficiary (“bucket company”), returned as a franked dividend to the same discretionary trust (being the sole shareholder of the company) in the following year and then distributed to a non-resident individual. 

The effect of this series of transactions was that the income ended up in the hands of a non-resident individual but only the bucket company was required to pay tax on the income, and only at the corporate tax rate — a very tax-effective outcome. 

ATO attacks the arrangement


The ATO attacked this series of transactions on two fronts: under s100A of the ITAA 1936 and under Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).

In the full court appeal, the ATO was unsuccessful in applying s100A to the arrangement but was successful in applying Part IVA in one of the relevant years. Ultimately, this meant that while the taxpayer had a win from an s100A perspective, he ultimately lost the case and was denied the tax benefit initially achieved.

There is one clear lesson from the Guardian case: whenever the ATO seeks to challenge the validity of a trust distribution, it will make use of all provisions at its disposal and, unfortunately, trust distributions are open to challenge under a number of tax provisions, including Part IVA. 

The ATO’s view regarding professional advisers

One interesting aspect of the Guardian case was the victory by the taxpayer in arguing that s100A should not invalidate the series of trust distributions.

One important aspect of the appeal decision relates to when the purpose or knowledge of an adviser (for example, an accountant) can be imputed to a taxpayer, including for the purpose of ascertaining if a trust distribution arose out of a reimbursement agreement (a key requirement for s100A to apply).

To that end, the ATO focused on the role of the taxpayer’s adviser, Pitcher Partners. Of note, the Commissioner broadly contended that the taxpayer’s practice in following the advice of Pitcher Partners in a prior income year meant that the purpose of the adviser in relation to a later income year could simply be imputed to the taxpayer. 

This argument is consistent with the ATO’s view in TR 2022/4. In this ruling, the ATO says that it is open to infer that an agreement exists where the parties act in accordance with the advice of a professional adviser (or rely on the professional adviser) in undertaking a series of steps or taking concerted action, even if the parties are not aware of the adviser’s purpose. See paragraphs 69 and 89 of TR 2022/4.

What the court found about following advice

The court did not agree with the Commissioner’s argument, finding that there was no reimbursement agreement in place at the time trust income was distributed. As such, s100A could not apply to invalidate the trust distribution.

The court made it clear that imputing the purpose of an adviser to a taxpayer requires more than the taxpayer generally following the advice of the adviser; rather, there must be evidence that the adviser actually has the authority to act on behalf of the taxpayer.

It reinforced this point by contrasting the ability to attribute an adviser’s purpose in the context of s100A with the ability to attribute purpose in a Part IVA context. It noted that the scope for attribution in an s100A context is “far more limited”. This is because Part IVA requires a conclusion to be drawn in respect of the purpose of a party based on the factors set out in s177D of ITAA 1936, rather than the party’s actual subjective purpose. See FCT v Hart [2004] HCA 26

In contrast, the attribution of purpose in the context of s100A is different. S100A requires the existence of an agreement that invokes a requirement of actual consensus and adoption of that agreement by the taxpayer. On this basis, the practice of merely following the advice of an adviser in prior years (i.e., where the adviser was not given authority to act for the taxpayer) was not sufficient to attribute the agreement laid out in that advice to the taxpayer. 

It is worth remembering that any agreement entered into in the course of “ordinary family or commercial dealing” will not be a reimbursement agreement. However, as the court found there was no agreement at the relevant time, it did not need to consider whether the ordinary family or commercial dealing exclusion applied. Unfortunately, this means the case did not provide any further insight on the ordinary family or commercial dealings exclusion in s100A.

Will the Guardian ruling change the ATO’s approach to s100A?

It is unlikely that the ATO’s compliance approach as set out in Practical Compliance Guideline 2022/2, will change as a result of Guardian’s case. 

That is not to say that the decision on s100A in the Guardian case is insignificant. It is an important decision that provides useful guidance for taxpayers, including on imputing the purpose of an adviser to a taxpayer.

Andrew Gardiner is a senior taxation manager at Corporate Seminars Australia and a spokesperson for the National Tax and Accountants’ Association.


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