A reimbursement agreement is an arrangement, where the trustee channels trust distributions via beneficiaries to a third party.
Reimbursement Agreement
Section 100A of ITAA36 is an anti-avoidance provision. It is to prevent trust stripping through a reimbursement agreement.
It cancels the taxation of a beneficiary on certain trust distributions when these are effectively diverted to a third party. And instead taxes the trustee on the distributions per section 99A at the top marginal tax rate plus Medicare.
Example
Sally arranges for her discretionary trust to distribute $300 to her tennis club. In return the tennis club waives her annual subscription of $300. The ATO could apply s 100A. And assess the trustee on the $300 at the 45% marginal rate (plus 2% Medicare levy).
Definition
Section 100A only applies where there is a reimbursement agreement as defined in s100A.
s100A (7): …an agreement….that provides for the payment of money or the transfer of property..or the provision of services or other benefits for a person…other than the beneficiary…
To be a reimbursement agreement, the purpose of the agreement must be to reduce or avoid tax.
Benefit
The benefit under a reimbursement agreement can be the payment of money, the transfer of property (including choses in action) or an estate, interest, right or power in or over property or the provision of services.
In all cases, the payment goes either to the person beneficially or to the person as a trustee.
Release of Debt
Any agreement under which a person either abandons their rights to repayment of loan moneys or fails to take action to recover loan moneys is deemed to be an agreement for the payment of money.
Such an agreement also includes the postponement of the repayment of any debt (see a 100A(12)).
In Raftland Pty Ltd v FCT (20080 68 ATO 170, the trust made distributions to another trust with extensive tax losses. The High Court declared the distribution to be a sham, applied s100A(1) and assessed the trustee under s 99A.
Ordinary Family Dealings
Reimbursement agreements do not include arrangements entered into in the course of ordinary family dealings.
But the ATO will not necessarily consider an arrangement as an ordinary family dealing merely because all involved are members of the same ‘family group’.
The High Court in Newton v FC of T (1958) 98 CLR 1 interpreted “ordinary business or family dealings” (in context of tax avoidance) as follows:
“In order to bring the arrangment within the section you must be able to predicate – by looking at the overt acts by which it was implemented – that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section”
Commercial Dealings
Reimbursement agreements also do not include arrangements entered into in the course of ordinary commercial dealings.
In FCT v Prestige Motors Pty Ltd (1998) 82 FCR 195 the court looked at two arrangements. They involved the trustee of a motor vehicle retail business. The court held both arrangements to be reimbursement agreements because they were not explicable as ordinary commercial dealings.
The taxpayer sold a profitable business to a unit trust. He then issued 93% of the units to a company with substantial losses. The taxpayer also issued units to National Mutual Life Association Ltd (NMLA). Income from the units was tax-exempt in the hands to NMLA.
The Full Federal Court held that s100A didn’t just apply to agreements for existing trusts. And that the section can apply to trusts set up in consequence of what would otherwise be reimbursement agreements.
The court added that s 100A can apply where agreement reduces or eliminates the tax liability of a third party.
MORE
Tax Deduction for Gifts and Donations
Commissioner’s Effective Life of Depreciable Assets for 2019
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Last Updated on 23 March 2020
