In this s100A Q & A session in our mini-series about s100A ITAA36 we go through all the outstanding questions you still had.
s100A Q & A
s100A Q & A – in this episode Andrew Henshaw of Velocity Legal in Melbourne will give you some very helpful answers. Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
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s100A Q & A
Here are the nine questions Andrew Henshaw will discuss with you.
1 – Legal Status of Practical Compliance Guidelines
In a PCG the ATO tells you how they want to administer the law. A PCG conveys the ATO’s assessment of risk. Telling you which scenarios include what tax compliance risk. Which scenarios they are likely to investigate further and fight.
Thanks to a PCG you can position yourself in a way that the ATO describes as low risk. You can safely ‘swim between the flags’.
However, PCGs are not to express a view on the way tax law applies. Rather, they guide you on how the ATO will allocate their compliance resources – ie. audit teams – according to their assessments of risk. PCGs may outline a practical approach to the operation of tax laws. Accordingly, PCGs are not public rulings as such. See PCG 2016/1 for more.
2 – Legal Status of Taxation Rulings
A Taxation Ruling (TR) represents the Commissioner’s view on how a relevant provision could apply.
If you rely on a Ruling with reason and in good faith, you are safe from interest and penalties, even if there is an issue. But you still have to pay the correct amount of tax.
3 – Legal Status of a Taxpayer Alert
The ATO issues Taxpayer Alerts (TA) to warn you of arrangements they consider high risk.
A TA is an early warning. It usually is about a new or emerging activity or arrangement that is causing the ATO concern.
The ATO often issues a TA before the extent of the risk is fully known. It is an early response. A warning when the ATO views the risk as prevalent with the potential to grow and affect tax revenue.
The ATO can issue an alert before they have finalised their view on how the law applies to the arrangement. As a result, don’t use a TA to provide advice or guidance on technical or administrative issues. See PS LA 2008/15 for more.
4 – Reimbursement Agreement
For there to be an issue, you need an agreement, arrangement or understanding at the time the present entitlement is created. You need a reimbursement agreement between the parties beforehand.
That was the principal foundation of the Full Federal Court’s decision in Guardian (Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT [2021]). And the ATO’s four publications endorse that view.
The text of s 100A (7) supports, by analogy, a conclusion that the reimbursement agreement must necessarily precede “the payment of money or the transfer of property to, or the provision of services or other benefits”.
You can have a reimbursement agreement even when neither the presently entitled beneficiary nor the trustee is parties to the agreement.
5 – Prior To
Per TR 2022/D1, you have a reimbursement agreement, when the agreement is made prior to any entitlement arising.
“For an entitlement to arise from (or payment or application to result from) a reimbursement agreement, that agreement must have been in existence prior to the entitlement arising (or before the resulting payment or application of income).”
There are different factors the ATO looks at to establish whether such an agreement existed beforehand. One of them is how the parties behave before and after.
6 – Tax Reduction Purpose
For s100A to apply, you need a tax reduction purpose. Without that, no s100A.
There are two important court cases in relation to this. In East Finchley, at 474, Hill J 0bserved of s 100A (8) that:
“It will be recalled that s 100A(8) requires the purpose of entering into the relevant arrangement to be the reduction of a liability of some person to income tax. It requires the hypothesis to be formulated as to what income tax would become payable if the relevant agreement had not been entered into.”
And in AXA Asia Pacific Holding Ltd v federal Commissioner of Taxation (2009) 77 ATR 829, at [118], Jessup J stated:
“The exercise thus postulated, in my view, is wholly one of fact-finding. A fact is not disqualified, a priori as it were, from consideration merely by reason of it having been an element of the scheme which was in place. To the contrary: what the tax payer and his or her associates in fact did in the commercial circumstances which existed is likely to shed much light on what they would have done in the absence of the scheme, and in some cases to be , as a matter of prediction, elements of that counterfactual.”
The Full Federal Court supported and referred to these views in Guardian.
7 – Objective Test
The tax reduction purpose test is an objective test. So it is based on facts and how outsiders would view the set up. And not on what people involved thought at the time.
The onus of proof falls on you as the taxpayer. So the ATO doesn’t have to prove its position. It is you who has to.
One way to provide such proof is to show the prevailing circumstances at the time and what you and your associates did in light of these. The prevailing circumstances don’t just have to be commercial. They might include family or personal circumstances. In fact, they might only be family or personal.
8 – Ordinary Commercial or Family Dealings
s100A excludes any “agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing”. So as long as you have an ordinary commercial or family dealing – no s100A.
But what is an ordinary commercial or family dealing? That was a big point of contention in the Guardian.
In Guardian, the Full Federal Court Court argued that the word ‘ordinary’ means the opposite of ‘extraordinary’ and refers to a dealing which contains no element of artificiality. Please also see the Judicial Committee of the Privy Council’s arguments in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1.
However, the ordinary dealing exception does not apply simply because all parties to an agreement are family members. There needs to be more.
“The essential feature of ordinary family or commercial dealing is that it is ordinary. Consistent with the approach of the Court in Newton, dealing is ordinary where a person can examine the acts and predicate that they can be explained by the familial and/or commercial objects they are apt to achieve without further explanation.”
9 – ATO’s Plans re s100A
The ATO Assistant Commissioner in the Office of Chief Tax Counsel, Justin Dearness, said there was no specific compliance program in place. Only in “exceptional circumstances” would the ATO consider cases prior to 2014.
Speaking on a webinar hosted by Brisbane-based ChangeGPS, Mr Dearness worked through issues that have generated a month of angry feedback from tax agents and offered the following advice:
“If you’re considering a distribution and then there’s an underlying agreement that some payment is going to be made to someone else, and when you step back from it and say that the only reason this is being done is to achieve a tax advantage, then I would suggest that you at least have a section 100A question to consider.”
And with those wise words let’s end here.
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