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Here are some comments about the updated s100A TR and PCG – TR 2022/4 and PCG 2022/2.
Updated s100A TR and PCG
The ATO has done a lot of work around s100A. And to reflect this here are the four episodes we have done so far on s100A ITAA 1936 published in 2022.
340 – s100A ITAA 1936,
345 – The Guardian Case,
346 – Blue Zone Arrangements
347 – s100A Q & A.
Back in 2022 both the taxation ruling and practical compliance guidelines were still in draft. TR 2022/D1 and PCG 2022/D1. But now we have an updated s100A TR and PCG and that is what we cover in this episode:
TA 2022/1, TR 2022/4 and PCG 2022/2.
These show notes are just a reflection of our understanding of the topic. And it is just the tip of the iceberg – a copy of some of the notes we took during the interview.
So please listen in to the episode with Andrew Henshaw of Velocity Legal in Melbourne, since Andrew covers the updated s100A TR and PCG in a lot more detail.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Updated s100A TR and PCG
In these notes, we will cover 7 points. Seven things about s100A – a comment about
- the 30 June deadline,
- amendment periods
- the three criteria for s100A to apply
- there is no actual change of law
- that Taxpayer Alert 2022/1 already tells you all
- the legal status of TA, PCG and TRs
- and a closer look at example 9 in TR 2022/4
(Please note that the numbering in these show notes is different from the numbering in this episode).
Point # 1 – Fix it Before 30 June
s100A usually applies when someone becomes presently entitled to trust income but does not receive the income, meaning they do not actually receive any funds. And instead, the money goes to somebody else.
As you know, one way to solve such an s100A issue is to pay out the present entitlement to the declared beneficiary. So let the money follow the present entitlement.
As you are aware, resolving the distribution of trust income before 30 June is necessary for the trustee to prevent allocating the income to the default beneficiary. In situations where there is no default beneficiary, the trustee, if an individual, will face assessment at top marginal rates, along with Medicare (if applicable).
And so you need to address all this before 30 June.
Point # 2 – Amendment Periods
How far back can the ATO go with s100A issues? Indefinitely.
s100A has no amendment period. Because the beneficiary is deemed to never have been actually presently entitled. They were never meant actually to get the trust income paid out to them. The so-called trust distribution was just a sham to use their lower marginal tax rates. And so there is no amendment period for s100a re the official beneficiary. Instead, the trustee is assessed under s99A.
So s100A has no amendment period. And the trustee most likely won’t be protected through an amendment period either when being assessed via s99A, because trustees usually don’t lodge a tax return.
There is one open question left we didn’t ask in this interview. If – just in theory – the trustee had lodged a return, would there be an amendment period for the income the trustee is assessed on under s99A? The answer is probably NO but we forgot to confirm this.
Point # 3 – Three criteria for s100A to apply
For s100A to use, you need to meet three requirements:
1 – Connection
2 – Benefit to another
3 – Purpose
And not hit the exception.
1 – Connection
You must have a present entitlement connected to an agreement not to actually pay out this entitlement. So you have a trust distribution without the intention of ever actually paying the official beneficiaries.
2 – Benefit to Another
Instead of the official beneficiary, someone else receives the payment – either in cash or through the transfer of property or services – even though they are not the official beneficiary.
3 – Tax Reduction Purpose
And the intention with all this must be to reduce tax.
If you have these three elements, then you have a s100A reimbursement agreement.
Exception
There is one big exception for s100A NOT to apply The ‘ordinary course’ exception. If the agreement is entered into in the course of ‘ordinary family or commercial dealing’, then s100A does not apply. And of course that is a very grey area, so TR 2022/4 spends a lot of time on this definition of ‘ordinary family or commercial dealing’.
Point # 4 – No Change of Actual Law
So this is s100A as it stands. And that hasn’t changed. There is no change of actual law.
The ATO is just saying “This is going to be our focus, be warned and this is what we are looking for and this is how we plan to audit this”.
So the Taxpayer Alert, Practical Compliance Guideline and Taxation Ruling are all just laying the ground for the ATO to attack these sham trust distributions, but the law itself hasn’t changed.
Point # 5 – Taxpayer Alert TA 2022/1
Putting everything aside, especially the complicated arrangements we discuss next week, the ATO basically tells you in its Taxpayer Alert, in TA 2022/1 what they are focusing on, where they see the biggest issue.
And you don’t even need to read the Taxpayer Alert itself. The title already tells. “Parents benefitting from the trust entitlements of their children over 18 years of age”. So college kids receive trust distributions and never see a dime. That is a big chunk of what this is about. Because that is where the ATO loses a lot of its tax revenue around s100A.
Point # 6 – Legal Status of TAs, PCGs and TRs
We are talking a lot about TAs, PCGs and TRs in this episode, so let’s just quickly rejig your memory about the legal status of TAs, PCGs and TRs. How much can you rely on TA 2022/1, PCG 2022/2 and TR 2022/4?
1 – Taxpayer Alert (‘TA’)
A TA is the ATO’s early response – often before the extent of the risk is fully known. It’s like hearing the siren of the fire engine far away on its way to a bushfire. They don’t know yet what exactly is happening, you don’t know what they are going to do. The ATO is just telling you they are coming.
It is like saying, ‘There is smoke on the horizon. It looks like a bushfire, but we don’t know yet whether it is, what caused it, how big it is, and which direction it is travelling, but there definitely is smoke on the horizon.’ That is what the ATO is saying in a TA.
So TA 2022/1 doesn’t provide advice or guidance. It just tells you that the ATO can see a lot of smoke coming out of trust distributions.
2 – Practical Compliance Guidelines (‘PCG’)
PCGs are two things NOT. They are NOT an interpretation of the law itself. PCG 2022/2 doesn’t say s100A means this or that. And they are NOT a public ruling either. You can’t rely on a PCG the way you can rely on a public ruling.
So what is a PCG then?
A PCG tells you how the ATO assesses the risk and how they plan to allocate their audit teams according to this assessment of risk. Which scenarios will pick their interest to dig deeper? Which set-ups are they likely to fight?
It’s like a fire department saying, ok, if we have one hectare burning with no wind, we send 1 truck out, if it is 1m hectares with strong wind, we declare a state of emergency.
Or if you prefer the beach and surf lifesavers – PCGs are like putting two flag posts into the sand, so you can choose to swim between the flags. It doesn’t give you 100% certainty that you won’t get caught in a rift. It doesn’t mean you will never get audited. But the risk is pretty low if you stay between the flags. And if you venture away from the flags, at least you know how far away you are.
3 – Taxation Rulings (‘TR’)
In a Taxation Ruling, the ATO puts the bounty on the table. This is where they say, ‘This is how we think the law should apply.’ It is a technical ruling
In a TR the ATO makes its most significant commitment, giving you the greatest protection.
If you rely on a Taxation Ruling with reason and in good faith, you are safe from interest and penalties, even if there is an issue. You still have to pay any additional tax – if there is a tax shortfall – but at least no interest or penalties.
So this is the legal status of TA, PCG and TRs. In a TA the ATO says “We can see smoke”, In a PCG the ATO says “We will send 2 fire trucks for this much smoke, and 4 for that much.” And in a TR the ATO says, “This is what we think causes a fire.” outlining how the ATO interprets the law.
Point # 7 – Example 9 in TR 2022/4
Example 9 from Taxation Ruling 2022/4 covers a very common scenario and might surprise you. We have shortened some bits and rewritten some parts, so it is not a 100% quote, but the content is the same.
Example 9, para 145 to 148 of TR 2022/4
“145. From time to time, the trustee of the Davidson Family Trust makes John Davidson, the son who is a full-time student with no other income, presently entitled to a share of trust income.
John’s entitlement is usually $20k per year so he doesn’t pay any tax.
John has indicated to the trustee aka his dad that he will not call for the payment until he purchases a home or makes a similar investment. Nonetheless, John is at liberty to enforce his rights as a beneficiary to recover those amounts at any time.
John’s tax-free threshold reduces the overall tax on the trust’s net income. However, in the absence of additional factors, the arrangement that involves John simply delaying the payment of his original trust entitlement would likely be entered into in the course of ordinary dealing.
A different outcome may arise if, for example, the trustee loans the funds on interest-free terms for an undefined period to another person, or otherwise applies the trust’s funds in a way that is inconsistent with the intention that John would ultimately receive the amount of his entitlements.”
This example shows it is not as black and white as it might seem when it comes to payments.
Please read the Updated s100A TR and PCG
So this is a short summary of seven points we touch on this interview. But of course there is a lot more. Andrew goes through the s100A topic in much more detail and structure. So please listen in.
And if you have a s100A issue, please read TR 2022/4 and PCG 2022/2. They are very helpful to assess the risk.
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Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 08 June 2023
Tax Talks spoke to Andrew Henshaw - Director at Velocity Legal - for more details.
