After almost 8 years in the making, the ATO has finally released its views on the application of section 100A to certain trust distributions in a suite of documents released to the public on 23 February 2022.
The ATO released Draft Tax Ruling TR 2022/D1 dealing more generally with the ATO’s views on Section 100A Reimbursement Agreements, as well as a Draft Practical Compliance Guideline PCG 2022/D1 which outlines the ATO’s Compliance Approach to their views in the Ruling.
Whilst we recommend that you consider these documents, it is important to note that both documents are currently in draft and are subject to comments by 8 April. It is hoped that both documents will be finalised (with some changes!) before June 2022 when accountants are undertaking their tax planning considerations for Family Group clients.
MKT will be covering the Ruling and PCG, more fully, and hopefully in their final form, in our May/June 2022 Case Study dealing with Trust Distributions and Tax Planning for 2022.
However, the document of immediate concern is the Taxpayer Alert TA 2022/1 – Parents benefitting from the trust entitlements of their children over 18 years of age.
This is not a draft and applies immediately, whereby the ATO encourage taxpayers who have entered into such an arrangement to effectively contact the ATO to request a ruling or make a voluntary disclosure.
Of utmost concern for accountants is the threat of promoter penalties to accountants who promote this arrangement and the possible referral of those accountants to the Tax Practitioners Board. Strong words from the ATO, especially for a section that has been in place, unchanged for over 43 years, without judicial guidance on the arrangement outlined in the Alert.
So what is the arrangement the ATO are concerned about?
Quoting from the Alert:
- We are currently reviewing trust arrangements where parents enjoy the economic benefit of trust income appointed to their children who are over 18 years of age (Children). The common feature of the arrangements is that trust income is appointed between members of the family group but in substance it is the parents who exercise control over and enjoy the economic benefit of the income….
- The arrangements may display all or most of the following features:
- The trustees of a discretionary trust (Trust), or the directors of a corporate trustee, are either one or two individuals who are the parents in a particular family (Parents).
- Income derived by the Trust is used during the year of derivation to meet the expenses of the Parents. These may be recorded as beneficiary loans made from the trustee to the Parents throughout the year.
- Resolutions of the trustee for the year show one or more of the Children presently entitled to a share of the income of the Trust.
- The entitlements are for substantial amounts but do not generally result in the Children’s taxable income exceeding the threshold for the top marginal tax rate ($180,000).
- Amounts are not paid to the Children. Rather, at the actual or purported direction of the Children, the entitlements are satisfied by the amounts being either
- paid to their Parents, or
- applied against any beneficiary loans owed by the Parents.
- The parties contend that the entitlements are paid or applied in this manner because
- the Children are required to repay their Parents for expenses incurred in relation to their upbringing or while they were minors (for example, school fees, school uniform costs or their share of the family holidays)
- the Children are required to pay or repay their Parents amounts to meet their share of family costs for the current year in excess of amounts it would reasonably be expected an adult child would meet for their personal living expenses while they remain living at home or otherwise supported to some extent by their Parents (those amounts being, for example, a reasonable rate for their board, lodgings or rent if living away from home, or car expenses), or
- there is an agreement that the Parents will manage the pooled family members’ entitlements from the Trust for the benefit of the family members.
- There is no expectation or understanding that the Children’s income they derive from sources other than the Trust distributions will be used to either repay their Parents for expenses incurred when they were a minor or pay more than their reasonable share of the household expenditures, or be placed in a pool to be managed by the Parents for the benefit of the family members.
The Alert draws a distinction between expenses incurred on behalf of children aged under 18 years, as compared with expenses incurred by or on behalf of children aged 18 and over.
The ATO are clearly of the view that expenses, including private school fees, incurred for the benefit of minor children are “parental expenses” and should not be offset against future trust entitlements of the adult children.
However, in some welcome news, the ATO provides an example in the Alert whereby a trust entitlement is used to meet University fees and board paid to a Grandmother for an adult child, are legitimate expenses that are not subject to the Alert.
It is important to state that the ATO’s views in the Alert (and indeed the Draft Ruling and PCG) have not arisen from recent judicial guidance or legislative amendment, but represent the Commissioner’s preliminary view on how section 100A should be applied.
The key question yet to be answered by the Courts is what constitutes “ordinary family dealings” and specifically whether so called “parental expenses” would be or would not be considered “ordinary family dealings”. Until we get that answered, the ATO’s position must be taken as a draft view.
However, given the severity of the consequences outlined by the ATO in their Alert, accountants must discuss the Alert with their Family Group clients now or at least during their June year end meetings, both in regard to what has been done in prior years and what is proposed to occur in 2022.