PCG 2022/D1 on Section 100A – Staying out of the Red Zone

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PCG 2022/D1 on Section 100A – Staying out of the Red Zone

On 23 February 2022, the ATO issued PCG 2022/D1 which sets out the Commissioner’s compliance approach with section 100A. The PCG provides a risk review matrix for taxpayer to use as a self-assessment tool to determine the applicable ‘risk zones’ set out by the Commissioner.

 

The Commissioner will actively target taxpayers in the ‘red zone’. It is therefore necessary to understand this zone and how to steer away from it in the 2022 year.

 

The PCG defines a red zone arrangement where:

  • the beneficiaries’ respective entitlements appear to be motivated by sheltering the trust’s (taxable) net income from higher rates of tax; and

 

  • the arrangement involves contrived elements directed at enabling someone other than the presently entitled beneficiary to have use and enjoyment of the economic benefits referable to the trust’s net income.

The PCG provides the following examples of the Red Zone:

  • The offsetting of pre-age 18 expenses (what the ATO term, “parental expenses”) for a child against distributions made once the child turns 18.
  • A distribution to a non-resident beneficiary whereby the beneficiary makes a loan or a gift equivalent to the distribution to an associate.
  • A distribution to a loss entity whereby the trustee or another person has the use or enjoyment of the economic benefit of the distribution.

Based on the PCG, taxpayers would be in the Red Zone where all of the following applies:

  1. A beneficiary who is made presently entitled is on a lower tax rate.
  2. There are contrived elements in place – such as, making a non-resident beneficiary presently entitled and then gifting or lending the funds to an associate, making a loss entity presently entitled but not paying the distribution and offsetting parental expenses against future distributions to the adult child; and
  3. Some other person or the trustee has the use or enjoyment of the economic benefit of the distribution.

Based on the guidance in the PCG and examples provided, the following scenarios should be avoided for the 2022 year in order to stay out of the Red Zone:

  1. Parental expenses accrued in trusts should not be offset against current or future distributions to the relevant child.
  2. If distributions are made to adult children, there should be no gifting or payment of the entitlement to the parents. In this case, beware of offsetting entitlements by way of journal entries to the parents accounts, as this will be deemed a ‘payment’ to the parents.
  3. If distributions are made to non-resident beneficiaries or loss entities, ensure that the funds follow to that entity as soon as possible thereafter.

If you have any queries in relation to the above please contact Gaurav Chitnis.

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