We considered the Australian Taxation Office’s (ATO) recently released guidance on section 100A here and here. Those documents give the clearest public indication to how the ATO interprets section 100A of the Income Tax Assessment Act 1936 (ITAA 1936).
The ATO also released a Taxpayer Alert 2022/1 (Alert) that targets trust arrangements where parents enjoy the economic benefit of trust income appointed to their adult children. These arrangements are in the ‘Red zone’ under Practical Compliance Guideline PCG 2022/1.
The Alert specifically considers arrangement whereby families use trust income appointed to adult children to offset expenses paid by the parents for usual parental responsibilities. Examples of these expenses are the costs of their upbringing as a minor or for the kinds of ongoing financial support parents would ordinarily provide their 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.
What are the ATO concerns?
The ATO is particularly concerned about taxpayers entering these arrangements to avoid tax on the net income of the trust by utilising the lower marginal tax rate applying to the adult children in circumstances where the benefit from these arrangements is, in substance, enjoyed by the parents as:
the children are paying amounts for expenses that would ordinarily be met by their parents; or
the children’s entitlements are otherwise being applied for the benefit of the parents either directly, or by the charging of excessive amounts; and / or
there are elements of contrivance.
While this Alert specifically focuses on arrangements involving the adult children of controlling individuals, the ATO’s concerns extend to similar arrangements involving other family members of controlling individuals who have lower marginal tax rates than the controlling individuals.
We note that section 100A does not apply where the present entitled beneficiary is under a legal disability. Therefore, a testamentary trust making a minor child presently entitled to income is not within the ambit of section 100A. However, could Part IVA apply if the dominant purpose of the arrangement was to obtain a tax benefit?
What are the potential consequences?
These arrangements may lead to unintended tax consequences, including:
the purported entitlement of the children to trust income may be a sham or otherwise ineffective for trust law purposes;
the arrangement may constitute a reimbursement agreement under section 100A of the ITAA 1936;
subsections 95A(1) and 97(1) of the ITAA 1936 may apply to treat the parents as presently entitled; or
the general anti-avoidance provisions in Part IVA of the ITAA 1936 could apply.
What should you do?
The Alert not only provides a warning to taxpayers, but also for advisers.
The Alert says that registered tax agents involved in the promotion of this type of arrangement may be referred to the Tax Practitioners Board to consider whether there has been a breach of the Tax Agent Services Act 2009. In addition, the ATO raises the potential to use the promotor penalty regime under the Taxation Administration Act 1953 which can impact tax agents as well as other advisers who are not covered by the Tax Agent Services Act 2009.
Taking this threat further, the Alert includes an email address and contact details to ‘tip off’ (alleged) promoters of this type of arrangement. A tip off may not be the same as breaking the Omerta code, but by including how to on the Alert, it indicates the level of seriousness of the ATO.
If you have entered, or are contemplating entering, into an arrangement of this type, we encourage you to seek professional advice. Sladen Legal’s tax team regularly advises on section 100A. If you have any questions about what the ATO views may mean for you and your arrangements, please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 405 847 261
E: ehennebry@sladen.com.au
