S100A Income Tax Assessment Act 1936 and the ‘ordinary family or commercial dealing’ exclusion

GST Withholding on residential contracts

The Australian Taxation Office (ATO) targets discretionary trusts because of a perception that trusts are principally used for tax minimisation purposes. Despite this, trusts remain a popular albeit not always well understood structure for family businesses and groups. Trusts can offer asset protection, flexibility and the ability to pass assets to future generations without triggering taxation or stamp duty consequences.

Trust distributions of net profit are normally made by a written resolution before the end of the financial year. However, a distribution to a beneficiary may not always flow to the beneficiary from the trust for a variety of reasons. The scope of s100A is to capture arrangements where someone other than the beneficiary obtains a tax benefit except if this occurs as part of an ordinary family or commercial dealing.

If section 100A is applied, it gives the ATO the power to tax the trustee on the trust distribution at the highest marginal rate.

The ATO has released its long awaited Final Ruling TR 2022/4 (“Ruling”) and Practical Compliance Guide 2022/2 (“PCG”). There is also the decision of FCT v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 which, in addition to considering s100A, applied the general anti-avoidance provisions in Part IVA ITAA 1936 to trust distributions.

Some of the scenarios which may be at higher risk of attention from the ATO are:

  • trust distributions made to a minor or adult child in which the cash does not flow to the child but is used by the parents for other purposes or gifted by the minor/adult child back to the trustee;
  • the allocation of trust income to an adult child that is not paid to them but rather to their parents to offset expenses paid in relation to usual parental responsibilities prior to the adult child turning 18;
  • ‘washing machine arrangements’ where income is appointed to a corporate beneficiary and then distributed back to the trustee by way of a franked dividend.

The Ruling also sets out the ATO’s views on what may constitute an ordinary family or commercial dealing. According to the ATO, the following are examples of ordinary family or commercial dealings with some carve outs for riskier transactions:

  • Trust distributions made to a husband and wife who have mixed finances and shared financial responsibilities. They use the funds distributed by the Trust. S100A should not apply in this situation;
  • Trust distributions made to a husband and wife. Their adult child needs to buy a house and the parents use the funds from the Trust distribution and gift it to their child. S100A should not apply in this situation unless the parents do this repeatedly and are on lower tax rates than their child;​
  • Trust distributions made to an adult child to use their lower marginal tax rate. The child gifts the amount back to the Trust.  The ATO may look into this and question whether someone has achieved a favourable tax outcome. If this happens every year, the ATO may take the view that s100A applies. Furthermore, s100A may also apply if:
    • The child gifted the distribution to the parents;
    • The child tells their parents they would like them to have the money for all the costs the parents have incurred for them whilst they were a minor;
  • Trust distributions made to an adult child each year. The child has never received anything in cash from the Trust but is at liberty to call upon his entitlements. The Trust keeps the funds owed to the child aside and can be made available to them at any time. S100A should not apply in this situation unless instead of the Trust keeping the funds aside for the child, the parents (or someone else) use the funds on interest free terms.

Whether s100A will apply will come down to a range of factors, but the above scenarios provide some guidance as to the kind of arrangements that the ATO is targeting. Ultimately, the arrangements that are at most risk are those where the end user of a trust distribution is not the beneficiary who is entitled to it.

What constitutes an ordinary family or commercial dealing is likely to remain a contentious area.

In addition to s100A, the ATO may also choose to apply Part IVA to trust distributions. Part IVA is the general anti-avoidance provision. Using Part IVA to attack discretionary trust distributions has several advantages for the ATO over s100A, including a more clearly defined tax avoidance purpose requirement, and the requirement to ignore tax costs when considering alternative courses of action available to the trustee.

It is likely that there will be more emphasis by the ATO on pursuing discretionary trusts using Part IVA in the future.

In the lead up to the end of any financial year, the following should be front of mind for Trustees and their advisers:

  • S100A is not new law, and the Ruling and PCG are simply the ATO’s view on how the current law operates;
  • Trustees ought be more robust in documenting how beneficiaries are made aware of their entitlements and any beneficiary direction in relation to the application of same;
  • Beneficiaries should be asked to acknowledge their entitlement in writing including their ability to demand it if they see fit;
  • Beneficiaries should be asked to authorise the application of their entitlement in writing if they are not receiving the funds;
  • Trustees and beneficiaries should generally record the historical sharing of resources within the family group;
  • Trustees should be prepared to confirm a distribution was made with the full expectation of it having to be paid to the beneficiary.

If you are concerned or affected by this area of law, please contact DBL Solicitors.