What Happens When Section 100A Applies?
When a beneficiary is made presently entitled to trust income and section 100A applies, the beneficiary is not deemed to be presently entitled to the relevant share of trust income. The ATO confirms that no another person is currently entitled to the income as a result of this (e.g., a default beneficiary).
This means that the trustee is assessed the relevant share of the trust’s net taxable income for the year under section 99A. This means that the trust’s relevant portion of taxable income is taxed at the highest marginal rate.
In the case of section 100A, section 170 guarantees that the normal amendment period rules do not apply. This means that the Commissioner has unlimited time to amend assessments related to the application of section 100A.
ATO’s Compliance Approach
The ATO differentiates risk for a variety of trust arrangements to which section 100A may apply, according to PCG 2022/D1. The PCG’s goal is to explain how the ATO intends to allocate compliance resources in this area and to assist advisers and taxpayers in determining the level of risk associated with trust distribution arrangements.
To explain its compliance approach in relation to section 100A, the ATO uses four risk zones. The danger zones are listed below.
White Zone
This zone applies to agreements made in income years that ended before July 1, 2014. The ATO will not devote additional compliance resources to consider the application of section 100A to these arrangements unless the following conditions are met:
- Otherwise, the ATO is looking into the taxpayer’s tax affairs for those years.
- The taxpayer has made a commitment that will last both before and after that date, or
- The trust and beneficiary tax returns that were due for those years were not filed before July 1, 2017.
Green Zone Arrangements
The ATO outlines a number of scenarios that would fall within the green zone and be considered low risk for the purposes of section 100A.
Blue Zone Arrangements
The blue zone contains arrangements that do not fit into any of the other zones.
When it comes to situations where the trustee retains funds, the ATO states that the arrangement will not fall into the green zone if any of the following characteristics are present:
- The configuration is a red zone configuration.
- The trust beneficiary makes a gift of their trust entitlement or an amount due from the trust (for example, if the unpaid present entitlement was transformed into a loan).
- The beneficiary waives their right to payment or forgives or releases the trustee from paying their trust entitlement or a related amount due from the trust.
- The trust’s distributable income is less than its net taxable income as a result of the trustee’s power to affect the trust’s income quantum, or the deed being amended.
- Payments from that beneficiary satisfy a beneficiary’s trust entitlement, or a beneficiary’s trust entitlement has been made subject to a loan agreement, and the loan repayments are sourced from loans or payments from that beneficiary. This could include a situation where a dividend paid to the trustee by a corporate beneficiary is offset against the trust’s obligations.
- One or more features of the arrangement could be explained by a tax avoidance motive.
According to the ATO, if you have a blue zone arrangement, you may want to think about making changes to it to reduce its risk profile.
Red Zone Arrangements
The ATO is interested in the arrangements in this zone. The ATO explains a number of scenarios that fall into this risk category.
This scenario applies when an individual adult beneficiary is made currently entitled to a trust’s income and any of the following conditions apply:
- The entitlement funds are paid to the beneficiary’s parent or other caregivers in connection with expenses incurred by the parent or caregiver before the beneficiary turned 18 years old.
- The trustee applies the funds representing the entitlement to a debit balance account for the beneficiary (for example, an amount recorded in the trust’s accounts as a loan) to cover expenses incurred by the trustee in relation to the beneficiary before they turned 18 years old.
- The funds that represent the entitlement are made available to the beneficiary’s parent or other caregivers as a loan or gift.
The beneficiary is a non-resident, and the funds that represent the entitlement are loaned or gifted to another party.