What is Section 100A?
The reimbursement agreement rules are a set of integrity provisions found in Section 100A of the Income Tax Assessment Act 1936 (ITAA 1936). The rules are aimed at situations where a beneficiary of a trust receives income, but the real benefit of the funds is provided to another party, such as the trust-making distribution.
For many years, it was difficult to find much in the way of reimbursement agreement rules guidance from the ATO. In July 2014, the ATO published some guidance on its website under the heading Trust taxation – reimbursement agreement, which changed the situation. A request from the tax profession prompted the release of the guidance. The guidance provided some high-level commentary on how the rules in section 100A work, as well as some examples of how the ATO viewed various arrangements.
The ATO replaced its existing guidance with the following documents in February 2022:
- TR 2022/D1, which explains the operation of section 100A and gives several examples
- PCG 2022/D1, which clarifies the ATO’s approach to compliance in this area
- TA 2022/1, which specifies the number of high-risk arrangements
These new documents have sparked controversy among tax professionals and trust clients.
When is Section 100A Triggered?
As previously stated, section 100A is intended to address situations in which a beneficiary is given immediate access to some of a trust’s income, but the real benefit of the funds is given to another party. While navigating the legislation can be difficult, section 100A will usually be activated when the following conditions are met:
- A beneficiary gains immediate access to a portion of a trust’s income; and
- The current right arises as a result of or in connection with an agreement that includes the following features:
- The agreement must provide for the payment of money, the transfer of property, the provision of services, or the provision of other benefits to someone other than the above-mentioned beneficiary; and
- One or more of the agreement’s parties hope that a person will be liable to pay less income tax for a given year.
- Section 100A does have some exceptions. The following are the main exceptions:
- When the trust income is currently due to a beneficiary who is legally disabled (for example, a minor); or
- Where the agreement is made in the course of normal family or business dealings.
For the purposes of section 100A, the term “agreement” is defined broadly. An agreement does not have to be formal, and it does not have to be enforceable. The parties’ conduct or the surrounding circumstances can be used to infer an agreement.
The reimbursement agreement must have existed prior to the beneficiary becoming currently entitled to the trust’s income for the rules to apply. However, the ATO notes in TR 2022/D1 that:
- The parties’ actions before and after that time may be relevant in determining whether or not an agreement existed at that time; and
- Neither the currently entitled beneficiary nor the trustee must be a party to the agreement or even exist at the time of its creation.
The term ‘ordinary family or commercial dealing’ is one of the more contentious aspects of the ATO’s guidance. The following are some of the key points made by the ATO in relation to this exception:
- Just because something is commonplace or involves no artificiality does not make it a normal family or commercial transaction.
- Because all parties to an agreement are family members thus the ordinary dealing exception does not apply. The transactions between family members and their entities must be able to be explained as achieving regular or normal familial or commercial ends to be considered ordinary dealing.
The presence of tax-related features in an agreement is relevant to the objective inquiry into whether an agreement was entered into in the ordinary course of business.