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In-Depth Topic


The ATO rulings and guidance on section 100A ITAA 1936


Hello.  I’m John Jeffreys. 


In this in-depth topic I am going to discuss three ATO documents that concern the operation of section 100A.  There are three documents that issued in late February 2022.  Two are drafts and one is a Taxpayer Alert.  These three documents represent a seismic shift in the way the ATO intends to administer the tax laws in relation to trust distributions.  In my view, as far as clients are concerned, they represent the biggest change to the way trusts income is to be taxed during the careers of any person currently working in the tax industry.


This topic discusses the basic operation of section 100A and the broad principles arising from the three ATO documents. 


TR 2022/D1

Section 100A Reimbursement Agreements




After over 40 years of waiting, the ATO has finally spoken in a draft tax ruling about its view on section 100A of the Income Tax Assessment Act 1936.  This is TR 2022/D1.  There was some earlier website guidance by the ATO on this provision released in July 2014.  The ATO has now moved to state with authority its position on how section 100A operates. 


This draft ruling sits alongside two other ATO documents that have recently issued and are part of a package of guidance released on section 100A.  These other documents are PCG 2022/D1 and TA 2022/1.  PCG 2022/D1 is a practical compliance guideline that sets out the ATO’s draft approach to administering section 100A.  Taxpayers are asked to determine which “zone” they fall into in order to determine their risk of being examined by the ATO.  TA 2022/1 is a Taxpayer Alert concerning parents benefitting from the trust entitlements of their children over 18 years of age.  This taxpayer alert, which is not a draft, signals a major shift in the attitude of the ATO towards such distributions and will cause many families increased tax related anxiety.


Summary of what section 100A does


Here is a short summary of how section 100A operates.


The provision requires a trust to make a beneficiary presently entitled to the income of a trust.  The beneficiary must not be under a legal disability, for example, being a minor.  The beneficiary will include the amount of the distribution in its tax return, if it lodges one.  I will call this beneficiary the “nominal beneficiary”.


In addition, there must be another person or entity that[1]:


  1. Is paid money; or
  2. Has property transferred to it; or
  3. Is provided with services; or
  4. Is provided with other benefits.

This other person or entity must not be the nominal beneficiary.  I will refer to this other person or entity as the “real beneficiary”.  However, the real beneficiary need not be a beneficiary named in the trust deed.  Further, the nominal beneficiary may receive some benefit as well as the real beneficiary.


An important part of these arrangement is that there must be what is called a “reimbursement agreement” entered into by certain parties.  I will explain that in more detail shortly, but it is worth noting that the term “reimbursement agreement” is a poorly chosen name because there does not need to be a reimbursement for there to be a reimbursement agreement.


The effect of section 100A is to make the trustee of the trust assessable on the income that was distributed to the nominal beneficiary by deeming the nominal beneficiary never to have been presently entitled to the income that was distributed to it.  Note, that this is only for the purposes of the tax law.


Section 100A reimbursement agreement requirements


TR 2022/D1 gives detailed explanations of what the ATO considers are the requirements of a reimbursement agreement for the purposes of section 100A.   It defines these requirements as:


  1. The connection requirement.
  2. The benefits to another requirement.
  3. The tax reduction purpose requirement.

I will now explain these.


The connection requirement


The first requirement for a reimbursement agreement is that there be a connection between a beneficiary being presently entitled to the income of a trust (this is the nominal beneficiary), and an agreement, arrangement or understanding out of which the distribution arose.  That agreement, arrangement or understanding must be part of a reimbursement agreement, as defined.


There is no discussion in the draft ruling concerning what constitutes a connection for the purposes of having a reimbursement agreement.


Agreement, arrangement or understanding


For there to be a reimbursement agreement, there must be an “agreement” as defined.  This is defined extremely broadly, and it will be difficult for there not to be an agreement of some sort when a distribution is made to a beneficiary of a trust.  However, for the ATO to apply section 100A, it is necessary for the ATO to specify the nature and scope of the relevant agreement.  


The ATO states that it is not necessary for all of the parties involved in an agreement to have a precise understanding of all of the aspects of the agreement.  Indeed, the nominal beneficiary need not be a party to the agreement nor does the nominal beneficiary need to be in existence when the agreement is made.   Further, the ATO states that the trust making the distribution need not be in existence at the time the agreement is made.


Agreement must be in existence


An important point that was highlighted in the recent case of Guardian AIT v Commissioner[2] is that the reimbursement agreement must have occurred prior to the present entitlement arising for the nominal beneficiary or a payment is made, or funds applied.  Logan J. held in that case that section 100A could not apply because there was no reimbursement agreement in existence prior to the corporate beneficiary (which was owned by the trustee of the relevant trust) being presently entitled to distributions from the trust.




The operation of section 100A requires the ATO to propose a counterfactual or an alternate postulate[3].  This means the ATO must, in preparing an assessment under section 100A, postulate what amount of income the beneficiary would have been presently entitled to had the reimbursement agreement not been entered into.  


The taxpayer has the onus of establishing a reasonable expectation that the beneficiary would have been presently entitled to the original amount distributed to the beneficiary.  According to the ATO, a “reasonable expectation” requires more than a possibility.  It involves a prediction as to the events which would have taken place if the reimbursement agreement had not been entered into.  The prediction must be sufficiently reliable for it to be regarded as reasonable.


Where a trustee is the beneficiary


There is an exception to the operation of section 100A, when the nominal beneficiary is a trustee of another trust.  This second trustee is referred to as the “interposed trust”.   Where this is the case and the interposed trust has distributed the income distributed to it by the first trust, section 100A has no application to the distribution from the first trust to the interposed trust. 


Benefits to another requirement


The next key requirement for the operation of section 100A is the “benefits to another” requirement.  This means that a person or entity other than the nominal beneficiary is to receive:


  • A payment of money; or
  • The transfer of property; or
  • The provision of services; or
  • Other benefits.

The ATO states that the provision does not limit who can be the provider of the money, property, services or other benefits.  These can be provided by anyone.  Also, according to the ATO, the benefit does not have to be provided directly to the recipient.  For example, a benefit could be provided to an entity in which the real beneficiary holds equity.


The benefit provided to the real beneficiary need not be the amount to which the nominal beneficiary was presently entitled or has been paid.  Further, the real beneficiary can be anyone.  This can include the trustee, another beneficiary of the trust, or any other person.


“Payment of money” extended


Section 100A extends the meaning of the term “payment of money”.  The term is defined to include a payment by way of loan and to the release, abandonment, failure to demand payment or postponement of payment of a debt.  So, according to the ATO, it follows there is a “payment of money” where a beneficiary loans the amount of their entitlement to the trustee[4].  Also, the ATO considers that “other benefits” are provided in the case of an agreement where funds are not distributed but retained in the trust.


Tax reduction purpose requirement


The third requirement of a reimbursement agreement is that there must be a tax avoidance motive.  In the legislation, this is described in an awkward manner, but, basically, some person must have a purpose of reducing the tax liability of some other person.  This purpose need not be the sole or dominant purpose of the particular agreement.  It need only be one of the purposes.  Further, it can be a merely incidental purpose.


The person whose tax liability is to be reduced or eliminated need not be a party to the reimbursement agreement.


Accountants, lawyers and financial planners should also be aware that their purposes in advising their client can also be taken into account.  The draft ruling sates that the purpose of a party’s adviser can be imputed to the party where that party acts in accordance with the adviser’s advice[5].


The income tax liability to be reduced can be in relation to any year of income, meaning that a purpose of deferring tax to a later year would be sufficient to demonstrate the tax reduction purpose[6].


Important exception – ordinary dealing


There is an important and controversial exception to the operation of section 100A.  Where an agreement is entered into in the course of ordinary family or commercial dealing, it will not be treated as a reimbursement agreement for the purposes of the provision.  The big question is what does ordinary family or commercial dealing mean?


There is no definition of “ordinary family or commercial dealing”.  The phrase has its origin in the 1958 case of Newton v FCT[7].


The ATO states in the draft ruling that the essential feature of ordinary family or commercial dealing is that it is “ordinary”[8].  You will probably not find that statement very helpful.  The ATO goes on to explain that, in its view, a dealing is considered to be ordinary where a person can examine the acts and assert that they can be explained by the familial and/or commercial objects they are apt to achieve without further explanation.  The ATO seems to adopt the view that the idea of “without further explanation” refers to “without the need of a tax avoidance motive”. 


An example


The ATO gives an example of a family member called Paul.  Paul has some significant medical bills and needs assistance from his family to pay for them. The family members agree to gift their trust distributions to Paul for this purpose.  The ATO says there is nothing extraordinary about the arrangement or the transactions which give effect to the arrangement.


Family or commercial objects


The ATO says that to explain acts that achieve family objectives without the need for further explanation, a person would need to objectively conclude that the transactions entered into among family members are adopted as a means to achieve normal or regular family purposes.  An example is given of a dependent child gifting money attributable to a family trust distribution to their parents.  The parents could have otherwise been made presently entitled to the trust income.  In this situation, according to the ATO, the arrangements would not usually have the quality of ordinary dealing.


What is common practice


When considering what is an ordinary family or commercial dealing, you might be inclined to think that what accountants have been doing with trust distributions over the past 40+ years is “ordinary”.  That is, it is very common for trustees to make distributions to family members and not make payment to them. 


For example, it is very common for a trust distribution to be made to an adult child and the distribution remain as an unpaid present entitlement.  The funds are applied for the benefit of the child and the family, generally.  Up until now, many would have thought that this was an ordinary family dealing.  Not so, says the ATO.  It states than an arrangement between family members where the overt acts achieve a particular favourable tax result will not be ordinary dealing simply because the arrangement has become prevalent, unless it can otherwise be seen to result in the achievement of a family or commercial object[9].


Commercial dealing


With regard to ordinary commercial dealing, the ATO says that parties would be expected to advance their respective interests.  It is ordinary commercial dealing where it would be normal or regular if seen in trade or commerce as a means to advance commercial objects[10].  The ATO says that the use to which the funds have been put can be an indicator of whether commercial objectives have been achieved.


The presence of tax-driven features


The draft ruling also makes some comments about tax driven features that are worth noting.


Not all tax effective arrangements will be caught by section 100A.  The ATO states that regular family and commercial objects can still be advanced in transactions which are chosen for the reason that they are tax effective when compared to similar alternatives to achieve those objects.


What raises a red flag for the ATO is where a dealing has features that are clearly tax driven and which make the arrangement appear contrived and artificial.   The ATO specifically states in the draft ruling that in the context of section 100A, which is an anti-avoidance provision, a commercial or family object of reducing collective income tax liabilities to maximise post-tax group wealth, would not, of itself, satisfy the ordinary dealing exception.


Capital gains and franked distributions


An interesting part of this draft ruling is how the ATO considers the receipt of capital gains and franked distributions by a trust interacts with section 100A.  The tax implications of such receipts are dealt with under subdivisions 115-C and 207-B ITAA 1997 (which I will call the streaming provisions) and not under the trust taxation rules in Division 6 of Part III of the 1936 Tax Act.


When section 100A operates, it creates a fictitious taxation outcome.  This is because it deems the nominal beneficiary not to be presently entitled with the result that the trustee is deemed not to have made the distribution.  When applying the streaming provisions, the ATO considers that this fictitious circumstance should be used to determine how the streaming provisions operate.


For example, assume that a beneficiary of a capital gain is made specifically entitled to that gain through a combination of being presently entitled to a portion of the income of the trust and also through a capital distribution.  If section 100A is applied to the amount to which the beneficiary is presently entitled, the beneficiary will be considered by the ATO not to have received, or not be reasonably be expected to receive some of the financial benefit.  This means that the beneficiary will not be specifically entitled to a portion of the capital gain.  The result of this is that a portion of the capital gain will be allocated to the beneficiaries in accordance with their “adjusted Division 6 percentage” as altered by the operation of section 100A.




Here are some examples from the draft ruling.


Example – A will trust


This is example 1 from the draft ruling.


William is the grandson of his deceased grandfather.  The grandfather set up a trust with funds sourced from the estate for the benefit of William.  This occurred when William was 15.  Each year, William is presently entitled to the income of the trust each year, but it must not be paid to him until he reaches the age of 25.  Each year the trustee reinvests the income until William reaches that age.


While William is a minor, he is under a legal disability and section 100A cannot apply to the income to which William is presently entitled.  When William turns 18, section 100A does have potential application.  It needs to be considered because he is not able to immediately benefit from the trust income.  That is, the trustee is benefiting from the income and not William during the period while William is under 25.


However, the ATO states that this arrangement, in its view, is in the course of ordinary dealing and therefore section 100A would not be applied.


Example – Distribution to spouses with mixed finances


This is example two from the draft ruling.


Lisa and Matthew are spouses are beneficiaries of their family trust.  Each year, the trust makes Lisa and Matthew presently entitled to the income of the trust in equal proportions.  The couple share financial responsibilities and fund their lifestyle from a common pool of assets.


The ATO considers that trust distributions to spouses who have shared financial responsibilities and who ultimately enjoy the shared benefits of the distribution would usually be capable of explanation as achieving ordinary family objectives without the need for further explanation.  Accordingly, the ATO would consider this an ordinary dealing.


Example – Trust entitlement gifted to trustee


This is example 4 from the draft ruling.


The trustee of the Gallagher Family Trust makes Pauline, who is an adult full-time student, presently entitled to trust income for a particular year.  Pauline’s entitlement is determined so her taxable income will not exceed a particular marginal tax rate threshold.  Pauline gifts her entitlement back to the trustee.


According to the ATO, the creation of an entitlement and gifting back to the trustee indicates there may be an agreement, arrangement or understanding between the parties which is connected to Pauline’s present entitlement.  The ATO considers that this arrangement calls for an explanation.  It is an arrangement that has resulted in a tax benefit, and, on its face, the arrangement does not seem to be an ordinary family dealing. 


It is possible that arrangement could be an ordinary family dealing but other factors would need to be examined.  For example, if Pauline did this year after year, there would be a presumption the arrangement was in place to lower the incidence of tax on the family group.  Further, it would appear artificial and contrived.


The ATO also states that additional factors which may indicate the dealing more closely exhibits tax avoidance than ordinary dealing would include:


  • Where the trustee loaned funds attributable to Pauline’s entitlement to her parents on interest-free terms for an undefined period, or
  • Instead of gifting back to the trust, Pauline gifts her trust entitlements to her parents, or
  • Instead of gifting back to the trust, Pauline applies her trust entitlements to repay her parents for costs incurred by them on her maintenance, education and financial support while Pauline was a minor.


PCG 2021/D1

Section 100A reimbursement agreements – ATO compliance approach 




The ATO has released practical compliance guideline PCG 2021/D1 regarding its compliance approach to section 100A.  This guideline is a companion document to draft taxation ruling TR 2022/D1.


Amendment of assessments


An important aspect of section 100A is that the Commissioner has an unlimited time to amend a taxpayer’s assessment.  It will be noted that the general anti-avoidance rule of the income tax law, Part IVA, has a time limit of 4 years.  The unlimited ability to amend an assessment is of particular concern in the context of this guideline.




The scope of what the ATO considers section 100A applies to is now considerably wider than what most tax practitioners have come to understand over the past 44 years since s.100A was enacted.  Indeed, the approach that the ATO is now taking will be startling to practitioners that have worked in the industry for many years.  Distributions to beneficiaries and the use of trust monies in a family context will now have to be thought about more deeply and discussed with clients in more detail.  Actions that accountants take in relation to their trust clients that were previously thought to be of no risk, can potentially put a client into a position where the client may have a large, unexpected tax bill.


For example, the ATO states in the PCG:


“An agreement that includes the creation of a present entitlement to funds that are retained by a trustee, will satisfy the basic elements of the definition of a reimbursement agreement, as it will involve a present entitlement and the provision of a benefit to the trustee[11].”


Compliance approach


The ATO adopts the approach of using zones to enable taxpayers to assess their risk of being investigated by the ATO.  There are four zones.  Each one is given a colour; white, green, blue and red.  Here is a brief description of what is in each zone.


White zone


The ATO sees 1 July 2014 as an important date.  I assume this is because around that time, the ATO published information on its website regarding some of its views on section 100A.  A taxpayer will come within the white zone in relation to the application of section 100A unless the arrangement is outside the green zone, (which I will discuss in a moment) and:


  • The ATO is otherwise considering the taxpayer’s tax affairs for those years
  • The taxpayer has entered into an arrangement that continues before and after 1 July 2014, or
  • The trust and beneficiary tax returns that were required to be lodged for those years were not lodged before 1 July 2017.

If a taxpayer falls within the white zone, the ATO states that it will not commence any new compliance activity into the taxpayer’s affairs. 


Green zone arrangements


If a taxpayer falls within the green zone, the ATO also will not, generally, commit compliance resources to investigating the taxpayer’s affairs.  Broadly, arrangements will come within the green zone where the taxpayer is doing what the ATO considers to be the right thing. 


The ATO states that all taxpayers that consider they fall in the green zone need to document why they consider this to be the case.  




The PCG gives some examples of when a taxpayer will come within the green zone.


In this scenario, an individual beneficiary is made presently entitled to income of a trust and the funds are paid to the beneficiary.  These funds are mixed with their spouse’s funds in a joint bank account.  The funds from that bank account are used for people that include a dependant of the beneficiary of the trust.


You may be surprised that a scenario such as this is even being considered in the context of an anti-avoidance provision.  However, such is the breadth of section 100A, the only reason that this does not trigger the operation of that provision is because the ATO considers this to be an ordinary family dealing.




Another example of being in the green zone given in the draft PCG is important to understand because it sets out a scenario where a trust distribution can be retained by the trustee without risk.


In this scenario, a beneficiary who is an individual or a private company is made presently entitled to income of the trust.  However, the distribution remains an unpaid present entitlement.  The ATO will allow this situation to be in the green zone where:


  • If the beneficiary is an individual, either:
    • the individual and/or their spouse is a trustee of the trust or controls the trust; or
    • The individual is employed in the management of a business that the trustee conducts.
  • If the beneficiary is a private company,
    • The company is controlled by an individual who also controls the trust, and
    • There is a Division 7A qualifying loan agreement put in place.

Also, the trustee must satisfy what the PCG calls a “use of funds condition”.  This means that the trustee, as permitted by the trust deed, uses the funds that represent the beneficiary’s entitlement only in the following ways:


  1. As working capital in a business that the trustee actively carries on; or
  2. For the acquisition, maintenance or improvement of investment assets of the trustee, or
  3. To lend the funds to an associate under an agreement that satisfies the terms of Division 7A. The associate must use the funds as working capital in a business or for investment purposes.

Blue zone arrangements


The PCG also speaks of blue zone arrangements.  These are arrangements that do not fall within any of the other zones, including the red zone, which I will discuss shortly.  If an arrangement falls in the blue zone, the ATO states it may review the arrangement to better understand it.  This may, or may not, result in further action.


I think the blue zone could be referred to as the “we don’t know what’s going on but we are going to come and find out, zone”.




Here are some of the situations that the ATO states might be in the blue zone if it is not part of a red zone arrangement.


  • The beneficiary makes a gift of their trust entitlement or an associated amount receivable from the trust. For example, if the beneficiary has converted an unpaid present entitlement into a loan and gifts that loan.
  • The beneficiary disclaims their entitlement or forgives or releases the trustee from its obligation to pay their trust entitlement or an associated amount receivable from the trust.
  • The income of the trust is less than the net income as a result of the trustee exercising a power, or the deed being amended, to affect the quantum of income of the trust.


Red zone arrangements


The last zone, and the one that will be of most concern is those in the red zone.  The ATO says that red zone arrangements will attract the attention of the ATO and it will dedicate resources to these situations to consider whether section 100A applies.  Red zone arrangements are described as being where:


  • Beneficiaries’ entitlements appear to be motivated by shielding the trust’s taxable income from higher rates of tax.
  • The arrangement involves contrived elements directed at enabling someone other than the presently entitled beneficiary to have use and enjoyment of the economic benefits referrable to the trust net income.


Here are some examples of what the PCG states are in the red zone. This is example 7.


Brown Trust’s beneficiaries include the members of the Brown family. Brown Co is the trustee of Brown trust, and Bronwyn Brown is the sole shareholder and director of the trustee.  Bronwyn is the parent of three adult children. These are Sandra who is 26 years old, Simon who is 21 years old and Sam, who is 19 years old.


During the 2022-23 income year, Sandra is self-employed and has a taxable income of $90,000. Simon and Sam study full time and derive no income during the income year. Bronwyn’s children live at home with her at all times throughout the income year.


During the 2022-23 income year, Brown trust derives $240,000 in income [the trust’s net income is also $240,000]. Throughout that year, Brown Co makes regular payments totalling $240,000 into Bronwyn’s bank account. Those payments are recorded as a beneficiary loan in the accounts of Brown trust. Bronwyn uses these amounts throughout the year to meet her personal living expenses and those of the household.


On 30 June 2023, Brown Co resolves to make Simon and Sam each presently entitled to $120,000 of the Brown trust income. Brown Co applies their entitlements against the beneficiary loan owed by Bronwyn. The entitlements of Simon and Sam are each recorded as having been fully paid in the accounts of Brown Trust.


Bronwyn assists in the preparation of Simon and Sam’s tax returns and pays the tax liability arising in relation to their entitlements from her personal funds. The entitlements of Simon and Sam are applied in this manner because they each purportedly have an outstanding debt owed to Bronwyn in respect of education expenses and their share of the Brown household expenses that Bronwyn paid before they each turned 18 years of age.


The ATO says it would apply compliance resources to examine this situation. I note that the PCG does not state that the ATO would definitely apply section 100A. However, the situation would be investigated with the prima facie presumption that there was a reimbursement agreement.




This is example 8 from the PCG.


Orange Trust is a discretionary trust with beneficiaries including the members of the Orange family. Orange Co is the trustee of the Orange Trust, and Thomas Orange is the sole shareholder and director of the trustee. Orange Trust has made a family trust election and Thomas Orange is the specified individual in that election.


Thomas is aged 44 and his parents are Sylvia (aged 66) and Sylvester (aged 67). His parents reside outside of Australia and are non- residents for tax purposes.


During the 2022- 23 income year, Orange Trust derives $400,000 of income that is comprised of fully franked dividends. The dividends are paid directly into Thomas’ bank account. Thomas uses these amounts to meet his personal expenses and mortgage repayments. The trust income paid into Thomas’ bank account is recorded as a beneficiary loan in the accounts of Orange Trust.


On 30 June 2023, Orange Co exercises its power to appoint income to make Sylvia and Sylvester each entitled to $200,000 of Orange Trust’s income. Orange Trust is not required to pay or withhold tax in respect of the distribution to Sylvia and Sylvester. At the time income is appointed to Sylvia and Sylvester, they have agreed to use their entitlements to lend $400,000 to Thomas on interest-free at-call terms. In the accounts of Orange Trust, Orange Co records that Sylvia’s and Sylvester’s entitlements are fully satisfied in being applied to repay the $400,000 loan owed by Thomas.


The Tax Office indicates that it would investigate this situation without specifically stating that section 100A would apply.




This example is based on example 10 from the PCG. It outlines a more complex arrangement whereby the controlling individual of a group is able to obtain significant funds from the accumulated profits of the group without paying tax.


This is the structure of the group. Holding Trust owns all of the shares in Passive Pty Ltd. Holding Trust is a discretionary trust. Holding trust is controlled by Daisy.


Daisy conducts a business through Operating Trust which is also a discretionary trust. Each year Operating Trust distributes 100% of its income to Passive Pty Ltd. Passive Pty Ltd has a large amount of accumulated profits as at 30 June 2023. An arrangement is entered into so Daisy can access the accumulated profits of Passive Pty Ltd with there being little tax liability.


Prior to 30 June 2023, the trust deed of holding trust defines trust income as being the net income of the trust calculated under the tax legislation. That is, the distributable income of the trust is defined as taxable income.  The trust deed of holding trust is amended on 29 June 2023 so that proceeds from share buy-backs are capital of the trust. This means that proceeds from the buyback of shares held by holding trust will not be treated as the distributable income of the trust.


Also on 29 June 2023, a new company is incorporated that is also wholly owned by Holding Trust. The name of this company is New Bucket Pty Ltd.


On 30 June 2023, Passive Pty Ltd buys back 90% of its shares held by holding trust for $2.8 million. Under the tax rules that apply to share buybacks, the $2.8 million is treated as a fully franked distribution. Also, for trust law purposes, the $2.8 million is treated as a capital receipt, not an income receipt, by Holding Trust.


On 30 June 2023, Operating Trust distributes its distributable income to the newly incorporated company, New Bucket Pty Ltd. Apart from the share buyback, Holding Trust only receives $1,000 of interest income. This $1,000 amount constitutes the distributable income of the trust for the year. The trustee of Holding Trust resolves to distribute all of the distributable income of Holding Trust to New Bucket Pty Ltd.  Under s.97 ITAA 1936 all of the net (taxable) income of the trust will flow to New Bucket Pty Ltd.  However, because most of the net income from Holding Trust is comprised of fully franked dividends, New Bucket Pty Ltd will, effectively, only pay tax on the $1,000 of interest.


Also on 30 June 2023, Holding Trust makes a capital distribution to Daisy of $2.8 million which has been sourced from the share buyback proceeds.  Apart from the potential operation of section 100A, there is no provision that will bring this amount to tax in the hands of Daisy.


As you would expect, the ATO would investigate such an arrangement with the view to applying section 100A.



TA 2022/1

Parents benefiting from the trust entitlements of children over 18 years of age




In conjunction with the release of TR 2022/D1 and PCG 2022/D1 concerning the operation of section 100A, the ATO has also released a taxpayer alert – TA 2022/1. Being a taxpayer alert, this is not a draft. This is an official statement of an ATO warning about things it doesn’t like.


This taxpayer alert is of concern because it describes arrangements that many have previously thought would not contravene an anti-avoidance provision.  It describes a very common arrangement. The ATO raises the prospect of a number of provisions being used to attack the arrangements, including section 100A, the normal trust assessing provisions and the anti-avoidance provision, Part IVA.


What the tax alert is about


Broadly, the ATO is saying that it is concerned with arrangements where adult children are made presently entitled to distributions from a trust where the children do not, in substance, gain access to the funds constituted by the present entitlement. The ATO states that a common feature of the arrangement is income being appointed to members of the family group but, in substance, it is the parents who exercise control and benefit from the income.




This is example one from the taxpayer alert. This describes a situation that the ATO is concerned about.


ABC Trust’s beneficiaries include the members of the ABC family. David is the sole trustee of the ABC Trust. David and his wife Rani have two children, Jenny (age 22) and Paul (aged 19), who live with them in the family home. David and Rani have an existing mortgage on the home. Jenny and Paul are both full-time students and during the 2021-21 income year, they each earned approximately $12,000 from casual employment.


During the 2020-21 income year, the ABC trust derives income of $720,000 (the trust’s net income is also $720,000). A resolution of the trustee of the ABC trust dated 30 June 2021 shows both Jenny and Paul are each presently entitled to $160,000 income of the ABC trust, with David and Rani each presently entitled to $200,000.


Jenny and Paul are not paid any amounts. Instead, David transfers an amount equal to their entitlements to the mortgage offset account that he and Rani maintain. Jenny and Paul’s entitlements are recorded as having been fully paid in the accounts of the ABC trust. David pays Jenny and Paul’s tax liabilities in relation to their entitlements from his personal funds.


David has taken these actions as Jenny and Paul have agreed that their entitlements from the ABC trust will be managed by David for the benefit of all family members. David has determined that those entitlements should be applied to reduce the debt on the family home.


The ATO says that by entering into this arrangement, the purported $160,000 entitlements of both Jenny and Paul are not subject to the top marginal tax rate. David has not managed the entitlements for the benefit of all members of the family. David and Rani receive the same economic benefit from the income as if it had been appointed to them directly, but without the amounts being included in the assessable income and subject to tax at a higher marginal tax rate.


Promoter penalty regime


Of concern in the taxpayer alert is the reference by the ATO to the possible imposition of penalties under the promoter penalty regime. The taxpayer 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.


The taxpayer alert also encourages people who are aware of these types of arrangements to use the ATO tip off arrangements.


Date of effect


I now want to discuss the issue regarding the date of effect of the ATO documents and the issue of potential retrospectivity of the application of section 100A. I have to admit that this is quite confusing due to several sources of information. The sources of information are:


  • The ATO documents themselves
  • Information on the ATO website
  • Statements by Jeremy Hirschhorn, Second Commissioner of the ATO
  • A press release put out by the Assistant Treasurer, Michael Sukkar
  • Statements by senior ATO officers in webinars.

The combination of these various pieces of information makes it difficult to precisely state to which arrangements the ATO documents, when finalised will apply. Having said that, it should be appreciated that TA 2022/1 is not a draft, and it can only be concluded that it is currently operative.


I will set out these various pieces of information and then try to make some comments that makes sense of this information. However, I can’t promise you a crystal-clear view as to when the ATO will be operating the views it will set out in the finalised rulings.


The ATO documents


Let me discuss what is said in the ATO documents about the date of effect.


TR 2022/D1 states in relation to the date of its effect when finalised:


“When the final Ruling is issued, it is proposed to apply to arrangements both before and after its issue. However, the ruling will not apply to you to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of the issue of the Determination. Note: The Commissioner has published Draft Practical Compliance Guideline PCG 2022/D1 Section 100A reimbursement agreements – ATO compliance approach that includes proposed bases on which compliance resources will not be directed to certain arrangements, including particular arrangements entered into in current and prior income years.”


With regard to PCG 2022/D1 and the date of effect, the PCG says:


“When finalised, this guideline is proposed to apply to present entitlements to income of the trust estate conferred before or after its date of issue. However, for entitlements conferred before 1 July 2022, the Commissioner will stand by any administrative position reflected in “trust taxation – reimbursement agreement”, which was first published on our website in July 2014 to the extent it is more favourable to the taxpayers’ circumstances than this guideline.”


Information on the ATO website


I will now refer to the information on the ATO website in relation to the commencement date of these documents. This states in relation to entitlements from 1 July 2022:


“Draft Practical Compliance Guideline PCG 2022/D1 Section 100A reimbursement agreements – ATO compliance approach sets out our proposed compliance approach in relation to beneficiary entitlements conferred on or after 1 July 2022.”


In relation to entitlements before 1 July 2022 the ATO website information states:


“For beneficiary entitlements conferred before 1 July 2022, the administrative position outlined in [the July 2014 website guidance] will continue to apply.”


Statements by Jeremy Hirschhorn, Second Commissioner of the ATO


On 6 April 2022, Jeremy Hirschhorn, Second Commissioner, gave testimony to the Senate Economics Legislative Committee. He was questioned by Senator McDonald concerning the ATO documents regarding section 100A. There were a number of questions asked. I will try and summarise the responses as I understand them.


Mr Hirschhorn wanted to emphasise that the ATO was seeking to enforce the policy that a beneficiary that is presently entitled to a distribution from a trust should be the one that is receiving that distribution and not some other party. He did acknowledge that the documents put out by the ATO had unsettled some in the tax advisor community. This was because those documents had called into question some practices which have been relatively long-standing.


When Sen McDonald pressed him on the retrospective nature of the tax office documents, Mr Hirschhorn stated that section 100A enabled the ATO to go back as far as they want to amend assessments. Nevertheless, he placed importance upon the ATO guidance on the ATO website that was put there in 2014. He said that the ATO was standing by its July 2014 guidance for affairs in the period up to 30 June 2022.


Mr Hirschhorn did admit that the drafting of the taxpayer alert was “perhaps indelicate” and that cause people to worry about certain comments in it. With regard to the reference to promoter penalties, he said that this was a statement aimed at a very small subset of people and was only for the most aggressive schemes. I will quote this statement that he made:


“I mention that because I think there is a fear in the tax advisor community, or some elements of the tax advisor community, that there is going to be some massive swathe of old, 100A assessments and also, potentially, a swathe of promoter penalties. That is not what we are anticipating.”


He also said later:


“Certainly, our intention is not to capture prudent ordinary tax planning transactions. I think a touchstone of our position, around 100A, is that, if the beneficiary of the trust gets the benefit, 100A has no role to play. We are not concerned about ordinary family trusts where the family benefits from the distributions. We are concerned about situations where the family trust is used and, let’s say, paperwork is drafted, for example, such that parents keep all the money from the trust but benefit from the tax-free thresholds of their children. If the children actually get the money, we have no concerns under 100A. So I say that, if there is an absolute touchstone, it is that, if the beneficiary of the trust benefits, 100A has no role to play.”


Press release by the Assistant Treasurer


Shortly afterwards, Michael Sukkar, the Assistant Treasurer, put out a press release welcoming the view of the ATO that the draft guidance on section 100A would not be applied on a retrospective basis. The press release states that the ATO has confirmed that taxpayers can continue to rely on the July 2014 guidance that has been placed on the ATO website.


Statements by senior ATO officers


The final piece of information are verbal statements made by senior ATO officers in webinars that have been held on the section 100A documents. Some of this information I have heard first-hand and some of the information I have heard from others.


The senior ATO officers have continually expressed the view that most taxpayers will be in the green zone and that only relatively few will find themselves in the red zone. They see the guidance on section 100A as being directed at the most egregious type of arrangements. Apparently, senior ATO officers have also emphasised that the guidance will not be applied on a retrospective basis.


What does all this mean?


Having set out these various sources of information regarding the date of effect and whether or not the ATO will apply the new guidance on section 100A retrospectively, I am not sure whether much comfort can be gained from what has been said.


Let me begin with the statements that taxpayers can rely on the July 2014 ATO guidance.


It is not at all clear to me why relying on this guidance in July 2014 is of much benefit to any taxpayer. The information released in July 2014 is certainly not as expansive as the draft ATO documents, but it still sets out a view about section 100A that will be very concerning to the vast majority of accountants and their trust clients. Further, the ATO is not saying that they will not go back past 1 July 2014. The PCG clearly contemplates that they will do this in certain circumstances.


The real difficulty for accountants who will very soon be preparing trust distribution minutes for their clients to sign, is what they are to do for the year ending 30 June 2022. There is a thought that PCG 2022/D1 will only be applied in relation to trust distributions that occur after 1 July 2022. To some extent, there is an implication of this idea in paragraph 47 of the PCG.


The ATO is clearly contemplating the possibility of amending assessments in prior years. However, there is the “concession” that the ATO will not raise an assessment that is less favourable than the administrative guidelines set out in July 2014 which were posted on the ATO website. However, having read the administrative guidelines released in July 2014, it is not at all clear to me whether this concession is of much use. It is not clear to me what is more favourable with regard to the July 2014 information as compared to what is said in PCG 2022/D1.


The white zone


Earlier in the presentation I spoke about the white zone and when a taxpayer will be considered to be in that zone. Even though this zone refers to arrangements prior to 1 July 2014, in substance, if the ATO doesn’t like your arrangement then you can’t be assured that you will be in the white zone. In this, there is no support for the idea that the ATO will not apply this guidance retrospectively.


What does “no retrospectivity” mean?


The ATO and the Assistant Treasurer have made the statements that the ATO guidance will not be applied retrospectively. But, I think those statements need to be understood cautiously because I think the meaning of those parties when they use the term “retrospective” needs to be interpreted with great care.  I also think it quite possible that the ATO and Minister Sukkar have a different view of what is “retrospective”.


First, I don’t think the ATO can be saying that it will ignore the unlimited amendment powers it has in respect of section 100A. When the ATO makes the statement that it will not apply this guidance retrospectively, I don’t think that it can legally disavow its power to be able to amend assessments for the purposes of giving effect to section 100A for an unlimited period of time. So, if the ATO is saying that the guidance won’t be enforced retrospectively, what exactly does it mean by this?


From my analysis, I think what the ATO means is that in the period from 1 July 2014 to 30 June 2022, it will apply the website guidance that was placed on the website in July 2014 in respect to section 100A matters. Perhaps, and I emphasise perhaps, in practice what this will mean is that there is an effective (type of) white zone as set out in PCG 2022/D1 for the period 1 July 2014 to 30 June 2022.  However, what that means in practice, I can’t say.


Another idea is that only the examples that are set out in the July 2014 website guidance are the ones to which the ATO will apply section 100A in the period 1 July 2014 to 30 June 2022. That is a view, but I believe it unlikely to be correct. I cannot imagine that the ATO will fetter itself to the ideas and examples that were set out in the July 2014 guidance.


So, I am still struggling to understand what the statements about not being retrospective mean.


What should accountants do?


On one view, PCG 2022/D1, TR 2022/D1 and TA 2022/1, as far as clients are concerned, is the most significant change to the taxation of trusts that has occurred during the working lives of those currently practicing in the tax industry. I appreciate that there has been other major changes such as the introduction of the trust loss provisions and the change in view of the ATO with regard to unpaid present entitlements of corporate beneficiaries. However, this change is something that just about all trusts will need to consider and there may be significant financial issues that many families will need to confront due to this PCG, and the other two ATO documents.


Year ended 30 June 2015 and following


The first point that should be appreciated is the length of time over which the ATO states it may examine section 100A issues. Under the PCG, a trust is in the white zone only if the year relates to the year ended 30 June 2014 or earlier. At the time of this recording, there have been seven completed financial years since that time. The implication of the PCG is that all trustees need to examine the potential application of section 100A to its affairs for the year ended 30 June 2015 and following. To make an understatement, this is quite concerning and a major compliance task. This compliance task will generally not be understood by clients and the reason for the work will have to be explained to them.


There is also the significant issue of whether the client is prepared to pay for such work. Clients will, not unreasonably, consider that the tax affairs going back that far are “done and dusted”. They may take some convincing that they need to take advice about whether they have contravened section 100A, at least, in the changed view of the ATO.


This changed view by the ATO is of such significance that it is simply not an option not to explain to clients that use trusts in their affairs that there has been an important change in the way the ATO administers the taxation of trusts. It may have significant implications for the way in which families administer their financial affairs both in their commercial and private dealings.


Which zone am I in?


If you are going to examine the past distributions and use of trust monies with the purpose of complying with PCG 2022/D1, the first major challenge is to try and determine in which zone a particular trust lies. The complexity of this task cannot be underestimated. This task requires a very strong knowledge of the PCG, TR 2022/D1 and TA 2022/1. It also, of course, requires a very strong knowledge of section 100A itself. Some accountants may consider that this is a technical challenge too great for them. Many others may consider that there simply isn’t the time to be able to do all of this work.


At a minimum, determining which zone a trust falls within will include the following:


  • Access to all necessary information to determine trust distributions since the year ended 30 June 2015.
  • An understanding of how the trustee has applied the cash and property of the trust since that time.
  • An understanding of how a family has applied trust distributions made to family members and family entities since that time. It will frequently be the case that an accountant will not be in possession of this information. They will have to ask the client to supply this information. There is a real issue as to whether a client has the records or even an understanding of how trust distributions have been used in a family’s affairs.
  • An examination of all of the above information by a person who has a strong knowledge of the relevant technical information.
  • Possibly seeking advice from other advisers or the ATO.
  • Explanation to the client of the results of the examination and obtaining instructions from the client as to the next steps.
  • Documentation of the findings of the above review. The ATO states in paragraph 15 of the PCG “If you choose to rely on this guideline, you should document how your circumstances meet the requirements of the green zone.”

As will be appreciated by all accountants in public practice, undertaking this process will be very time-consuming. Each practice will need to determine whether it has the capability to undertake this process or whether to simply take the risk that the ATO will not examine any of its clients. There is a risk that if the ATO takes interest in one client of an accounting practice it might extend that interest to other trust clients in the practice.


If an accounting firm decides that it will run the risk of the ATO not investigating its clients, this decision should, of course, be ultimately made by the client themselves. I do not recommend that an accounting firm decides to make a unilateral decision to ignore these tax office pronouncements without first consulting clients. However, I can imagine, due to the extensive work involved, that many accounting firms will take the decision to run the risk of section 100A applying to trust clients in the past.


Some accounting practices may take the view that they will follow the changed views of the ATO only on a prospective basis. That is, the accounting practice will advise their clients that from the year ending 30 June 2022, trust distributions and the use of trust property must not breach the changed views of the ATO.


Another approach that some accounting practices might adopt is to select their “A” grade clients and undertake the process required by the PCG for those clients. Advice of the change might be given to other clients, but no work will be undertaken unless there are express instructions from those clients.


Can a trustee “go back” and change the past?


If it is found that a client has a potential section 100A issue because it has arrangements either in the red zone or the blue zone, can anything be done to rectify that situation by engaging in transactions now?


In many situations the answer to this will be “no”. Certainly, past distributions to which beneficiaries have been presently entitled are not able to be changed. However, there is a possibility that money or property could be exchanged between parties to the reimbursement agreement now, so as to undo the payment of money or property or the provision of property that has occurred in the past. The question is whether the ATO will accept this practice as being permissible. This is currently unknown and hopefully this issue will be raised during the consultation process on the draft tax ruling and draft PCG.


For example, let us say the party that has received money under a reimbursement agreement in, say, the year ended 30 June 2017 repays that money to a relevant party such that it can be seen that, with the benefit of hindsight, that party has actually not received any benefit. It perhaps could be argued that the money had been lent to that party and the party was merely repaying it. I think it unlikely that the ATO will permit this, however, in the context of this significant change of the ATO’s views, perhaps they will permit taxpayers to undo prior reimbursement agreements. This may be permitted where the loan is dealt with on a commercial basis involving the payment of interest.


Remember that these are drafts


It must, of course, be remembered that at the current time, which is mid April 2022, the draft ruling and the draft PCG are drafts. Submissions on these drafts are due by 29 April 2022. The implication is the ATO will try and finalise these rulings prior to 30 June 2022. I expect that there will be significant consultation on these documents and this may delay the process. Also, it should be remembered that a federal election has been called for 21 May 2022, and this may also have some impact on the speed with which the ATO produces the final ruling and PCG.


Another factor in the finalisation of these ATO documents is the outcome of the appeal by the ATO in the Guardian AIT Case in the Full Federal Court. The ATO lost this case in a judgement before a single judge of the Federal Court that was handed down in December 2021. It may be that no decision from the full Federal Court will be available until later in 2022. Depending on the outcome of that decision and what the judges say in that case, it could have a significant impact on the ATO documents. If they have been finalised, it may be that they need to be withdrawn or, at least, rewritten.


Should I wait until the final rulings?


A reasonable question is whether you should wait and do nothing until the ruling and the PCG are finalised. In my view, I think it unlikely that the ATO is going to change its position significantly. Due to the amount of publicity concerning these rulings I think it better practice for accounting firms to begin addressing these issues with their clients as soon as possible. Even if the ATO’s position changes at a later time, for the most part, clients will feel better cared for if you raise the issue with them now.


What does the ATO say you should do?


There is very little said in the PCG as to what taxpayers should do if they find that they are in the blue or red zone. The PCG simply makes the point that the tax office will investigate the situation. There is no comment by the ATO as to what taxpayers should do if they find themselves in the blue or red zones.


I must say that I find this a significant deficiency in these ATO documents. I understand that the ATO has the responsibility for administering the tax laws but it also has a responsibility for helping taxpayers with the challenges that are raised by these documents. It is clear that these ATO documents herald a very significant change in the way the ATO has administered the taxation of trusts. It is unacceptable for the ATO not to make any comment as to what taxpayers ought to do if they discover they have arrangements that would fall within the blue or red zone.


John Jeffreys

John Jeffreys Tax Pty Ltd

16 April 2022

[1] S.100A(7)

[2] [2021] FCA 1619

[3] S. 100A(5) & (6)

[4] S. 100A(10) & (12)

[5] TR 2022/D1 [74]

[6] TR 2022/D1 [75]

[7] (1958) 98 CLR 1.

[8] TR 2022/D1 [79]

[9] TR 2022/D1 [89]

[10] TR 2022/D1 [90]

[11] PCG 2022/D1 [11]