Section 100A of the Income Tax Assessment Act 1936 was introduced in 1978 to deal with an egregious practice known as “trust stripping”. That typically involved a trust’s profits being stripped out, tax-free, by paying them to a tax-exempt or loss entity, then being re-settled on the real, intended, beneficiaries.
Forty-four years later, the ATO has issued a draft tax ruling and related guidance setting out the ATO’s view that s. 100A can apply to a far broader range of transactions—including distributions to adult children where the funds are, in the ATO’s view, applied for the benefit of their parents.
Very importantly, s. 100A doesn’t apply to “ordinary family or commercial dealings” (OFOCD). But the ATO has taken the position that a number of arrangements—common in a family setting—are artificial or contrived and thus outside the OFOCD exception.
In Taxpayer Alert TA 2022/1, the ATO has also asserted that arrangements involving distributions to adult children may fall within the draconian “promoter penalty” provisions and that tax practitioners who are involved with such arrangements could be referred to the Tax Agents Board.
It is therefore not going too far to suggest that the ATO’s new approach represents the most important development in the taxation of trusts in Australia for the last 30 or 40 years.
Interestingly, the ATO has noted there is limited guidance on the meaning of “ordinary family or commercial dealing”.
There is, however, judicial authority from 1977—predating the introduction of s. 100A—that: “a redistribution of family assets including a family business, as between husband and wife is a normal, ordinary, everyday family transaction”.
It is respectfully submitted that in 2022 the gifting, sharing and pooling of assets between family members is, similarly, an “ordinary, everyday, family transaction”. Doing things “for the benefit of the family” is, in Australia in 2022, something families ordinarily and regularly do.
The ATO’s guidance will, without doubt, be subject to robust debate over the next month (with submissions on the guidance due on 8 April 2022)—and one would expect, and hope, the professional associations will push back strongly on the ATO’s new position.
Given the long gestation period for the ruling, first mooted in 2015, the ATO will likely be slow and reluctant to change its views.
Taxpayers and advisors therefore need to consider immediately the implications of the guidance on previous, existing, and proposed trust arrangements.
In particular, will a taxpayer’s arrangements come within the White, Green, Blue or Red Zone of the ATO’s draft Practical Compliance Guideline?
If a taxpayer’s arrangements come within the Red Zone, the ATO has made clear that it will conduct further analysis “as a matter of priority” and, if further analysis confirms the arrangements are high risk: “may proceed to audit where appropriate”.