Section 100A of the Tax Act 1936 has been in place since 1979 but has received relatively little attention until recent years.
It is designed to prevent schemes in which trust profits are distributed to low-income taxpayers while the economic benefit of the profits is received by another entity, usually a taxpayer who would be taxed at a higher tax rate.
The operation of section 100A can be illustrated by a simple example:
- Cashcow Trust derives taxable income of $100 in a given income year
- Cashcow Trust has two primary beneficiaries, Budget Barry and Highroller Harry. Budget Barry has no other taxable income while Highroller Harry has a high taxable income and pays tax at the top marginal tax rate
- The trustee of Cashcow Trust resolves to distribute the $100 of income to Budget Barry. As Budget Barry has no other income, he pays little or no tax on the distribution
- Budget Barry subsequently agrees to pay some or all of the $100 to Highroller Harry, meaning that Harry receives the economic benefit of the distribution, despite it being assessable income for Budget Barry
While the example above is simple, the operation of section 100A can be far more far-reaching.
There are four basic conditions that must be satisfied for section 100A to apply:
- There must be an ‘agreement’. This term is broadly defined and includes written, unwritten and implied agreements
- A beneficiary must become entitled to the income of the trust
- There must be a payment of money (or transfer of property) to a person other than the beneficiary
- The agreement must have been entered into for the purpose of reducing or eliminating a person’s liability to income tax
If the basic conditions are satisfied, the Tax Office can assess the trustee of the trust on the income at the top marginal tax rate, rather than assessing the individual who received the distribution from the trustee.
Where a UPE is assigned or forgiven (either during a person’s lifetime or upon their death), the second and third elements above will be satisfied, and the critical question is whether there was an agreement entered into for the purpose of reducing or eliminating a person’s liability to income tax.
Relevantly, section 100A includes an exception where the agreement is entered into for ‘ordinary family or commercial dealings.’
An ‘ordinary family or commercial dealing’ is not defined, although the Tax Office has historically accepted that where a debt is forgiven as part of an estate planning arrangement, the forgiveness may be part of an ‘ordinary family dealing.’
For instance, in private binding ruling 1012113065944, the Tax Office observed (in relation to proposed debt forgiveness transactions being implemented as part of an estate planning arrangement) that while a debt forgiveness may not be an ‘ordinary’ transaction that occurs on a day to day basis between family members, the arrangement was entered into as part of an ‘ordinary family dealing’, being the estate planning.
For further information, please contact Patrick Ellwood on 0400 503 111 or patrick@cloverlaw.com.au.
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