Accountant's Foundation: Section 100A

Section 100A is not going away, so it's important we understand it and accommodate it in our tax planning processes. 

What is Section 100A? 

On February 23, 2022, the Australian Taxation Office (ATO) released Taxpayer Alert TA 2022/1, titled "Parents benefitting from the trust entitlements of their children over 18 years of age". In a nutshell, it's aimed at identifying situations where trust income is funneled to beneficiaries with lower tax rates, with an agreement to benefit someone who would otherwise face a higher tax bill. It's designed to put a cap on tax avoidance within the operation of trust taxation. 

To give you a clear guideline on what is acceptable behaviour, the ATO has colour-coded the different levels of risk associated with various tax planning strategies involving trust distributions into green and red zones. 

Why is Section 100A Important? 

The ATO plans to investigate red zone risks. If they invalidate a distribution by relying on S100A, the trustee will be taxed at 47%. 

What Falls into the Green Zone? 

Let's look at some examples from the ATO of what's in the green zone.  

• Adult Child / Parent receives Trust Distribution in full.  
•  Adult Child / Parent allocated Trust Distribution, leaves it in Trust for working capital for Trust  
•  Adult Child / Parent receives Trust distribution in full within 2 years.  
•  Bucket Company receives distribution from Trust in full.  
•  Bucket Company receives distribution from Trust, loans back to Trust under Div7A Loan Agreement for working capital for Trust.  
•  Trust Distribution to loss Company within family group – FTE.  
•  Testamentary Trust Distribution to adult child, retained in Trust until nominated age (e.g. 30 years old) 

 TaxPlan Advance and the Section100A report in ChangeGPS allow you to compare different scenarios, and the report easily shows which zone each scenario falls into. 

What Might be of Concern to the Commissioner? 

These red zone areas are likely to be red flags for further investigation. 

• Is the action taken only being done for a tax advantage? 
• Is the action taken motivated by sheltering the Trust's taxable net income from a higher rate of tax? 
• Are contrived elements enabling someone other than the beneficiary to enjoy trust income? 
• If the beneficiary lends or gifts some or all of their entitlements to another party. 
• If the beneficiary returns trust income to the Trust as assessable income. 
• If the beneficiary entitlements set off against subscription for units in Trust. 
• If the Trust net income included in a beneficiary's assessable income exceeds beneficiary's entitlement with difference the result of contrivance. 
• If entitlements to loss beneficiaries are motivated by using their tax losses. 
• Taxpayer alerts which express concerns regarding s100A. 

 Key Tips for Dealing with Section 100A 

Keep Contemporaneous Records 

Be sure that you are keeping records at the time of decisions that are sufficient to establish that the funds have been applied for the recipient's benefit. Or keep documentation of why records don't exist or why a requirement hasn't been satisfied. (Learn more about contemporaneous records in this foundational. [LINK to Contemporaneous Records blog) 

Develop a Firm-Wide Policy for All Client Trust Distributions 

When you have a policy implemented across the entire Practice, it ensures that all accountants are providing the same advice and will de-risk your firm. 

Educate Your Clients on the Changes 

Your clients need to be aware that new laws have been introduced but don't hesitate to mention that your previous advice was correct at the time. You should also be preparing your clients for the possibility of a higher tax payable, as this may be the case. 

Keep in Mind This is a Change 

This is a tax change, not a change you have brough about or a mistake you have made in the past. On the bright side, this should now give us some certainty around what is acceptable. 

Tax Planning has Changed 

Section 100A has changed tax planning going forward, and you'll need to update your process to ensure you're compliant. Things to keep in mind are: 

• Trust Distribution Resolutions can't be given to clients until just before June 30 (unless stated in the deed). 
• You need to record Trustee considerations and decisions about Trust Distribution each year. 
• You'll need an updated Tax Planning process.

Beneficiaries Must Benefit 

The main message from the ATO, and a key touchstone to keep in mind is that a beneficiary must benefit.