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The ATO’s draft steerage on segment 100A launched in February after which the finalisation of the ones perspectives in TR 2022/4 and PCG 2022/2 in December was once one of the vital essential tax problems that public follow accountants have confronted for years. 

Individually the results of the ATO’s stance at the operation of s100A is extra important than the succeed in of Department 7A and the ATO’s modified perspectives on unpaid provide entitlements owed to non-public corporations that have been made identified about 12 years in the past. 

Except the federal government comes to a decision to modify the best way during which agree with source of revenue is classed for tax functions, accountants will endlessly want to be fascinated with how the ATO may probably use s100A to assault even essentially the most not unusual agree with preparations. The finalised ATO paperwork handiest serve to intensify that worry. 

Whilst we now know a excellent deal extra about how the ATO thinks s100A may practice, the vast majority of agree with preparations will fall outdoor the golf green zone and pink zone as mentioned in PCG 2022/2. This implies accountants will probably be coping with the danger and uncertainty of advising shoppers with out understanding whether or not the ATO unearths the association applicable or now not.

The evidence will probably be within the pudding. Right here I imply “the pudding” of the way ATO auditors take care of the ATO paperwork in follow. Very senior officials of the ATO have attempted to calm the waters by means of pronouncing that the ATO thinks there’ll handiest be a couple of eventualities the place the ATO will attempt to practice s100A. The indication from those officials is that the ATO paperwork are handiest there to catch an overly small collection of egregious eventualities. I do hope that will probably be so. 

Alternatively, after pondering in some intensity as to the results of the ATO paperwork, I in finding it tricky to return to this view. It kind of feels to me that there are all kinds of ordinary agree with preparations that both don’t come inside the inexperienced zone or are excluded from it below paragraph 32 of PCG 2022/2.

Now not an educational workout

The issue for accountants is that this isn’t only a few great educational, highbrow dialogue that may be had over a pitcher of wine. Accountants will have to make actual choices for actual shopper eventualities about what’s going to be put (or now not put) in agree with distribution mins and tax returns. Those choices imply actual cash to actual other folks. Accountants and tax advisers are positioned in a troublesome place as a result of they’re going to want to make choices about those unsure eventualities. The s100A “greenback” will in reality prevent with accountants.

The ATO may say, “If you’re doubtful, simply ask the ATO for a ruling”, however this may incessantly be impractical. First, if the ATO have been critical in pronouncing this it could be flooded by means of non-public ruling requests, and we already know that the ATO is suffering to reply to such requests in a well timed means.

Additional, choices about agree with distributions are often made within the ultimate weeks of June each and every yr. The agree with distribution minute will have to be signed sooner than the stroke of nighttime on 30 June for many trusts. There’s no time to invite the ATO a sophisticated s100A query after which obtain a reaction by means of 30 June. This simply gained’t occur.

And, after all, soliciting for a non-public ruling request after the agree with distribution minute has been signed is fraught with issue. You’ll be able to’t trade the contents of the minute and the taxpayer will have to ship the request for a non-public ruling to the ATO with the implied place to begin that there’s a s100A factor — that’s why the ATO’s opinion is being sought within the first position. Accordingly, acquiring non-public binding rulings from the ATO isn’t one thing that many tax advisers will counsel to their shoppers.

The right way to clear up the issue

However, having stated all of the above, shoppers nonetheless desire a approach to the issue. I now set out what I believe are the 3 ways to unravel the s100A drawback.

  1. Pay the beneficiary

If the beneficiary is paid their entitlement inside of two years of being made at the moment entitled to the volume and the beneficiary spends the cash on themselves, you’ll be able to be rather sure that the ATO is not going to attempt to practice s100A. 

The 2-year thought derives from the PCG. It’s not an idea discovered within the legislation. I believe that we might now talk of the “two-year rule” that has been created by means of the ATO on this PCG. Widely, if a beneficiary is paid their entitlement inside of two years of being made at the moment entitled, it could appear that the ATO, in maximum eventualities, is not going to practice s100A. 

This isn’t to mention a trustee can not have an unpaid provide entitlement that endures for greater than two years, however the PCG calls for different prerequisites to be met if that’s the case, which I can now not speak about right here.

I additionally say that the beneficiary will have to spend the entitlement on themselves. Extra in particular, the beneficiary will have to now not reward their entitlement to any person. If the beneficiary does reward their entitlement, in entire or partially, and they don’t meet the slim necessities of inexperienced zone situation 1, the association will probably be excluded from the golf green zone. So, to make certain, the beneficiary must now not reward their entitlement if the trustee desires to be confident of no s100A brought about evaluate. (How the trustee can keep watch over this and even learn about what the beneficiary has finished with their entitlement is an intriguing factor, to position it mildly).

  1. Cross inexperienced

The second one technique to prevent the ATO attacking a agree with association (on its face) below s100A is to stay preparations inside the inexperienced zone eventualities as mentioned within the ATO paperwork. Principally, that is the “swim between the flags” means.

This calls for accountants and tax advisers to be very aware of the golf green zone eventualities and examples within the ATO paperwork. It additionally method being very aware of what can exclude preparations from the golf green zone as described in paragraph 32 of the PCG.

I make the prediction that accountants and tax advisers will probably be shocked at how incessantly the agree with preparations in their shoppers can’t be introduced inside the inexperienced zone. That is in particular so when regard is needed to: [1] the moderately slim eventualities that represent the golf green zone and [2] when the ones preparations are then excluded from the golf green zone below paragraph 32 of the PCG.

Accountants and tax advisers must keep in mind that even though preparations are inside the inexperienced zone, the ATO isn’t thereby pronouncing s100A can not practice. The entire ATO is pronouncing is that it is going to now not dedicate compliance assets to investigating the preparations. If the preparations arise all through any other form of ATO investigation, It’s not that i am positive whether or not the ATO will nonetheless believe the conceivable software of s100A.

  1. Don’t have a “compensation settlement”

This system of fending off s100A has had little airplay, but if it may be completed, it supplies the surest means of fending off the operation of s100A. It is because a situation this is vital for the appliance of the supply is not going to exist.

We’ve got witnessed during the last yr the ATO getting the accounting and tax advisory occupation to concentrate on what has came about with agree with distributions. This has been finished at the unspoken assumption that whether or not a refund settlement exists will also be made up our minds by means of what has in reality been finished with the distributions to which beneficiaries were made at the moment entitled. Whilst this concept can’t be pushed aside, there’s a elementary technical factor to which this concept can pay scant regard.

It will have to be saved obviously in thoughts that s100A (1)(b) and (2)(b) require the prevailing entitlement of the beneficiary to rise up out of a refund settlement. However, the beneficiary’s entitlement will have to rise up by means of reason why of any act, transaction or circumstance that came about in reference to, or because of, a refund settlement.

Put it appears that evidently, if there’s no compensation settlement, s100A can haven’t any software. Working out this elementary thought is the royal street to having no s100A issues. Individually, there was scant dialogue of this factor for the reason that ATO’s way has centered everybody’s consideration on what is going on with the beneficiary’s entitlement, at the assumption {that a} compensation settlement already exists. This isn’t a technically proper way. One will have to first make a decision whether or not a refund settlement exists after which read about what has came about with the beneficiary’s entitlement to decide whether or not there’s a risk of s100A making use of.

Now not having a refund settlement is conceivable to succeed in, however it’s within the fingers of the trustee of the agree with and the trustee’s advisers. 

An settlement (even though very extensively outlined) nonetheless calls for the assembly of, a minimum of, two “minds” to conform to do one thing. If on the time the trustee makes its resolution in regards to the distribution of the source of revenue of the agree with for a monetary yr there was no such assembly of 2 minds, there can’t be a refund settlement — it doesn’t matter what happens to the beneficiary’s entitlement.

Bear in mind, the beneficiary’s entitlement will have to rise up out of a refund settlement. This implies the settlement will have to have came about previous to the agree with distribution minute for the monetary yr being signed. With some effort, this will also be completed. I gained’t say that it is going to all the time be simple, however it’s achievable — and if you’ll be able to do so, you don’t must be involved concerning the PCG, inexperienced zones, pink zones or another zone or thought. S100A can not practice.

For many of ultimate yr I used to be encouraging accounting companies to advise their trustee shoppers to undertake a proper set of paperwork to lend a hand with the view that no compensation settlement were entered into.

First, it will have to be the case that previous to the agree with minute being signed, the trustee has now not entered into any settlement (whether or not of prison standing or now not) with any person as to how the agree with’s source of revenue is to be dispensed. This contains no discussions with the circle of relatives about what’s to occur with the agree with’s source of revenue. No discussions over Christmas lunch. No discussions over the circle of relatives fish fry. No discussions! 

On this approach, the trustee can testify in court docket, if want be, that no settlement was once entered into previous to the agree with distribution resolution being made and the agree with distribution minute being signed.

Subsequent, as soon as the volume of each and every beneficiary’s entitlement is made up our minds (incessantly a while after yr finish) the trustee writes to each and every beneficiary and units out the main points of the distribution that was once made to them on (typically) the prior 30 June. The trustee, on this letter, requests the beneficiary to advise the trustee what the beneficiary would love the trustee to do with the beneficiary’s entitlement. The beneficiary must be inspired to take arm’s duration recommendation — together with from the trustee — about this resolution.

The beneficiary then writes again to the trustee and informs the trustee of the beneficiary’s needs, no matter they’re. If that is all finished actually at arm’s duration and with correct governance procedures, there must be a robust argument that s100A can not practice. It is because it’s demonstrably the case that there was once no compensation settlement out of which the beneficiaries’ entitlements arose.

It’s my expectation that attorneys will create units of pro-forma paperwork to lend a hand trustees and their advisers to steer clear of an s100A drawback. Those paperwork would possibly not precisely replicate what I’ve stated above, however I do be expecting they’re going to kind of practice what I’ve stated.

I must make it transparent that It’s not that i am a legal professional, and those are my ideas as somebody who has a excellent working out of s100A. The paperwork that I recommend must be drafted by means of a legal professional. Accountants will have to be on guard in opposition to coming into into paintings that they’re averted by means of legislation from endeavor.

Ultimate remark

It might be a good suggestion for Karen Payne, the Inspector Common of Taxation and Taxation Ombudsman, to make a remark in her diary to research how the ATO is in reality making use of the ATO paperwork in a few years. She must take submissions from all events and analyse this intimately.

This could permit the Australian neighborhood to decide whether or not our fears concerning the succeed in of s100A are justified or whether or not the statements by means of senior ATO officials that it is going to handiest be implemented in a restricted collection of cases are proper.

John Jeffreys is director of John Jeffreys Tax Pty Ltd.


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