Why accountants should be alert to 100A settlement traps

The “compensation settlement”

For phase 100A to function in the case of a agree with distribution to a beneficiary, the prevailing entitlement of the beneficiary should stand up out of a “compensation settlement”. The prevailing entitlement of the beneficiary too can stand up through explanation why of any act, transaction or circumstance that came about in reference to, or because of, a refund settlement.

The time period “settlement” could be very broadly outlined to incorporate any settlement, association or figuring out, whether or not formal or casual, whether or not categorical or implied and whether or not or now not enforceable, or meant to be enforceable, through prison court cases.

This implies the idea that of a “compensation settlement” has an overly large succeed in. However how a long way does it succeed in when making an allowance for the position of an adviser?

The ATO’s choice

As a basic remark, I imagine that after the ATO raises an review on a trustee because of the appliance of phase 100A, it could desire that the movements and motivations of an adviser be incorporated with defining the “compensation settlement”. 

It is vitally steadily that the recommendation of an adviser is central to the making of agree with distribution choices through trustees. Accordingly, if the ATO can attach the motivations of an adviser to the motivations of a trustee, I feel this is able to steadily give a boost to the ATO’s case. 

That is specifically in the case of the tax saving situation of phase 100A. The adviser’s recommendation is steadily motivated through tax saving concerns. If this can also be attached to the trustee’s decision-making procedure, the tax saving situation of phase 100A is then established. This doesn’t imply that phase 100A will thereby practice, however it does imply one of the crucial stipulations is glad.

Goal v settlement

I imagine it necessary, in regards to the operation of phase 100A, for the glory to be obviously noticed between the aim of the settlement (and similar acts) and what if truth be told constitutes the settlement.

The aim of the settlement has bearing at the factor of the tax-saving pre-condition of phase 100A. This is, it should be concluded that a minimum of some a part of the aim of the “compensation settlement” was once to cut back the source of revenue tax legal responsibility of a few particular person or entity (whether or not or now not attached to the agree with). This objective don’t need to be the only or dominant objective. Certainly, it may be not up to an incidental objective for the situation to be glad.

However the objective (and similar acts) isn’t the settlement. The conflation of the aim with the real settlement is one thing that I feel the ATO tried within the moderately fresh BBlood Enterprises case [BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112].  (I be aware that the verdict on this case has been appealed through the taxpayer).

Some feedback within the judgement of Mr Justice Thawley in BBlood Enterprises are instructive on this regard.

Within the BBlood resolution there was once a dispute between the ATO and the taxpayer as as to whether the “initiation” of and “making plans” for the stairs within the settlement may just shape a part of the settlement. The Commissioner contended that the initiation of and making plans for the stairs within the settlement comprised an settlement.

The court docket mentioned, “I’m not able to peer how ‘initiation’, ‘making plans’ or ‘implementation’ can also be mentioned to contain an “settlement” as adverse, as an example, to these issues comprising proof from which it could be inferred that an settlement or figuring out got here into life or existed.” [paragraph 85].

Justice Thawley went on to mention at paragraph 90: “There both is or isn’t an “settlement” … If the Commissioner contends that there’s one, he must establish it. A remark that the “settlement” comprises “initiation” and “making plans” says not anything about what the contended “settlement” is. Such statements, unaccompanied through an identity of what negotiation, initiation or making plans is contended to represent part of the settlement or figuring out, and in what manner, is conducive to free considering in administering the regulation, and to an building up in value and extend for the events, and in the end to a waste of judicial assets in addressing useless argument.”

The purpose this is that the initiation and making plans phases of what took place was once instructive as to the aim of the settlement. Alternatively, it was once now not the settlement itself. The settlement happens when two “minds” input into an settlement “that gives for the cost of cash or the switch of belongings to, or the availability of products and services or different advantages for, an individual…rather then the beneficiary…”. (see additionally paragraph 11 of TR 2022/4).

The adviser and the settlement

I spotted that there was once a delicate distinction between the draft of TR 2022/4 [TR 2022/D1] and the general model when regarding the involvement of an adviser in an settlement. I’m really not certain whether or not this variation was once intentional, however I think it was once.

The overall ruling (TR 2022/4) refers to “the place the adviser is a celebration to the settlement”. This concept was once now not within the draft. The draft simply referred to the aim of the adviser being imputed to every other birthday party.

Whilst it’s technically imaginable for an adviser to be birthday party to a refund settlement, the occupation should face up to the concept that that is the norm. Advisers advise. It’s shoppers and similar events that agree. Sure, the aim in the back of the adviser’s suggestions can also be “taken on” through the buyer, however it’s the consumer (normally), or somebody attached to the buyer that if truth be told takes the motion – this is, engages within the settlement.

The stairs main as much as the settlement very steadily contain advisers. Discussions are had. Emails are exchanged. Recommendation is sought. However all of this isn’t the settlement with which phase 100A considerations itself. All of those movements are initial to the assembly of (a minimum of) two “minds” that constitutes the settlement.

A caution to advisers

As we noticed within the BBlood Enterprises case, the ATO argued that the issues achieved within the lead as much as the settlement, which incorporated the involvement of advisers, have been a part of the settlement. The Federal Courtroom rejected that submission, however I feel it is a sign of what accountants and legal professionals may be expecting from the ATO in tax audits. Advisers should be on guard in opposition to the ATO conflating the theory of objective (and similar acts), which could be very steadily initiated through advisers, and the real settlement which is, in maximum scenarios, the area of the buyer.

Skilled indemnity insurance coverage

A similar, however necessary factor is the protection {of professional} indemnity insurance coverage. Whilst an adviser engages within the provision of recommendation and the introduction of paperwork which the buyer finalises, in most cases skilled indemnity insurance coverage will quilt negligent acts through the adviser (one hopes).

Alternatively, if the adviser enters into the world of being concerned within the making of the compensation settlement itself, has the adviser entered into an act for which she or he isn’t insured? Has the adviser transform a birthday party to an anti-avoidance act versus simply advising on one thing to which the ATO has implemented phase 100A?

This is the reason I imagine advisers wish to be alert to scenarios the place it’s being argued through the ATO that an adviser has long gone past offering the aim of a transaction, to if truth be told enticing within the transaction for taxation functions.

John Jeffreys is director of John Jeffreys Tax Pty Ltd.