Tax effective distributions and reimbursement agreements – will the ATO come knocking?

The lead up to 30 June is the time for trustees to consider how to distribute trust income for the year.

There is usually nothing wrong with optimising tax outcomes by ensuring distributions are tax effective.  However, having this purpose can actually risk triggering Section 100A of the tax legislation.

Triggering Section 100A can result in the trustee being taxed on the distribution at the top marginal rate of tax.  Situations where a distribution is not actually paid to, or applied for the benefit of the beneficiary, or someone other than the beneficiary benefits from the income of the trust, can imply there is a ‘reimbursement agreement’ and trigger Section 100A.

Which distributions might be caught?  Lawful distributions to low tax adult children or loss trusts, distributions of interest and franked dividends to non-resident beneficiaries, as well as perpetual or circular distributions between companies and trusts, will draw the attention of the ATO.  If these distribution resolutions are not considered carefully, and arrangements documented appropriately, they could imply a reimbursement agreement and trigger Section 100A.

So how do you reduce your risk of scrutiny from the ATO?  Taking some simple steps at the time of making the resolutions can help if the ATO does come knocking.  ‘Ordinary family or commercial dealings’ will avoid triggering Section 100A.  Unfortunately, this term is not defined anywhere in the legislation.

What should you do?  Advisers should apply a risk assessment checklist to ensure Section 100A has been sufficiently considered and assist their clients to appropriately document the arrangements.  These steps will ensure the tax effective distribution resolutions on 30 June do not risk attracting unwanted attention from the ATO.

Author – David Marschke