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If you own a trust, the latest guidelines on section 100A by the Australian Taxation Office (ATO) may affect you.

Section 100A targets tax avoidance and deals with reimbursement agreements where:

  • The person receiving a benefit is not a beneficiary
  • It appears the transaction was done only to avoid tax

In this context, a benefit can be money, assets or services, including postponing a debt.

It also doesn’t matter which parties draw up the reimbursement agreement – it could be any combination of the trustees, beneficiaries and another person.

An example of an agreement likely entered to avoid tax is when a benefit is paid to a business that has a large assessed loss and there’s no commercial reason for the transaction.

Other arrangements the ATO may investigate is where the person who benefits from the proceeds is not the person paying tax on the proceeds.

A valid reimbursement agreement is established if:

  • It involves a beneficiary receiving and using their trust entitlement
  • The agreement appears to be in the course of running a family or business trust
  • The beneficiary receiving the proceeds is younger than 18 or suffers from a legal disability

For example, an agreement is likely to be found valid if a beneficiary genuinely owes someone money and agrees to pay it from the proceeds of the trust.

You may need to prove your arrangement does not fall under section 100A by:

  • Keeping records to show the validity of the transaction, like amendments to the trust deed, trustee resolutions and any communication to the beneficiaries
  • Recording the discussions explaining the necessity of the transaction
  • Keeping records on how the beneficiary used the trust income, or how the third party used the proceeds if the beneficiary did not receive it
  • Keeping records on any loan agreements
  • Recording the meetings between you and your registered tax agent

 

Need to check if section 100A is likely to apply to your trust agreement? Get in touch to receive expert tax advice on trusts by emailing info@accountingexcellence.com.au or calling 0431 981 005.