Commissioner changes guidance: how amendments to Taxation Ruling 2022/4 impact the role of tax planners and financial advisors with regard to reimbursement agreements

Earlier this year, the ATO finalised Taxation Ruling 2022/4 despite two key cases remaining before the Full Federal Court. Whilst the Commissioner maintains that these decisions have not substantially impacted his views on section 100A, in an addendum adopted last month, the ATO made several important changes to the Ruling. In particular, the addendum highlights the role of advisors in transactions involving trust distributions and the circumstances in which advisors themselves can be found to be a party to a reimbursement agreement. Other amendments clarify when and whether a trust beneficiary needs to be party to such an agreement in order for the provision to apply. 

The addendum is particularly relevant to tax planners and financial advisors who participate in tax planning and structuring for clients utilising discretionary trusts. Notably, the ruling states that a person can be made party to an agreement without knowing its terms where another person is authorised to act on their behalf, or where they have agreed to follow the decisions of another person (such as an advisor) in relation to the management of certain affairs. 
This article will provide an overview of the changes to the Commissioner’s guidance, with a focus on the amendments which directly impact the role of advisors to transactions. 

What is a reimbursement agreement and how does Section 100A apply?

Section 100A is an anti-avoidance measure which aims to cancel out any tax benefit associated with arrangements known as ‘reimbursement agreements’. A reimbursement agreement may arise where someone other than a presently entitled beneficiary receives a payment or benefit in connection with the arrangement and at least one party enters into the agreement for purposes that include a reduction in tax.  If this provision sounds broad, that’s because it is!

In a previous ClearLaw article, we provided a detailed summary of what constitutes a reimbursement agreement under section 100A. That summary identified the legislative elements required for a reimbursement agreement to be formed, including that: 

1. a beneficiary’s present entitlement to trust income arose out of, as a result of, or in connection with an agreement, arrangement or understanding;
2.  the agreement provided for the payment of money or transfer of property to, or provision of services or other benefits for, a person other than that beneficiary;
3. a purpose of one or more of the parties to the agreement included that a person would be liable to pay less income tax for a year of income; and
4. the agreement was not 'entered into in the course of ordinary family or commercial dealing'.

In circumstances where the above elements apply, the presently entitled beneficiary in question is cancelled and the trust’s income falls to be assessed in the hands of the trustee instead. Tax and financial planners will readily understand that this cancelation results in the imposition of punitive tax rates imposed on the trust income in the hands of the trustee.

How have the Courts affected the Commissioner’s view?

The above legislative elements are clearly open-ended and subject to a variety of possible interpretations.  To address some of this potential ambiguity, and stamp his authority on a favourable interpretation, the Commissioner finalised Taxation Ruling 2022/4 (Ruling) and accompanying guidelines on what the ATO’s compliance approach will be in Practical Compliance Guideline PCG 2022/D1. The Commissioner has now updated the Ruling in response to the judgements handed down in B&F Investments Pty Ltd ATF the Iluka Park Trust v Commissioner of Taxation [1] (Bblood) and Guardian AIT Pty Ltd ATF Australian Investment Trust  [2] (Guardian). 

The addendum amends the Ruling in important ways with respect to the role of an advisor to a transaction which may be considered a reimbursement agreement. In particular, the Ruling has been amended so that:

• in respect of the requirement for there to be an ‘agreement, arrangement or understanding’, the Ruling states that there must be 2 or more parties including (where relevant) through their authorised representatives;
• parties can include advisers who formulate the documentation and implement the agreement with the knowledge and assent of one or more parties to the transactions;
• the purpose of an adviser can be relevant to determining whether a tax reduction purpose exists. Where the adviser is a party to the agreement, the purpose of the adviser will be directly relevant; 
• a person can be made a party to an agreement without knowing its terms where another person is authorised to act on their behalf, or where they have agreed to follow the decisions of another person in relation to the management of affairs.
• even where an adviser is not a party to the agreement or understanding, their purpose may, in certain cases, be imputed to another party to the agreement or understanding. This would occur where they are authorised to act for that party. 

These amendments, which derive from the Court’s statements in Bblood and Guardian, should pique the interest of any advisor who advises on trust distributions or tax planning.  

What is an ‘ordinary’ family or commercial dealing?

The addendum also amended paragraphs of the Ruling concerning whether an agreement is entered into in the course of an ‘ordinary, family or commercial dealing,’ as part of the core test involving an inquiry into the objectives of an ‘arrangement.’ The Ruling suggests that dealings involving elements of contrivance or artificiality are factors pointing against an agreement being entered into for one of the three aforementioned categories, with the addendum adding that an arrangement which is overly complex and involves steps achieving no commercial purpose will require close examination. 

The addendum also draws on passages from BBlood to suggest arrangements which are overly complex and involving more than is needed to achieve the relevant objective “might more readily be seen as not…‘ordinary’.” 

What is the effect of the addendum on advisors?

These changes can be seen as an expansion of the Commissioner’s previous ruling with potential to capture a broader range of conduct by focusing on the role played by advisors in trust distribution strategies. Given the serious consequences of section 100A applying to a transaction, advisors should pay close attention to how their actions are likely to be construed by the Commissioner.

In light of the amendments to the Ruling set out above, advisers need to consider how their intention could be imputed to a client, or whether clients might be made party to an arrangement without knowing its terms, in circumstances where they have authorised an advisor to act on their behalf. 

Advisers should therefore consider whether clients comprehend and understand the purposes and tax outcomes of the transactions that they enter into. The addendum reinforces the need for clients to come to an independent decision, to ensure that an adviser’s purpose cannot be imputed to them. 

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

• The New Draft Section 100A Ruling Is Here! What Do Trustees And Advisors Need To Know?  
• Section 100A Ruling Finalised: Some Key Developments You Need to Know
• Crackdown! ATO ramps up pursuit of unpaid taxes

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[1] B&F Investments Pty Ltd ATF the Iluka Park Trust v Commissioner of Taxation [2023] FCAFC 89.
[2] Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3.