Section 100A Ruling finalised: Some key developments you need to know

Tax Ruling 2022/4 (Final Ruling) has been released following a period of consultation with industry on its draft version (Draft Ruling). It also incorporates developments in the case law through decisions that were handed down since the Draft Ruling was published. The Final Ruling sets out how the ATO will administer section 100A of the Income Tax Assessment Act 1936 (Act) on reimbursement agreements.

In substance the Final Ruling is consistent with its draft version, which we have summarised in an earlier article. However, the Final Ruling offers new examples and detail on the Commissioner’s view of the statutory elements making up section 100A, including cultural factors that weigh towards and against the ordinary dealing exception and consequences for the beneficiary across other tax provisions.

Tax and Revenue Team, Maddocks

What is the Final Ruling about?

The ATO’s Final Ruling provides guidance on the application of section 100A including the ‘ordinary dealing’ exception.

Section 100A can be applied by the Commissioner of Taxation (Commissioner) if the following four basic requirements are satisfied:

  1. a beneficiary has a present entitlement to trust income that has arisen out of, as a result of or in connection with a ‘reimbursement agreement’;
  2. the agreement must provide 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 must be that a person would be liable to pay less income tax for a year of income; and
  4. the agreement must not be one that has been 'entered into in the course of ordinary family or commercial dealing'.

Such agreements were historically known as ‘trust stripping’ arrangements however the Commissioner’s current approach to 100A arguably broadens its application beyond ‘trust stripping’.

Where section 100A applies, the beneficiary’s present entitlement to the income of the trust estate is ’switched off’ such that they are deemed not to be presently entitled to that income which results in the trustee being taxed on the taxable net income of the trust relating to that trust income at the top marginal rate.

What did the recent Guardian decision say about 100A?

In Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 (Guardian), which is referred to in the Final Ruling, the Federal Court found that the existence of a relevant ‘reimbursement agreement’ could not be established on the facts. The Commissioner contended that the agreement consisted of the nomination and appointment of income to a corporate beneficiary, return of franked dividends to the trustee and distribution to a non-resident individual had the effect of capping tax income at a corporate rate. However, the Court found that the requisite ‘agreement, arrangement or understanding’ that each of those steps would be completed did not exist at the time the unpaid present entitlement (UPE) of the corporate beneficiary arose.

The Commissioner appealed the decision to the Full Federal Court which upheld reasoning of the first instance judge and dismissed the appeal with respect to the 100A issue. In doing so, the Full Court held that a mere expectation that an arrangement concerning the payment of a dividend could be entered into after creating the UPE is not sufficient to establish that a reimbursement agreement had been created at the time of the UPE.

What does the Final Ruling add about the requirements that make a ‘reimbursement agreement’?

As outlined in our earlier article, and as referred to above, the legislation requires 3 positive elements for a reimbursement agreement to be formed: connection between an entitlement and the arrangement, benefit to another and a tax reduction purpose.

The Final Ruling clarifies that an entitlement will be connected with an agreement where it arises either before or simultaneously with the agreement.

What about the tax reduction purpose requirement?

The Final Ruling provides that purpose can be demonstrated by the parties’ own evidence as well as the objective facts, circumstances and their financial consequences.

Reasoning from BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 (BBlood) suggests that the purpose inquiry is arguably broader than the ordinary meaning of the words of the legislation suggest, with the broad reasoning in BBlood summarised in the Final Ruling at paras [83] to [89]. For example, the BBlood decision includes comments by the judge that there is no requirement to identify precisely what would have occurred in the alternative but rather what is required is that there is only a purpose that a liability for tax be wholly or partially avoided. On the facts of that case, the judge ultimately held the taxpayer did not discharge its onus to establish there was no tax reduction purpose.

Notably, the BBlood case in on appeal and it will be of significant interest to advisers to see if the Full Federal Court upholds the trial judge’s reasoning in relation to the purpose requirement.

What does the Final Ruling add about the ordinary dealing exception?

The Final Ruling emphasises the paramountcy of the ‘core test’ for ordinary dealing, which requires the dealing and the steps that comprise it to have the quality of achieving family and commercial objectives.

Supplementing these tests are factors that may weigh against a dealing being ‘ordinary’. While the Draft Ruling focused on whether the dealing has artificial or contrived features, the Final Ruling repeats the sentiment from Guardian that elements of artificiality point against an agreement being an ordinary family or commercial dealing but is not necessarily decisive. It adds two other features that will weigh against the exception. The first feature is that the arrangement suffers from over-complexity that lacks justification to achieve the alleged family or commercial objects. The second factor is where conduct of the arrangement is inconsistent with the legal and economic consequences of the beneficiary’s entitlement, for example where funds are lent to a third party with no intention of being repaid.

The ATO also reminds readers that tax effectiveness compared to alternatives is a common and permissible feature of commercial and family dealings.

What does the Final Ruling add about cultural factors?

While cultural factors are not mentioned at all in the Draft Ruling, the Final Ruling is descriptive about the influence cultural factors can have towards finding family objectives in a dealing. The Final Ruling defines the concept as follows:

"cultural factors refer to the distinct and observable ideas, customs or practices of people or certain groups within a society. The existence of a cultural factor which is not widely understood in the broader community can be demonstrated by evidence."

Three examples of cultural factors that tie into family objectives are referred to that could assist in informing the question whether a dealing is to achieve family or commercial objectives:

  1. where grandparents gift money to younger members of the family during festive seasons;
  2. where children meet the needs of parents and older relatives who are no longer working; and
  3. where a beneficiary from a trust will not call for their entitlement for religious reasons (unless there is no explanation for why a resolution to distribute to this beneficiary was made in the first place).

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Tax and Structuring Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

Order Cleardocs products

Discretionary Trust Distribution Minute

Discretionary Trusts - Deed of Variation (Excluding Foreign Persons)

Change of Trustee Unit Trust


Lawyer in Profile

Paul Ellis
Paul Ellis
Special Counsel
+61 3 9258 3524

Qualifications: LLB, Deakin University, BA (Political Science), Monash University

Paul is a Special Counsel in Maddocks Government and Not-for-Profit Commercial team. He specialises in:

  • the establishment, governance, operations, regulation and administration of charities and other not-for-profit entities,
  • in commercial arrangements for the procurement or supply of goods and services, including technology services, and
  • in compliance and enforcement activities undertaken by government agencies.

Paul is Maddocks' main authority in relation to the Personal Property Securities Act 2009.

He has an in-depth understanding of the government sector, as his experience prior to Maddocks includes 13 years with the Victorian Department of Justice.

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