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Trusts and reimbursement agreements — ATO guide released

The ATO has released a guide on section 100A of the ITAA 1936 concerning "reimbursement agreements". The ATO says that for the purpose of section 100A, a "reimbursement agreement" is an agreement under which all or part of the share of income of a trust to which a beneficiary is presently entitled is used to provide a benefit to another person — that is, not that beneficiary.

Terry Hayes, Thomson Reuters

The ATO says the guide has been provided at the request of practitioners, and developed in conjunction with them. It is designed to plug a gap in the ATO's information products. The guide also contains FAQs, for example, existence of trust at time of agreement; beneficiary party to reimbursement agreement; amendments periods.

The ATO says a reimbursement agreement generally involves making someone presently entitled to distributable income of a trust in circumstances where both:

  • someone else actually benefits from that income, and
  • a purpose of a party to the agreement is obtaining a tax benefit.

However, an agreement entered into in the course of an ordinary family or commercial dealing is excluded from the definition of a reimbursement agreement.

To be a reimbursement agreement, at least one of the parties to the agreement must have entered into it for the purpose of, or for purposes that included, reducing a person's liability to income tax.

In the ATO view, an "agreement" can comprise a series of steps or transactions. An agreement need not be enforceable or even intended to be enforceable. However, agreements entered into in the course of an ordinary family or commercial dealing are excluded.

There is no definition of ordinary family or commercial dealing. Whether a particular agreement comes within that exclusion will depend on all of the relevant facts. The ATO says the courts have made it clear that the exclusion must be considered having regard to all of the steps comprising the reimbursement agreement — not merely components of it.

An agreement will not necessarily be considered to have been entered into in the course of an ordinary family dealing merely because all of the entities involved are members of the same "family group".

Concerning loans, the ATO says where a trustee lends money on terms that require repayments of principal and interest, this would go towards indicating an ordinary commercial dealing. However, the ATO warns that loans made in the course of ordinary family dealings are often not as commercial loans, for example, where money is lent by a trustee to a family member on terms that require repayments of principal only (and such repayments are intended to be made), this could still indicate an ordinary family dealing when considered together with all the other relevant facts.

Interaction of section 100A with Division 7A

The ATO says there is potential for both section 100A and Division 7A to apply in certain circumstances. Where a loan from a beneficiary to a trust is placed on Division 7A complying terms (or an unpaid entitlement is held by the trust on terms described in PS LA 2010/4), and the funds retained in the trust are used as working capital, the Commissioner says he would consider this arrangement, without more, to be in the course of an ordinary commercial dealing.

The Commissioner says he has not sought to apply Division 7A to mere unpaid entitlements created before 16 December 2009. He says he will also not devote compliance resources to the application of section 100A to these entitlements where the relevant funds are retained as working capital of the trust.

Where Division 7A has application in respect of an unpaid entitlement created on or after 16 December 2009 and the retained funds are used as working capital of the trust, the Commissioner says he will not generally seek to devote compliance resources to considering the question of whether or not section 100A would also apply to that arrangement.

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:

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