An early Christmas present for the taxpayer and some welcome clarity
In what many would consider to be an early Christmas present and an excellent start to the new year for taxpayers, the Federal Court found in favour of the taxpayer on the application of the anti-avoidance provisions for trusts in s100A of the Tax Act (Tax Act). Section 100A is an area of tax law which has seen limited action and scrutiny from the ATO, with the last known case being in 2008.
On 21 December 2021, the decision of AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation was handed down by the Federal Court, which considered the application of s100A of the Tax Act as well as the general application of the anti-avoidance provisions in Part IVA of the Tax Act. The Federal Court found that the taxpayer did not enter arrangements that would fall foul of these two provisions.
Broadly, s100A of the Tax Act is an anti-avoidance provision that applies to trusts and deals with reimbursement agreements. It generally applies to arrangements where a trustee makes a beneficiary presently entitled to income, but another person benefits from that present entitlement. For the provisions to apply, there needs to be a ‘reimbursement agreement’, where someone or entity pays less or no tax due to the ‘reimbursement agreement’. An exemption applies to the provisions where the arrangement was entered into “in the course of ordinary family or commercial dealing” and is therefore not considered to be a ‘reimbursement arrangement’.
Part IVA of the Tax Act is an extremely broad and powerful anti-avoidance provision available to the ATO. Due to its breadth and reach, it is beyond the scope of this article and will be addressed and considered in another article in the future. Nevertheless, broadly speaking Part IVA of the Tax Act is a general provision against tax avoidance arrangements that, when viewed objectively, are entered into for the sole or dominant purpose of enabling a taxpayer to obtain a tax benefit.
The facts in AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation were that the trust had made various distributions to a corporate beneficiary, whereby the corporate beneficiary then paid dividends back to the trust. These dividends were then held on trust for an individual common across these entities. A key factor in the decision was the numerous supporting documents in relation to the payment of distributions and dividends between the trust and the corporate beneficiary as well as the fact that the common individual was preparing and planning for retirement.
The Commissioner contended that the arrangement was a reimbursement arrangement under s100A of the Tax Act since the trustee and individual beneficiary had reached an agreement that the individual beneficiary would benefit from the distribution made to the corporate beneficiary. The taxpayer argued that the arrangement was exempt from s100A of the Tax Act since the arrangement was entered into for the purposes of asset protection and risk minimisation.
The Federal Court decided in favour of the taxpayer and found that s100A of the Tax Act did not apply to the arrangement for the following reasons:
- Each of the steps that formed part of the overall arrangement was separate and not part of the same arrangement, as such the arrangement was not a “reimbursement arrangement”.
- The use of a corporate beneficiary and the payment of a distribution from the trust to the corporate beneficiary was separate and unrelated to the decision of the corporate beneficiary to pay dividends to the trust.
- The decisions of the taxpayer were not driven by a desire to benefit from a tax consideration. Furthermore, the considerations of the taxpayer did not include advanced tax planning.
- Where the main purpose of the arrangement is a desire for risk minimisation and the accumulation of wealth, that arrangement may be part of ordinary family or commercial dealings.
- The concept of the “ordinary family and commercial dealings” exclusion refers to a dealing that contains no element of being artificially created and is considered against the definition of what is “extraordinary”.
- The use of a corporate beneficiary does not necessarily mean that there is an element of tax avoidance. Furthermore, it does not necessarily mean that the use of a corporate beneficiary would fall outside of the ordinary family or commercial dealings exemption contained in s100A of the Tax Act.
- Part IVA of the Tax Act did not apply to the arrangement as no one (including the common individual, corporate beneficiary or the trust) obtained a tax benefit from the arrangements and that the arrangements were not entered into for the dominant purpose of obtaining a tax benefit.
The decision is welcomed by many advisors and taxpayers, but it should be approached with caution for the following reasons:
- The voluminous supporting documentation that was required to be provided in support of the taxpayer’s arguments in support of the application of the ordinary family or commercial dealings exemption.
- The use of the “in the ordinary family or commercial dealings exemption” is obscure and its application to any taxpayer’s circumstances should be considered carefully and in great detail.
- The ATO will most likely appeal this decision due to there being limited case law around the application of s100A of the Tax Act.
- The ATO has announced that it will be releasing additional guidance around s100A in February 2022 (which may be delayed if the ATO appeals the decision).
Clients who have trusts, regularly deal with trust distributions, planning for retirement or looking at using corporate beneficiaries for asset protection and risk minimisation purposes should speak to your advisor in Wisewould Mahony’s Business & Commercial Services area.
 Raftland v FCT  HCA 21