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Practitioners have been urged to tread carefully when advising on reimbursement agreements in trusts, with the ATO taking an open-ended stance on section 100A that could see advisers facing legal backlash from clients.
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Trust distributions in ATO’s sights, warns lawyer
28 May 2018
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Speaking at the Tax Institute’s NSW annual tax forum, Brown Wright Stein Lawyers partner, Andrew Noolan said the ATO’s release of the 2014 factsheet regarding the application of section 100A of ITAA1936 concerning reimbursement agreements has increased visibility of the provision in domestic arrangements.
According to the ATO, section 100A will not apply to an agreement that has been entered into in the course of an ordinary family or commercial dealing; or if the entitled beneficiary is under a legal disability, which is an out that Mr Noolan believes may trip practitioners up.
Using an example of a family discretionary trust distributing to adult children, giving “mum and dad” the benefit of the distribution, Mr Noolan said that just because the arrangement involves family members does not mean the tax office would view it as an ordinary family dealing under section 100A.
“You're not going to win the argument that every other bugger does it therefore it is ok,” said Mr Noolan.
“What is really important for practitioners is to recognise that when you are advising clients, it's all about risk sharing.
“If you've told a client to do something, then you've taken on the risk of advising clients and if there are risks in doing it that you do not make the client aware of, then you're responsible for those risks,” he added.
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“So if you tell the client to distribute to the adult children, you'll save yourself tax, that's cool unless they don't save tax because of 100A, then your failure to tell them about 100A which could have changed their view on whether they would have distributed to their children is the negligence on which you're going to get sued.”
Mr Noolan suggests managing clients by being upfront with them on the ATO’s focus on the section 100A provision and setting a threshold for distributions.
“If [a client] is distributing $108,000 to each of the three children to reduce the tax rate for the family then that's the time you've got to push some of the risk on to the client,” said Mr Noolan.
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