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Fundamental problems with the ATO’s approach to trusts mean its recent guide will be useless for most accountants, says one specialist.
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‘Confusion’ reigns over 100A as year counts down
24 June 2022
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Most accountants are confused about how to handle trust distributions with only days left for decisions and the ATO’s 100A tax time guide released this week has done nothing to clear that up, says specialist tax adviser John Jeffreys.
Mr Jeffreys said there were fundamental problems with the ATO’s interpretation of 100A in its February draft ruling because it “significantly narrowed” what is meant by “an ordinary family or commercial dealing” and its guidance was based on a circular reading on when 100A applies.
But the most important thing was the clock ticking on trust distribution decisions that had to be made in the next few days.
“In seven days trustees must make their decisions as to how they're going to make the distribution to beneficiaries," Mr Jeffreys said.
“If we were to do a poll of accountants around Australia and say, ‘Are you now clear about what you need to do in respect of 100A?’
“I absolutely know what that poll would say: People are just confused."
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He said the tax time 100A guide published this week was a good encapsulation of the ATO’s views and provided a few more examples, but failed to help accountants in public practice who have decisions to make and clients to advise before 30 June.
“It doesn’t take us much further. I was hoping that it might be even more directive in relation to what the tax office wants. But 95 per cent of it is a restatement of what we already know.”
The positive reception to the guide was the profession trying to work with the ATO and refrain from being too critical, he said.
But there was a fundamental problem.
“Section 100 is drafted on the basis that a presently entitled beneficiary is not receiving an entitlement. So to say that 100A doesn't apply when someone does receive their entitlement, in my view, is like saying water is wet.
“The issue is, if there is somebody other than the presently entitled beneficiary getting some of the money – and that is a very, very common situation in family situations – the question is, ‘What is an ordinary family or commercial dealing?’ That is what we really want to know.”
He echoed widespread views that the ATO had gone beyond its remit and was “narrowing considerably” what was meant by ordinary family dealing.
“Now, if it was the government's policy that presently entitled beneficiaries should receive all of their entitlement – it's paid to them and they have full, dispositive power of it – if that was the case, it would be easy for the government to draft a piece of legislation that says that.”
“This is where we are concerned that the tax office is actually trying to change the policy of the law by saying things like, ‘Well, just distribute it all to the beneficiary, and you have no problem.’
“But that doesn't address at all the problem. The problem with section 100 is given that someone other than the presently entitled beneficiary is benefiting from the money – and that's quite an acceptable thing – but given that being the case, is that dealing an ordinary family or commercial dealing? That's what we really want to know.”
“Just to say, ‘Why don't you just distribute it all to the beneficiaries and make sure that they get it?’ That doesn't help. Because in many, many – I'm talking thousands upon thousands – of trust situations, that is not what occurs.
“And the reason it doesn't occur is because in the past we have thought that was an ordinary family dealing.
“That is families, they give money to each other and they lend money to each other not at interest and they say, ‘Pay me back when you can’ and all that sort of thing – that's what families do.
“When the law was introduced we thought, ‘Okay, families do what they do. And so if we do that with a trust, and they give money and they lend it interest-free and all that sort of thing, that's just an ordinary family dealing.’ "
He said the tax office draft ruling “significantly reduced what we thought were ordinary family dealings”.
“That is the consternation and that's the problem that has to be solved. And this document on the 20 June, with the others, doesn't solve that problem.”
He said a common example might be a business that was being run by a trust that had been distributing amounts for years to the parents and the children. When the children became adults, if they had a small income the approach was to distribute the money to achieve the lowest tax outcome.
“Because the family just thinks, ‘Oh, this is our money. So you know, we'll just keep it in the trust. And we'll draw it out as we need it.”
He said for years the ATO did nothing about this until a 2014 100A factsheet and the February draft ruling and PCG.
“The tax office has said that they will only permit that situation where the unpaid present entitlement is due to the controllers of the trust, which in my example is likely to be mum and dad, or people who are involved in the management of the business, which maybe is also mum and dad.
“But what about the two children? Now, it is often the case that the children, despite them being adult and smart, have nothing to do whatsoever with the business.
“But now the tax office is stating or very clearly implying that if you leave that position with those two adult children, the unpaid present entitlements, that's something they will apply section 100A to.
“In the past, no one would have thought twice about that.”
He said under the ruling, the children would have be actively engaged in the management of the business.
“I have quipped that I think there are a lot of children that are going to get promoted very soon.”
This sort of problem was confronting scores of accountants in the run-up to 30 June.
“The problem is you will have a client coming into the accounting firm who knows nothing about this. And the accountant says, ‘Oh, do you know that you've now got to pay out your $100,000 each to your two children? And they have to keep it and you can't have it in your business? Did you know that?’
“The client is going to explode.”
Mr Jeffreys is offering a free webinar on 100A, including practical strategies about how to handle this year’s trust decisions, today (Friday).
To access the webinar go to: johnjeffreystax.com.au/contact”
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