The Australian Tax Office (ATO) has finalised its guidance on section 100A, trust reimbursement agreements, with the release of Taxation Ruling TR 2022/4 on 8 December 2022. This guidance applies to the trustees of discretionary trusts (such as a family trust).

Section 100A is an anti-tax avoidance rule that can apply where a beneficiary’s trust entitlement (trust distribution) arose from a reimbursement agreement.

A reimbursement agreement involves an arrangement under which a beneficiary is made presently entitled to trust income and:

• someone other than that beneficiary receives a benefit in connection with the arrangement, and;
• at least one of the parties enters into the agreement for a purpose of reducing tax (either implied, verbal or written).

Two common examples of these types of arrangements include:

• a distribution to an adult child or parent who has a lower marginal tax rate, without receiving any of the corresponding funds
• a distribution to a private company that pays tax on the amount and then returns the funds by way of a dividend.

The ATO have developed colour coded scenarios to determine the risk of an arrangement. Green scenarios will be low risk (and generally safe from ATO scrutiny) and red will mean the arrangement is likely to be queried.

High risk arrangements may result in the trustee paying tax on the distribution at the highest marginal tax rate.

There will be more detailed advice to come, if you wish to discuss your arrangement, please contact us on (03) 5443 0344 or email afs@afsbendigo.com.au