Section 100A Reimbursement Agreements: The ATO finalises its views'for now

• Published date: 12 April 2023
• Subject Matter: Corporate/Commercial Law, Tax, Trusts
• Law Firm: McCullough Robertson
• Author: Mr David Hughes and Adria Askin
• topic: Trust Law,Tax Law

The recent explosion of interest in the taxation of discretionary trust distributions would suggest that there has been a radical amendment of the Australian law. Nothing could be further from the truth.

What has occurred, particularly over the last eighteen months, is the culmination of multi-year campaign by the Australian Tax Office (ATO) to re-purpose a trust tax avoidance provision - section 100A of the Income Tax Assessment Act 1936 (ITAA36) - that was enacted in 1979, just prior to the introduction of the now familiar general anti-avoidance rules in Part IVA ITAA36.

Unlike Part IVA, section 100A is specifically constrained from acting where something was done in the course of an 'ordinary family or commercial dealing'. This phrase derives from a famous judgment of Lord Denning in the Judicial Committee of the Privy Council on the operation of section 260, the predecessor to Part IVA.¹

It is the meaning of this phrase (ordinary family or commercial dealing) which has been the subject of so much recent attention from the ATO, including:

• Taxation Ruling TR 2022/4;
• Practical Compliance Guideline PCG 2022/2; and
• Taxpayers Alert TA 2022/1.

These three ATO products were released in draft on 23 February 2022 and finalised on 8 December 2022.²

In addition, the recent judgment of his Honour Justice Logan in the Federal Court of Australia in Guardian closely examined the history, context and language of the ordinary family or commercial dealing exclusion, and concluded that it does not operate as argued by the Commissioner of Taxation.³ The Commissioner appealed that decision to the Full Court of the Federal Court,⁴ which on 24 January 2023 upheld the decision at first instance on section 100A.⁵

To paraphrase another judgment of Lord Denning, when he was Master of the Rolls, the difference between an ordinary family or commercial dealing and tax avoidance is:

'. like the border between day and night, or between red and orange. Everyone can tell the difference except in the marginal cases; and then everyone is in doubt.'⁶

Our summary of the judgment of his Honour Justice Logan in Guardian, and the introduction of the draft Tax Rulings and PCG, and the final ATO products can be found here - Guardian, draft products TR 2022/D1 and PCG 2022/D1 and TA 2022/1, final TR 2022/4 and PCG 2022/2.

Ordinary family or commercial dealing - artificial or not?

In 2010, in a published speech on Part IVA,⁷ Mr Peter Walmsley, the Deputy Chief Tax Counsel of the ATO said:

'The...