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May 31, 2022

Section 100A update

Section 100A Update

The ATO has released some further comments in relation to the controversial draft guidance on section 100A. In seeking to provide reassurance to tax agents and taxpayers, the ATO has stated that:

“The vast majority of small businesses operating through a trust are not operating in a way that will attract section 100A. A distribution to an adult child who has a low marginal tax rate will not attract section 100A where they simply receive or enjoy the benefit of their distribution”.

Further, the ATO has indicated that it is not concerned when profits from the family business are appointed to members of the family who work in the management of the business, with the family member choosing to reinvest the profits back in the business.
The ATO reiterates that section 100A can only apply when income is appointed to a beneficiary, but this relates to an agreement under which a payment or other benefit relating to this income will be provided to another individual or entity (who will typically be subject to a higher tax rate than the beneficiary) and where a purpose of that agreement is that someone will pay less income tax.
Addressing concerns about retrospective application of the draft guidance, the ATO confirms that it will not be pursuing taxpayers who entered into arrangements between 1 July 2014 and 30 June 2022 and who concluded in good faith that section 100A would not apply to them based on the ATO’s earlier 2014 guidance. Having said that, the earlier guidance is similar in some respects to the ATO’s more recent guidance so it is important to carefully consider whether the earlier guidance would provide any real protection to specific client scenarios.

Despite the ATO’s comments, practitioners will still need to ensure that clients are aware of the risks associated with section 100A and the scenarios that are likely to attract more attention from the ATO.

Related information: Update on draft guidance on trust reimbursement agreements and unpaid present entitlements

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