Private ruling: Delay in paying unpaid present entitlement - section 100A of the Income Tax Assessment Act 1936
Date of advice: 8 December 2020
Published: March 2021
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does the Trustees' delay in discharging the unpaid present entitlements constitute an 'agreement ... for the ... provision of services or other benefits' to the Trustees in their capacity as such so as to meet that element of the definition of 'reimbursement agreement' in subsection 100A(7)? | A1: No | Q2: If the answer to Question 1 is 'Yes', is the agreement, arrangement or understanding entered into in the course of 'ordinary family or commercial dealing' pursuant to subsection 100A(13)? | A2: Not Applicable.

Relevant facts and circumstances: Background facts • The Taxpayer is a discretionary trust. • The Taxpayer's affairs are managed by the two appointed trustees, being X and Y ('the Trustees'). • The Trustees are also eligible beneficiaries of the Taxpayer pursuant to the Trust Deed. • The Trustees are not under a legal disability and are not minors. • For the year ended 30 June 20XX, and immediately prior to 30 June 20XX, the Trustees made a resolution declaring two of the Taxpayer's beneficiaries ('the Child Beneficiaries') to be presently entitled to a share of the income of the trust estate. The amount to which each Child Beneficiary was made presently entitled was as follows: • Child 1 - $X • Child 2 - $X • The Trustees' resolution which gave rise to these present entitlements was made without any prior discussion or consultation with either of the Child Beneficiaries. • The Child Beneficiaries are the children of the Trustees. • The Child Beneficiaries are not minors or under a legal disability. • The present entitlement owed to each of the Child Beneficiaries was satisfied in February 20XY. On YY February 20XY, the Taxpayer paid in cash to each Child Beneficiary the full amount of the unpaid present entitlement arising in the year ended 30 June 20XX. The amounts were paid into bank accounts held solely in the name of, and under the control of, each Child Beneficiary. • Between the year ended 30 June 20XX and the time of the cash distribution to the Child Beneficiaries in February 20XY, the amount was in the Trustees' possession or control. • As at 30 June 20XX, the income of the trust estate was incapable of being immediately determined. By ZZ February that income remained to be finally determined. • Nevertheless, the entitlement of the Child Beneficiaries constituted an unpaid present entitlement which arose by resolution of the Trustees on 30 June 20XX and remained a present entitlement until it was satisfied on YY February 20XY. • Since having been paid, the amounts of the entitlements have not been provided to or used for the benefit of any person other than the respective Child Beneficiaries. There is also no arrangement, agreement or understanding (whether express or implied, formal or informal) that such a provision or use will be allowed in the future. • Neither of the Child Beneficiaries were presently entitled to any part of the income of the Taxpayer in their capacity as a trustee of another trust estate. • The financial statements and tax return for the Taxpayer will be finalised in June 20XY. It is at that time when the income of the trust estate will be finally determined. • Over the course of the months following the end of the year, the Trustees arranged to have the documents which allow the drawing of financial statements to be collected. These documents were subsequently provided to the trustee's advisors to commence the preparation of financial statements and the trust's income tax return for that year. In the period leading up to the payment the Trustees, in turning their minds to the affairs of the trust, determined that the income of the trust estate for the year, the balance amounts for present entitlements owed to beneficiaries (including the Child Beneficiaries) and the trust's current financial position, would allow them to pay the amounts to the Child Beneficiaries. The payments were therefore made on ZZ February 20XX. • Since the resolutions were passed in June 20XX there was sufficient excess cash within the Trustees' control which could be accessed to satisfy these entitlements. Those surplus funds were not applied for any other purpose by the trustees between the resolution being passed and the satisfaction of the beneficiary's present entitlement. The trustees did not have to liquidate any of the trust's assets nor did they have to raise external third party debt funding to satisfy the beneficiaries' entitlements. At all times between the resolution and payment the trustees had notionally set aside funds in the order of the FY20XX resolution amounts for the purpose of making those payments. Assumptions • The resolution and the cash distribution to the children gives the Child Beneficiaries complete and unfettered control over the amounts distributed. (i.e. there is no agreement, arrangement or understanding, formal or informal, express or implied, whether or not enforceable, or intended to be enforceable by legal proceedings, between the parent/s and children in any capacity about how they may use the amount/s). • The delay does not form part of, or is not a step in, a broader reimbursement agreement.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 100A

Reasons for decision: Summary: The Trustees' delay in discharging the unpaid present entitlements does not constitute an 'agreement ... for the ... provision of services or other benefits' to the Trustees in their capacity as such so as to meet that element of the definition of 'reimbursement agreement' in subsection 100A(7). Subsection 100A(7) is subject to subsection 100A(8) which requires that an agreement was entered into or carried out for a purpose of securing a reduction in liability to income tax in respect of a year of income. Having regard to the facts and assumptions there is insufficient purpose of securing a reduction in liability to income tax in this case. | Detailed Reasoning - Detailed reasoning: Section 100A of the applies where the present entitlement of a beneficiary to a share or a part of a share of trust income has arisen out of, or by reason of any act, transaction or circumstance that occurred in connection with, or as a result of, a reimbursement agreement. Where it applies, the trustee rather than the presently entitled beneficiary is liable to tax on the share of the net income to which that trust income corresponds, at the top marginal rate of tax. The explanatory memorandum to the bill in which the section was introduced stated that: The proposed section 100A will look to the existence of an agreement or arrangement that is entered into otherwise than in the course of ordinary family or commercial dealing and under, or as a result of which, present entitlement to a share of trust income is conferred on a beneficiary in return for the payment of money or the provision of valuable benefits to some other person, company or trust. Notes to clauses in the explanatory memorandum state that: Sub-section (8) will effectively exclude from the scope of section 100A any agreement that was not entered into or carried out for a purpose of securing for any person a reduction in that person's liability to income tax in respect of a year of income, i.e., section 100A is only concerned with tax avoidance arrangements. Section 100A, unlike the general anti-avoidance rules in Part IVA, does not depend for its operation on the making of a determination by the Commissioner. It is a self-executing provision which operates according to its terms. Subsection 100A(7) provides: Subject to subsection (8), a reference in this section, in relation to a beneficiary of a trust estate, to a reimbursement agreement shall be read as a reference to an agreement, whether entered into before or after the commencement of this section, that provides for the payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary or the beneficiary and another person or other persons. Subsection 100A(8) provides: A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into. Subsection 100A(13) provides: 'agreement' means any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing. Generally, beneficiaries are taxed on the net income of a trust based on their share of the trust's income, regardless of when or whether the income is actually paid to them. However, where s100A applies, the beneficiary is deemed not to be, and never to have been presently entitled to the relevant trust income. The delay by the Trustee in this case will not constitute a reimbursement agreement as there will not be an agreement under ss100A(7) by reason of the application of ss100A(8). The delay that occurred in paying the present entitlement, in this case, would not be considered as entered into or carried out for a purpose of securing a reduction in liability to income tax in respect of a year of income for the Trustee or the beneficiaries or other parties. In particular, because: • The agreement arrangement or understanding regarding the delay did not form part of, and was not a step in, a broader reimbursement agreement; • The Trust's income was not applied for any other purpose by the trustees between the resolution being passed and the satisfaction of the Child Beneficiaries' present entitlement; • The present entitlement was paid in cash to the Child Beneficiaries' bank accounts on ZZ February 20XY, upon finalisation of the Trust's financial statements; • The payment of the present entitlement gave the Child Beneficiaries complete unfettered control over the amounts and there was no agreement, arrangement or understanding, formal or informal, express or implied, whether or not enforceable, or intended to be enforceable by legal proceedings, between the Trustee parents and the beneficiary children in any capacity about how they may use the amount/s); • The Trustee's delay in discharging the Child Beneficiaries' entitlements, was a 'benefit' to the Trustee. The trust income was held in a form ready for immediate payment (i.e. cash) to the Child Beneficiaries. However, the Trustee only notionally set aside the trust income until finalisation of the trust's accounts in February 20XY. Considering the amounts distributed to the Child Beneficiaries and the four points above, this alone is insufficient to draw an inference that a purpose of any person was to secure a reduction in liability to income tax in respect of a year of income, for the Trustee or any other party. Consequently, the delay by the Trustee in paying the present entitlement in the current facts and circumstances does not constitute an 'agreement ... for the ... provision of services or other benefits' to the Trustees in their capacity as such so as to meet that element of the definition of 'reimbursement agreement' in subsection 100A(7). | Summary: As the answer to Question 1 is 'No', it is not necessary to consider whether the agreement, arrangement or understanding was entered into in the course of 'ordinary family or commercial dealing' pursuant to subsection 100A(13)? | Detailed Reasoning - Detailed reasoning: Not Applicable