PCG 2022/2: Section 100A reimbursement agreements - ATO compliance approach
Document type: Final PCG
Status: Current
Date of issue: 8 December 2022

1. The use of trusts as business and investment vehicles in Australia is common. We recognise that most trustees appropriately comply with their obligations. The purpose of this Guideline is to support trustees with managing their compliance risks with respect to section 100A of the Income Tax Assessment Act 1936 [1] , a tax law integrity provision. 2. This Guideline sets out how we differentiate risk and how we manage that risk through our compliance approach for a range of trust arrangements to which section 100A may potentially apply. We aim to give you more certainty by setting out how we will engage with you; in particular, how we: 3. This Guideline uses 3 coloured zones to denote risk ratings. Table 1 at paragraph 13 of this Guideline summarises each of these zones and the corresponding compliance approach. The Appendix to this Guideline contains examples of how to apply the risk zones. 4. This Guideline is designed to give you confidence that, if your circumstances align with the principles in the white zone or green zone set out in this Guideline, we will not allocate compliance resources to test the tax outcomes of your arrangement, except to confirm that your arrangements meet the requirements of the zone. 5. This Guideline will be updated from time to time to reflect modifications to our risk framework. 6. Note: This Guideline does not replace, alter or affect the ATO's interpretation of the law in any way. It complements, and should be read together with, Taxation Ruling TR 2022/4 Income tax: section 100A reimbursement agreements, which sets out the ATO's interpretative position on the application of section 100A. This means that if, under this Guideline, we allocate compliance resources to consider section 100A, our consideration of section 100A will be in accordance with our interpretation set out in TR 2022/4. 7. We have published further guidance about section 100A that complements this Guideline on our website.


8. Section 100A may be relevant to a broad range of arrangements involving a beneficiary's present entitlement to trust income. 9. Where a beneficiary's present entitlement [2] has arisen from a reimbursement agreement, the beneficiary is deemed not to be, and never to have been, presently entitled to the relevant trust income. In these cases, section 100A generally applies to make the trustee, rather than the presently entitled beneficiary, liable to tax at the top marginal rate. One element of the definition of a reimbursement agreement is that the entitlement has arisen out of, or in connection with, an agreement, arrangement or understanding that provides for a payment or benefit to another person. [3] 10. There is no reimbursement agreement and section 100A will not apply to a beneficiary's present entitlement to trust income where any of the following apply: 11. An agreement is not a reimbursement agreement where it has been entered into in the course of ordinary family or commercial dealing. [4] The Commissioner's view in TR 2022/4 is that ordinary family or commercial dealing is a dealing explained by the family or commercial objectives it will achieve. If the objective of a dealing can be explained as the payment of less tax to maximise group wealth, rather than a family or commercial objective, it is not an ordinary family or commercial dealing. 12. For example, an agreement that includes the creation of a present entitlement to funds that are retained by a trustee will satisfy some of the basic elements of a reimbursement agreement, as it will involve a present entitlement and the provision of a benefit to the trustee. However, whether such an agreement is a reimbursement agreement will depend on whether it meets the other elements of a reimbursement agreement. This will include a consideration of whether it was entered into in the course of ordinary family or commercial dealing (in which case it is not a reimbursement agreement). [5] This consideration will be undertaken against a background which acknowledges that it is regular for the controllers of an entity that conduct income-earning activities to re-invest in that entity so that it can derive further income.

Intro: 13. Table 1 of this Guideline describes our compliance approach for arrangements to which section 100A may apply. | Table 1: Compliance approach: Except as described at paragraph 16 of this Guideline, we will not dedicate new compliance resources to consider the application of section 100A to arrangements in the white zone. We will not dedicate compliance resources to consider the application of section 100A to arrangements in the green zone, other than to confirm that the features of the relevant scenario are present in your circumstances. Arrangements in this zone will attract our attention and we will conduct further analysis on the facts and circumstances of your arrangement as a matter of priority. If further analysis confirms the facts and circumstances of your arrangement are high risk, we may proceed to audit where appropriate. 14. This Guideline does not provide guidance on our compliance approach to arrangements outside of the zones. For arrangements not within the white, green or red zones, the following principles can be used to guide you as to whether your arrangement has a higher risk of the ATO dedicating compliance resources to consider the application of section 100A: 15. Where your arrangement is not within the zones in this Guideline, this does not mean that there is a high risk of section 100A applying. Where an arrangement that is not in the green zone is subject to compliance activities, we may engage with you to better understand your arrangement, including the risk of section 100A applying. 16. We will not commence new compliance activities to consider the application of section 100A for income years ended before 1 July 2014, unless it is outside the green zone and: 17. See Example 1 of this Guideline for an example of a white-zone arrangement. Example 2 of this Guideline illustrates an arrangement that continues before and after 1 July 2014. See Example 3 of this Guideline for an arrangement that commenced before 1 July 2014 but is not a white-zone arrangement. 18 We will not dedicate compliance resources to consider the application of section 100A to green-zone arrangements, other than to confirm that the features of the relevant scenario are present in your circumstances. If you choose to rely on this Guideline, you should document how your circumstances meet the requirements for the green zone. 19. All green-zone scenarios in this Guideline proceed on the basis that none of the exclusions listed in paragraph 32 of this Guideline are present. | Green zone: scenario 1  distribution to individuals who are members of a family: 20. An individual beneficiary is made presently entitled to income of the trust estate, none of the exclusions listed in paragraph 32 of this Guideline are present and the funds are paid to the beneficiary (including to a jointly-held account) and used to: 21. Diagram 1 of this Guideline illustrates circumstances within the scope of this scenario. | Green zone: scenario 2  beneficiary's entitlement received and used by the beneficiary: 22. A beneficiary is made presently entitled to income of the trust estate and both of the following are satisfied: 23. For the purposes of this scenario: 24. While this scenario describes a low-risk scenario, failure to satisfy this scenario due to a beneficiary's entitlement remaining unpaid after 2 years in itself does not mean there is a high risk of section 100A applying. | Green zone: scenarios 3A and 3B  retention of funds by the trustee: 25. For the purposes of these scenarios: | Green zone: scenario 3A  individual beneficiary and retention of funds by the trustee: 26. A beneficiary, being an individual, is made presently entitled to income of the trust estate and all of the following apply: 27. Diagram 2 of this Guideline illustrates the circumstances within the scope of this scenario. | Green zone: scenario 3B  company or trust beneficiary and retention of funds by the trustee: 28. A beneficiary, being a trustee or company, is made presently entitled to income of the trust estate and all of the following apply: 29. Diagram 3 of this Guideline illustrates circumstances within the scope of this scenario.


Appendix 1:  Examples Arrangements that commenced before 1 July 2014 Example 1  arrangement ceased before 1 July 2014 56. Reformed Trust acquires investment assets. Xavier Co is the trustee of Reformed Trust. Mr Xavier is a beneficiary of Reformed Trust and the sole director of Xavier Co. 57. In income years ending before 1 July 2014, Reformed Trust and Mr Xavier entered into arrangements in relation to present entitlements conferred on Mr Xavier which are red-zone arrangements in this Guideline. 58. Reformed Trust and Mr Xavier changed the nature of their arrangements in relation to present entitlements conferred on Mr Xavier from the 2014-15 income year onward. None of the exclusions in paragraph 16 of this Guideline apply. 59. The entitlements conferred in income years before 1 July 2014 are white-zone arrangements and we will not dedicate new compliance resources to consider the application of section 100A to them. The risk rating of the arrangement modified in July 2014 would need to be tested separately. Example 2  arrangement continues before and after 1 July 2014 60. Zed Co is a resident company that acts as the trustee of Zed Family Trust. 61. Mr Zed, a resident individual, is the controller of Zed Family Trust given that he is both the appointor of Zed Family Trust and he is the sole director of Zed Co. 62. Between the 2012-13 and 2019-20 income years, the trustee of Zed Family Trust has been paid $300,000 franked dividends each year. In each of these income years, the dividend income was appointed by Zed Co as trustee to Ms Lee, a non-resident beneficiary who is the sister-in-law of Mr Zed. 63. Ms Lee's entitlements to the dividend income remains unpaid while Zed Co has permitted Mr Zed to use the corresponding dividend receipts of the trust to both meet his personal expenses and to repay debt that he owes to other private companies that he controls. The arrangement is not within the green zone. 64. The arrangement is not in the white zone as the arrangement commenced before 1 July 2014 and continued after that date. That is, the arrangement in respect of Ms Lee's present entitlement to trust income for 2012-13 and 2013-14 income years appears to have continued into the 2014-15 and following income years. Example 3  taxpayer under audit for fraud or evasion 65. The ATO is undertaking an audit of Cash Discount Trust for the period 1 July 2010 to 30 June 2014. 66. The focus of the audit is the understatement of the assessable income of Cash Discount Trust, with the trustee of Cash Discount Trust having omitted significant cash receipts from its reported assessable income as a result of evasion. 67. During the course of the audit, the ATO ascertains that the beneficiaries used their trust entitlements to make gifts in each year under audit. The recipient of the gifts is the beneficiaries' mother who controls Cash Discount Trust. The arrangement satisfies the criteria of Red zone: scenario 1. 68. The arrangement is not in the white zone as we are otherwise considering the income tax affairs of Cash Discount Trust in connection with evasion that resulted in understating of net income in the trust tax returns. Green-zone arrangements Example 4  funds used for family purposes 69. Greater Trust is a discretionary trust controlled by Ms Great. The beneficiaries of Greater Trust include Ms Great, her spouse Mr Better and members of their extended family. The trustee of Greater Trust is Greater Pty Ltd. The director and shareholder of Greater Pty Ltd is Ms Great. 70. Greater Trust holds a number of investment assets. 71. Ms Great and Mr Better have 2 children  Hubert (aged 15) and Violet (aged 17). 72. On 30 June 2023, the trustee of Greater Trust makes a determination to appoint 50% of the trust income to Ms Great and appoint 50% to Mr Better. Funds representing the entitlement are paid to a bank account jointly held by Ms Great and Mr Better. The funds are subsequently used for purposes which benefit both of them and their children. 73. Diagram 5 of this Guideline illustrates the facts in this Example. Diagram 5 74. We would not dedicate compliance resources to the arrangement in this Example, on the basis that it meets the conditions in Green zone: scenario 1 of this Guideline and it does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. The entitlements were used for joint family purposes and to benefit the beneficiaries' dependent children. 75. The facts of this Example should be contrasted with Red zone: scenario 1 and Example 14 of this Guideline, both of which describe situations when an arrangement involving children of a beneficiary will be high risk. Example 5  time lag between a beneficiary becoming presently entitled and that entitlement being satisfied 76. Tortoise Trust holds a number of investment assets and is controlled by Mr Hare Senior. 77. On 30 June 2023, the trustee of Tortoise Trust makes a determination to appoint 100% of the trust income to Mr Hare Junior. 78. On 15 March 2024, the trustee of Tortoise Trust finalises its accounts for the 2022-23 income year. In doing so, the trustee ascertains that the amount of trust income to which Mr Hare Junior is presently entitled for the 2022-23 income year is $120,000. 79. On 18 March 2024, Mr Hare Junior is informed by the trustee of Tortoise Trust as to the amount of his trust entitlement. 80. On 31 March 2024, Mr Hare Junior lodges his 2022-23 tax return and includes his trust entitlement of $120,000 from Tortoise Trust in his assessable income. That same day, he calls for a $30,000 part-payment of his trust entitlement, which is then paid by Tortoise Trust so that Mr Hare Junior can pay his tax liability. 81. By 30 April 2025 (which is within 2 years of the entitlement being conferred), Mr Hare Junior has received the $90,000 balance of the $120,000 from the trustee of Tortoise Trust in satisfaction of Mr Hare Junior's trust entitlement for the 2022-23 income year. 82. Mr Hare Junior uses the funds representing his trust entitlement to invest in a new florist business he has commenced as a sole trader. 83. Prior to satisfying Mr Hare Junior's trust entitlement, the $120,000 income receipts had been retained by the trustee of Tortoise Trust as part of the investment portfolio maintained by the trustee. 84. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 2 of this Guideline and the arrangement does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. Example 6  time lag between a loss trustee beneficiary becoming presently entitled and that entitlement being satisfied 85. Doctor Evergreen controls and is a beneficiary of both Top Trust and Bottom Trust. 86. Doctor Evergreen is the specified individual in the FTEs made by each of the trustees of Top Trust and Bottom Trust. 87. Top Trust undertakes investment activities. 88. Bottom Trust undertakes a business that has prior year tax losses, with the trustee of Bottom Trust indebted to other parties  the debts arose in the course of carrying on the business. 89. For the 2022-23 income year, the trustee of Top Trust appoints all the income of that trust to Bottom Trust. 90. On 30 September 2023, the trustee of Top Trust finalises its accounts for the 2022-23 income year and ascertains that the unpaid trust entitlement owing to the trustee of Bottom Trust is $250,000 for that year. The trustee of Bottom Trust is informed of the amount of its trust entitlement on the same day. 91. On 31 October 2023, the trustee lodges the trust tax return for Bottom Trust and includes the $250,000 as assessable income. Bottom Trust has nil taxable income as its deductions exceed its assessable income. 92. On 1 December 2023, the trustee of Top Trust receives cash in respect of a 6-month interest-bearing term deposit that has matured. $250,000 is transferred by the trustee of Top Trust into the bank account of Bottom Trust in satisfaction of the entitlement (which is within 2 years of when the beneficiary was made presently entitled). 93. The trustee of Bottom Trust uses the $250,000 in first repaying debts incurred in carrying on the business it undertakes and uses the balance to make a capital distribution to the beneficiaries. 94. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 2 of this Guideline and the arrangement does not have any features that exclude it from the green zone under paragraph 32 of this Guideline. Example 7  use of funds condition and part-payment of unpaid present entitlement 95. Homewares Trust is a discretionary trust controlled by Ms Retail. The trustee of Homewares Trust is Homewares Pty Ltd (and all references to Homewares Pty Ltd are in that capacity). The director and shareholder of Homewares Pty Ltd is Ms Retail. The beneficiaries of Homewares Trust include Ms Retail, her spouse Mr Retail and members of their extended family. 96. Homewares Trust carries on a retail business selling homewares. 97. On 30 June 2023, Homewares Pty Ltd resolves to appoint 50% of the trust income to Ms Retail and to appoint the remaining 50% to Mr Retail. 98. Mr Retail and Ms Retail use some of their trust entitlements for the 2022-23 income year to meet their personal expenses during the 2023-24 income year. The balance of their entitlements remain unpaid and are used to supplement the working capital of the business carried on by Homewares Trust. 99. Diagram 6 of this Guideline illustrates the facts in this Example. Diagram 6 100. Ms Retail and Mr Retail expect to be paid the remainder of their entitlements but they have no firm plans on the timing of payment. They allow the trustee to use those funds in the homewares business for working capital purposes. 101. Funds representing Ms Retail and Mr Retail's trust entitlements have been either paid to them or retained by the trustee for working capital of the business. 102. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3A of this Guideline and the arrangement does not have any features that excludes it from the green zone described in paragraph 32 of this Guideline. Example 8  distributions from a family business 103. Newsagent Trust is a discretionary trust controlled by Ms Magazine. The trustee of Newsagent Trust is Newsagent Pty Ltd. Ms Magazine is the director and shareholder of Newsagent Pty Ltd. The beneficiaries of Newsagent Trust include Ms Magazine, her spouse Mr Magazine and members of their extended family. 104. Newsagent Trust carries on a business as a newsagent. 105. Danny is aged 18 and is the daughter of Ms Magazine. 106. During the 2022-23 income year, Newsagent Trust derives income of $150,000 (the trust's net income is also $150,000). On 30 June 2023, the trustee of Newsagent Trust makes a determination to appoint $18,000 to Danny and 50% of the remainder to each of Ms Magazine and Mr Magazine. 107. Funds representing Danny's entitlement are paid into her bank account and she subsequently uses them to pay her university fees. 108. Ms Magazine and Mr Magazine do not call for their entitlements to be satisfied and funds representing each of their entitlements are retained by the trustee and used in the working capital of the newsagent business. 109. We would not dedicate compliance resources to the arrangement in this Example, on the basis that: Example 9  distributions involving a trustee undertaking a farming business 110. McDonald Family Trust is a discretionary trust controlled by Old McDonald. 111. The trustee of McDonald Family Trust carries on a farming business. 112. The management of the farming business is undertaken by Old McDonald and his daughter Young McDonald. 113. It is intended that Young McDonald will take control of McDonald Family Trust when her father passes away. 114. During the 2022-23 income year, Old McDonald and Young McDonald each draw on funds from the trust bank account to meet their private outgoings. 115. On 30 June 2023, the trustee of McDonald Family Trust makes Old McDonald and Young McDonald each presently entitled to a 50% share of the income of the trust for that year. 116. The entitlements of both Old McDonald and Young McDonald are first set-off against the amounts each drew throughout the year with the balance remaining unpaid. The funds representing the unpaid entitlements are retained by the trustee and used to maintain and improve the farm. 117. It is intended that Old McDonald and Young McDonald will each call on so much of their trust entitlements to meet future private outgoings, with funds representing any unpaid entitlements used by the trustee in the farming business and expected to benefit them through future profitability of the enhanced business. 118. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3A of this Guideline and the arrangement does not have any features described in paragraph 32 of this Guideline. 119. Diagram 7 of this Guideline illustrates the facts in this Example. Diagram 7 Example 10  testamentary trust 120. A trust established under a will provides that Gemini, the daughter of the deceased, is entitled each year to all of the trust income and to receive the trust corpus once she reaches 30 years of age or (if she dies before attaining the age of 30) to her estate. 121. Gemini is 18 years of age at the time the trust is created. 122. Gemini's entitlement to trust income is not immediately satisfied in full each year. Instead, the trustee pays Gemini a weekly allowance of $500 with the balance of funds representing Gemini's income entitlement retained by the trustee. 123. Gemini uses her allowance to pay her personal living expenses. This includes paying $250 per week to her aunt for food and board. 124. The funds representing so much of Gemini's income entitlement that is retained by the trustee is invested in income-producing assets for Gemini's direct future benefit. 125. The arrangement does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3A of this Guideline. Example 11  use of funds condition and unpaid present entitlement 126. Investment Trust is a discretionary trust controlled by Ms Alia. The trustee of Investment Trust is Investment Pty Ltd. The beneficiaries of Investment Trust include Ms Alia, her spouse Mr Aarif, their extended family and Beneficiary Pty Ltd. Ms Alia is the director and shareholder of Investment Pty Ltd and Beneficiary Pty Ltd. 127. Investment Trust holds a number of investment assets including shares in listed companies and commercial property from which it derives dividend and rental income respectively. 128. In the 2022-23 income year, Investment Trust derives income comprised of dividends from listed companies. The income is used to purchase further shares pursuant to dividend reinvestment plans. 129. On 30 June 2023, Investment Pty Ltd resolves to appoint 60% of the trust income to Beneficiary Pty Ltd, 20% to Ms Alia and 20% to Mr Iarif. At the time of appointment, there is an understanding between the parties that each of the beneficiaries will use their entitlement to lend money back to Investment Trust. The unpaid entitlements are used by Investment Trust to purchase listed shares. 130. The arrangement between Investment Trust and Beneficiary Pty Ltd amounts to financial accommodation. [21] Ms Alia and Mr Aarif expect to be paid their entitlements, but they have no firm plans on the timing of payment. 131. During the 2023-24 income year, Investment Pty Ltd enters into an arrangement with Beneficiary Pty Ltd to borrow an amount equal to the funds that Beneficiary Pty Ltd is entitled to receive from the Investment Trust on commercial terms. [22] 132. During the 2023-24 income year and subsequent income years, Investment Pty Ltd uses trust receipts to meet its principal and interest obligations under the loan agreement. 133. Funds representing the beneficiaries' present entitlements that have been retained satisfy the use of funds condition and a written loan agreement has been entered into between Investment Pty Ltd and Beneficiary Pty Ltd on commercial terms. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenarios 3A and 3B of this Guideline and does not have any features that exclude it from the green zone under paragraph 32 of this Guideline. Example 12  trustee retains funds and services loan agreement 134. Flower Trust is a discretionary trust controlled by Ms Rose. The trustee of Flower Trust is Flower Pty Ltd. The beneficiaries of Flower Trust include Ms Rose, her spouse Mr Rose, their extended family and Plant Pty Ltd. Ms Rose is the director and shareholder of Flower Pty Ltd and Plant Pty Ltd. 135. Flower Trust carries on a business as a florist. 136. During the 2022-23 income year, Flower Trust derives income of $100,000 (the trust's net income is also $100,000). 137. On 30 June 2023, Flower Pty Ltd resolves to make Plant Pty Ltd presently entitled to all of the income of Flower Trust. 138. Flower Trust partially satisfies the entitlement of Plant Pty Ltd to enable it to pay its tax on the $100,000. The balance of the entitlement remains unpaid and is used by the trustee of Flower Trust in funding the working capital of the business. The arrangement amounts to financial accommodation [23] and Flower Pty Ltd and Plant Pty Ltd put in place a loan agreement on commercial terms that comply with section 109N. 139. Diagram 8 of this Guideline illustrates the facts in this Example. Diagram 8 140. Flower Pty Ltd uses the receipts from the trust's business to make interest and principal payments to Plant Pty Ltd to comply with the terms of the loan agreement. 141. Funds representing Plant Pty Ltd's present entitlement have been retained by the trustee for working capital of the business and a written loan agreement has been entered into on commercial terms. 142. The arrangement does not have any features described in the red zone. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3B of this Guideline. Example 13  distributions to a company beneficiary with tax losses 143. Ms Willow is the appointor of Black Trust and her spouse controls Red Pty Ltd. 144. Noir Co is the trustee of Black Trust (all references to Noir Co are in that capacity) and is controlled by Ms Willow. 145. Black Trust carries on a manufacturing business. 146. Red Pty Ltd has prior year tax losses as a result of operating a business venture that continues to operate and has a nil distributable surplus. 147. On 30 June 2023, Noir Co makes a determination to appoint 100% of the trust income to Red Pty Ltd, being $300,000. 148. Red Pty Ltd includes $300,000 in its assessable income, being the net income of Black Trust. After deducting tax losses of $300,000, the taxable income of Red Pty Ltd is nil. 149. The funds representing Red Pty Ltd's trust entitlement were retained by Noir Co for the purpose of funding the working capital for the manufacturing business. Noir Co and Red Pty Ltd subsequently enter into a loan agreement on commercial terms that comply with section 109N. 150. Diagram 9 of this Guideline illustrates the facts in this Example. Diagram 9 151. Noir Co uses the receipts from the business to make interest and principal payments to Red Pty Ltd to comply with the terms of the loan agreement. 152. The arrangement does not have any features that excludes it from the green zone under paragraph 32 of this Guideline. We would not dedicate compliance resources to this arrangement as it meets the conditions in Green zone: scenario 3B of this Guideline. Red-zone arrangements Example 14  amounts provided to the parent in respect of expenses incurred before the beneficiary turns 18 years of age 153. Patel Trust's beneficiaries include the members of the Patel Family. Patel Co is the trustee of Patel Trust and Lila Patel is the sole shareholder and director of the trustee. 154. Lila is the parent of 3 adult children  Sima (aged 26), Kumar (aged 21) and Jai (aged 19). 155. During the 2022-23 income year, Sima is self-employed and has a taxable income of $90,000. Kumar and Jai study full time and derive no income during the income year. Lila's children live at home with her at all times throughout the income year. 156. During the 2022-23 income year, Patel Trust derives $240,000 in income (the trust's net income is also $240,000). Throughout that year, Patel Co makes regular payments totalling $240,000 into Lila's bank account. Those payments are recorded as a 'beneficiary loan' in the accounts of Patel Trust. Lila uses these amounts throughout the year to meet her personal living expenses and those of the household. 157. On 30 June 2023, Patel Co resolves to make Kumar and Jai each presently entitled to $120,000 of the Patel Trust income. 158. Patel Co applies their entitlements against the beneficiary loan owed by Lila. The entitlements of Kumar and Jai are each recorded as having been fully paid in the accounts of Patel Trust. Lila assists in the preparation of Kumar and Jai's tax returns and pays the tax liability arising in relation to their entitlements from her personal funds. 159. The entitlements of Kumar and Jai are applied in this manner because they each purportedly have an outstanding debt owed to Lila in respect of education expenses and their share of the Patel household expenses that Lila paid before they each turned 18. 160. Diagram 10 of this Guideline illustrates the facts in this Example. Diagram 10 161. On the basis that this arrangement meets the conditions in Red zone: scenario 1 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 15  non-resident beneficiary makes a loan or gift to another party 162. Oberon Trust is a discretionary trust with beneficiaries including the members of the Oberon Family. Oberon Co is the trustee of Oberon Trust, and Titan Oberon is the sole shareholder and director of the trustee. Both Oberon Co and Titan Oberon are residents of Australia. 163. Oberon Trust has made an FTE and Titan Oberon is the specified individual in that election. 164. Titan is aged 44 and his parents are Sylvia (aged 66) and Sylvester (aged 67). His parents reside outside of Australia and are non-residents for tax purposes. 165. During the 2022-23 income year, Oberon Trust derives $400,000 income that is comprised of fully franked dividends. The dividends are paid directly into Titan's bank account. Titan uses these amounts to meet his personal expenses and mortgage repayments. The trust income is recorded as a 'beneficiary loan' in the accounts of Oberon Trust. 166. On 30 June 2023, Oberon Co exercises its power to appoint income to make Sylvia and Sylvester each entitled to $200,000 of Oberon Trust's income. Oberon Trust is not required to pay or withhold tax in respect of the distribution to Sylvia and Sylvester. 167. At the time income is appointed to Sylvia and Sylvester, they have agreed to use their entitlements to lend $400,000 to Titan on interest-free at-call terms. 168. In the accounts of Oberon Trust, Oberon Co records that Sylvia's and Sylvester's entitlements are fully satisfied in being applied to repay the $400,000 beneficiary loan owed by Titan. 169. Diagram 11 of this Guideline illustrates the facts in this Example. Diagram 11 170. On the basis that this arrangement meets the conditions in Red zone: scenario 1 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 16  the presently entitled beneficiary is issued units by the trustee (or related trust) and the amount owed for the units is set-off against the beneficiary's entitlement 171. Johnson Trust is a hybrid trust that carries on a profitable business providing building repair services to the public. Johnson Co is the corporate trustee of Johnson Trust and Lauren Johnson is its sole shareholder and director. 172. Hammer Co is a private company with Lauren Johnson as the sole director and shareholder. 173. As a hybrid trust, Johnson Trust has 2 classes of beneficiaries. One class is comprised of the unit holders and the second class are the discretionary beneficiaries. 174. The terms of the trust deed for Johnson Trust include the following: 175. During the 2022-23 income year, Johnson Trust derives income of $500,000 (the trust's net income is also $500,000) from its business activities. The trust reinvests the net income into its business activities as working capital. 176. On 30 June 2023, Johnson Trust resolves to distribute 100% of the trust income to Hammer Co which is within the class of discretionary beneficiaries. 177. On 1 October 2023, the trustee of Johnson Trust exercises its power to issue new units to Hammer Co for $500,000. The accounts of Hammer Co and Johnson Trust recognise a set-off of Hammer Co's $500,000 UPE against the unit subscription amount. The market value of the units is significantly less than $500,000. 178. Diagram 12 of this Guideline illustrates the facts in this Example. Diagram 12 179. On the basis that this arrangement meets the conditions in Red zone: scenario 3 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 17  the share of net income included in a beneficiary's assessable income is significantly more than the beneficiary's entitlement 180. Since before 2023, a private group controlled by Ms Day has consisted of Operating Trust, Passive Pty Ltd and Holding Trust. 181. Holding Trust is a discretionary trust and the shareholder of Passive Pty Ltd. The deed of Holding Trust defines trust income as being equal to the net income of the trust calculated under section 95. 182. Passive Pty Ltd receives trust distributions from Operating Trust which represent the annual profits from Operating Trust's business. Passive Pty Ltd has retained profits that reflect distributions from Operating Trust over the past 5 years. 183. Passive Pty Ltd uses its retained profits to make loans to Ms Day. 184. During the 2022-23 income year, the private group undertakes the following steps so that most of the retained profits in Passive Pty Ltd can be distributed to Ms Day: 185. Operating Trust continues to appoint its trust income to Passive Pty Ltd and there are no other changes to the group structure. 186. The tax outcome regarding the share buy-back is that the assessable income of Holding Trust includes $2.8 million dividends and $1.2 million franking credits. This is included in the assessable income of New Bucket Pty Ltd since it is presently entitled to the entire $1,000 trust income of Holding Trust. New Bucket Pty Ltd obtains no benefit from the share buy-back. 187. The economic outcome regarding the share buy-back is that Holding Trust has received $2.8 million which is ultimately distributed as capital to Ms Day. 188. Diagram 13 of this Guideline illustrates the facts in this Example. Diagram 13 189. On the basis that this arrangement meets the conditions in Red zone: scenario 4 of this Guideline, we would apply compliance resources to consider the application of section 100A in these circumstances. Example 18  the presently entitled beneficiary has losses 190. Rouge Trust is controlled by Mr Rouge and has historically distributed to Mr Rouge and members of his family. 191. During the 2022-23 income year, Mr Rouge meets Ms Loss who has significant tax losses from prior years. They agree that Ms Loss will be made entitled to income of Rouge Trust and that only 10% of her entitlements will ever be paid. 192. As Ms Loss is not part of Mr Rouge's family, the trust deed of Rouge Trust is amended to include Ms Loss as a beneficiary of the trust on 1 June 2023. 193. On 30 June 2023, Rouge Trust has $500,000 trust income (the trust's net income is also $500,000) to which Ms Loss is made presently entitled. 194. Ms Loss includes the $500,000 net income of Rouge Trust as assessable income in her tax return for the 2022-23 income year and reports taxable income of nil after applying deductions for prior year tax losses. 195. Only $50,000 of Ms Loss' entitlement to the $500,000 income of Rouge Trust is paid. The remaining $450,000 is used by the trustee to make loans to Mr Rouge in lieu of the trust distributions that have historically been made to him and his family. 196. Diagram 14 of this Guideline illustrates the facts in this Example. Diagram 14 197. On the basis that this arrangement meets the conditions in Red zone: scenario 5 of this Guideline, we would apply compliance resources in these circumstances.


What this Guideline is about | Green zone: scenario 3A and 3B  retention of funds by the trustee | Green zone: scenario 4  examples described in TR 2022/4 as being an ordinary family or commercial dealing | Exclusion from the green zone | Red zone: scenario 1  arrangements where the presently entitled beneficiary lends or gifts some or all of their entitlement to another party | Red zone: scenario 2  arrangements where trust income is returned to the trust by the beneficiary in the form of assessable income | Red zone: scenario 3  arrangements where the presently entitled beneficiary is issued units by the trustee (or related trust) and the amount owed for the units is set-off against the beneficiary's entitlement | Red zone: scenario 4  arrangements where the share of net income included in a beneficiary's assessable income is significantly more than the beneficiary's entitlement | Red zone: scenario 5  arrangements where the presently entitled beneficiary has losses and is outside the family group | Red zone: scenario 6  arrangements subject to a Taxpayer Alert | This Practical Compliance Guideline sets out a practical administration approach to assist taxpayers in complying with relevant tax laws. Provided you follow this Guideline in good faith, the Commissioner will administer the law in accordance with this approach. | Desription and compliance approach | Green zone: scenario 4  examples described in TR 2022/4 as being an ordinary family or commercial dealing: 30. Arrangements that are relevantly identical to an example in Appendix 2 of TR 2022/4 which concludes that the arrangement would likely be entered into in the course of ordinary family or commercial dealing. [13] | 31. Examples 4 to 13 in the Appendix to this Guideline illustrate the scenarios that are green-zone arrangements. | Exclusion from the green zone: 32. Arrangements are not in the green zone if they have one or more of the following features: | 33. When an arrangement is described in the red zone, it does not necessarily mean that section 100A applies to the arrangement. The relevance of an arrangement being in the red zone means that it attracts our attention and we will dedicate compliance resources to consider the application of section 100A as a matter of priority. Section 100A will be considered in accordance with our view of how it applies, as set out in TR 2022/4. | Red zone: scenario 1  arrangements where the presently entitled beneficiary lends or gifts some or all of their entitlement to another party: 34. An individual adult beneficiary is made presently entitled to income of the trust estate and any of the following apply: | 35. Examples 14 and 15 in the Appendix to this Guideline illustrate this scenario. | Red zone: scenario 2  arrangements where trust income is returned to the trust by the beneficiary in the form of assessable income: 36. A private company beneficiary is made presently entitled to income of the trust estate, and all of the following features are present: | 37. An arrangement where a trust receives a dividend that is not sourced from income of that trust, is outside this scenario. | 38. Diagram 4 of this Guideline illustrates the circumstances within the scope of this scenario. | Diagram 4: 39. The arrangement is unusual, cannot be explained by any commercial objective and appears to be more properly explained by the objective of reducing the tax that would otherwise have been payable had the trustee simply accumulated the income. | 40. Example 12 of TR 2022/4 illustrates this scenario. | Red zone: scenario 3  arrangements where the presently entitled beneficiary is issued units by the trustee (or related trust) and the amount owed for the units is set-off against the beneficiary's entitlement: 41. A trustee of a closely held trust [15] sets off a beneficiary's UPE against an amount the trustee is owed by the beneficiary, being the subscription price to acquire units, and either of the following apply: | 42. Example 16 in the Appendix to this Guideline illustrates this scenario. | Red zone: scenario 4  arrangements where the share of net income included in a beneficiary's assessable income is significantly more than the beneficiary's entitlement: 43. The share of trust net income included in a beneficiary's assessable income, together with the beneficiary's share of franked distributions [16] and capital gains [17] of the trust, is significantly more than the beneficiary's entitlement to income of the trust estate, and all of the following apply: | 44. Example 17 in the Appendix to this Guideline illustrates this scenario. | Red zone: scenario 5  arrangements where the presently entitled beneficiary has losses and is outside the family group: 45. A beneficiary's taxable income is less than the share of trust net income included in the beneficiary's assessable income or the beneficiary's net capital gain is less than the beneficiary's share of trust capital gains. | 46. This scenario will not apply to a beneficiary's present entitlement to trust income where: | 47. Example 18 in the Appendix to this Guideline illustrates this scenario. | Red zone: scenario 6  arrangements subject to a Taxpayer Alert: 48. An arrangement that is the subject of a Taxpayer Alert where the Commissioner expresses a concern that section 100A applies. [19] | Record keeping: 49. You should prepare and keep good records that explain the transactions that have happened. Having a clear understanding as to why a beneficiary has chosen to deal with their entitlement in the way they have and knowledge of the relevant parties to the transaction or arrangement will help support your position. It will also assist in the timely resolution of any compliance activity we undertake. | 50. While each arrangement depends on its facts, the following documents and records are important and should be kept wherever possible: | 51. We acknowledge that family arrangements are typically conducted with a greater level of informality than dealings between unrelated parties. Nonetheless, to the extent possible, the trustee or their registered tax agent should maintain contemporaneous records that are ordinarily created which demonstrate the objectives an arrangement was intended to achieve and how it would achieve them. For example, this could be in the form of a file note of a meeting between the trustee and registered tax agent. | 52. The maintenance of contemporaneous records by the trustee is part of good governance arrangements for managing the trust's affairs and dealing with the ATO. Notwithstanding that an arrangement is fully documented, section 100A may still apply, particularly where the arrangement is contrived or artificial, is overly complex or has tax-driven features so that the dealings cannot be explained by ordinary family or commercial purposes. [20] | Date of effect: 53. This Guideline applies to present entitlements to income of a trust estate arising before and after its date of issue. | 54. For entitlements arising before 1 July 2022, the Commissioner will stand by the administrative position in Trust taxation  reimbursement agreement , which was first published on our website in July 2014, to the extent it is more favourable to the taxpayer's circumstances than this Guideline. | 55. In addition, we will not dedicate compliance resources to consider the application of section 100A to an entitlement arising before 1 July 2022 where you demonstrate to us that: | Commissioner of Taxation 8 December 2022 | Paragraphs 32(b) and32(c) | Changes have been made to further clarify some features of arrangements that are excluded from the green zone. | Previously issued in draft format as PCG 2022/D1 | Related Rulings/Determinations: TD 2022/11 TR 2012/D1 TR 2022/4

Related rulings and determinations: TA 2013/1 | TA 2016/12 | TA 2022/1 | TD 2022/11 | TR 2022/4
Legislative references: ITAA 1936 Div 7A ITAA 1936 95 ITAA 1936 100A ITAA 1936 100A(1) ITAA 1936 100A(2) ITAA 1936 100A(5) ITAA 1936 100A(7) ITAA 1936 100A(8) ITAA 1936 100A(11) ITAA 1936 100A(13) ITAA 1936 101 ITAA 1936 102UC ITAA 1936 109D(3) ITAA 1936 109E(6) ITAA 1936 109N ITAA 1936 159GZZZP ITAA 1936 Sch 2F Subdiv 272-D ITAA 1936 272-80 ITAA 1997 115-215 ITAA 1997 207-35
Other references: Trust taxation - reimbursement agreement TA 2013/1 TA 2016/12 TA 2022/1