In the season of getting matters dealt with before the end of the year, the ATO have released its finalised guidance on trust reimbursement agreements with the release of Taxation Ruling TR 2022/4 and the companion product Practical Compliance Guideline PCG 2022/2.
These documents were issued in draft, on 23 February 2022 and focus on the economic benefits trust entitlements being obtained by someone other than the beneficiary.
The ATO’s approach has called into question some long standing practices adopted by some advisers with the ATO providing some clear examples of what they will and will not accept. The finalised Ruling and Guidance takes into account feedback received from the accounting profession, however, more detailed guidance or “ordinary family dealings” would still be welcome.
Should the reimbursement provisions apply the beneficiary is deemed not to be, and never to have been, presently entitled to the relevant trust income meaning that:
- The trustee is assessed and liable to pay tax on the relevant share of the net income;
- If the beneficiary is a non-resident, there is no withholding tax liability;
- If the beneficiary is a company, no franking credits arise and Division 7A does not apply.
Ordinary dealing exception
The ATO’s test for determining whether the “ordinary family or commercial dealing” exception applies is an objective one which is applied, “at least principally”, from the perspective of the persons whose purposes are relevant to the operation of the provisions and may be significantly narrower than another person’s interpretation of ordinary family dealings.
ATO’s compliance approach
The ATO have continued to adopt the traffic light approach to classifying risk using 3 risk zones – white (low risk – pre 1 July 2014 arrangements), green (also low risk) and red.
Red zone arrangements include but are not limited to those where:
- The beneficiary lends or gifts some or all of the entitlement to another party or where trust income is returned to the trust by the beneficiary in the form of assessable income;
- The trustee (or a related trust) issues units to the beneficiary and the amount owed is set-off against the beneficiary’s entitlement;
- The share of net income included in another beneficiary’s assessable income is significantly more than the beneficiary’s entitlement; and
- The beneficiary has losses and is outside the family group.
The drafting of distributions by trustees will take on extra significance moving forwards, so too will the utilisation of the entitlements conferred on beneficiaries. Should you have any questions relating to these changes please reach out to your ESV Engagement Partner.