What Small Business Owners Need to Know About 100A

ATO has made changes to trust distributions. Are you ready?

You may have heard about the changes to trust distributions in the news. Well, the time has come for all businesses established under the trust structure to get familiar with what's considered a "reimbursement agreement" under Section 100A of the Income Tax Assessment Act 1936 or 100A.

What is a reimbursement agreement under Section 100A?

Section 100A was created to prevent a reimbursement agreement which refers to entitlements made by a trust company to one party which are effectively enjoyed by another party. The motivation for such an agreement is to shelter the income created by the entitlement from a higher tax rate. Currently, the highest marginal tax rate for trust distributions is 47%.

An example of such an agreement is one where a company is "made presently entitled" to income deriving from a dividend sourced from that company's trust.

Another example would be a parent-trustee "made presently entitled'' to a disbursement of $75,000 to one of their college-aged children. That beneficiary uses the funds to reimburse the parent for costs incurred by them during college, less what the beneficiary pays in taxes.

Under the new guidance of the Australian Taxation Office (ATO) these examples of reimbursement agreements would be risky. If the trust is found to have a reimbursement agreement then the beneficiary will have to pay at the higher tax rate.

How do you know if you have a reimbursement agreement underway?

To be absolutely sure that you don't have a reimbursement agreement that the ATO would cite, it's important to consult with a tax professional. It's common that these types of agreements are done informally, especially considering the beneficiaries are trusted partners and family members. There are some rules of thumb to keep in mind when assessing your risk of noncompliance with the new treatment of 100A by the ATO.

An agreement can't be considered a reimbursement agreement if:

  • Your trust has entered into an agreement that can be considered an "ordinary family or commercial dealing."
  • The beneficiary is a child under 18 or legally disabled.
  • At the time your beneficiary was "made presently entitled," there was no agreement, arrangement or understanding that another party would enjoy the entitlement.

The consequences of a reimbursement agreement are that the beneficiary's disbursement will be taxed at the trustee's marginal tax rate. Paying a higher rate on trust distributions can lead to a cash crunch for businesses. Read more about how to manage Section 100A. Contact us if you need help preparing for a higher tax bill as a result of these trust distribution changes.

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