Trustee taxes: Section 100A & reimbursement agreements

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Introduction

The Commissioner of Taxation's draft tax ruling TR 2022/D1 (Income Tax: section 100A reimbursement agreements) has raised a number of serious issues for trustees including the risk of a trustee being liable to income tax dating back to 1979. This problem arises in part because a beneficiary is taxed on trust distributions which they have not received which could result in the beneficiary taking steps against the trustee.

A trustee of a trust has significant exposure to retrospective tax liabilities arising from the unlimited amendment period pursuant to section 170(10) Item 17 of the Income Tax Assessment Act 1936. The draft tax ruling indicates at paragraph [39] the new interpretation of the Commissioner of Taxation applies retrospectively.

What are the limits of section 100A?

The Commissioner has provided guidance that there are legal limitations on the operation of section 100A where the arrangements are a sham. Separately, the Commissioner has provided limited examples where the Commissioner would not regard the arrangements are being within the operation of section 100A.

It is much less clear what is the scope of the meaning of "entered into in the course of ordinary family or commercial dealing". Such agreements are expressly excluded from the scope of operation of section 100A.

The uncertainty of the meaning of this exclusion is problematic for trustees because of these are vast numbers of ways in which family or commercial dealings occur and those arrangements may be specific to a family's cultural or religious beliefs.

Common arrangements in the Green zone

The Commissioner has advised for 2021-2022, certain arrangements are considered low risk (Green zone). This is where either:

(a) a beneficiary simply uses their entitlements to benefit themselves, their spouse and dependents, or

(b) in most cases, the beneficiary’s entitlement is retained by the trustee for use in commercial or income earning operations of the trust, provided that either:

  • the beneficiary is employed in managing the business conducted by the trustee;
  • the beneficiary (or their spouse) controls the trustee; or
  • the beneficiary is a private company that enters into a loan agreement with the trustee that complies with Division 7A.


  • Record keeping obligations

    The Commissioner has provided the following guidance on 20 June 2022 for 2021-2022:

    "Keep good records that explain the transactions that have happened. Having a clear understanding as to why entitlements have been dealt with in the way they have will help support your position. It will also assist in timely resolution in the event that we review your arrangement.

    While each arrangement depends on its facts, the following will be important:
  • the trust deed (including amendments), trustee resolutions, and contact details of the trustee
  • for an inter-party loan, copies of the loan agreements and records of the purpose for making the loan
  • evidence to demonstrate that a beneficiary has received or enjoyed the benefit of their entitlement."


  • It is acknowledged that intra-family arrangements are typically conducted with a greater level of informality than commercial dealings that are conducted by unrelated parties. Nonetheless, to the extent possible, the trustee or their registered tax agent should maintain contemporaneous records that demonstrate the objectives an arrangement was intended to achieve and how it helped to achieve them."


    What are the consequences for a trustee?

    For the purposes of section 100A, the trustee is liable for the share of the trust's income which is no longer deemed to be the income of the beneficiary. There many be administrative penalties of between 25% to 75% of any shortfall tax and interest on unpaid taxes.

    Is the Commissioner's current interpretation of section 100A final?

    The Commissioner's draft ruling has created a great deal of uncertainty for trustees, however the draft ruling is not finalised. The Commissioner's position remains under consideration and may be finalised later in 2022 and published in a final public ruling.

    Trustee's who need further information or advice

    You can access Dr Michael Robson's presentation dated 27 June 2022 on section 100A (reimbursement agreements) and issues for trustees using this link

    Webpage last updated: 27 June 2022.

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