Following the Australian Taxation Office’s latest draft rulings on trust distributions, is it fair to ask: why would we trust the ATO?
On Wednesday, the Commissioner finally released his long promised position on section 100A: draft Tax Ruling (TR 2022/D1). Section 100A is over 50 years old and was introduced to combat bottom-of-the harbour era tax avoidance comprising a scheme referred to as trust stripping. The Commissioner has completely repurposed this provision and in doing so, seeks to attack trust distributions that are ordinary family dealings in apparent defiance of a clear and recent decision of the Federal Court.
In accordance with the Commissioner’s current approach to engaging with the taxpaying community, the draft Tax Ruling is accompanied by a draft Practical Compliance Guideline (PCG 2022/D1) and a Taxpayer Alert (TA 2022/1), complete with the now de rigueur traffic light system, which provides taxpayers with the faint comfort of trying to understand what compliance resources the Commissioner will devote to reviews and audits.
The ATO’s position was generally expected, if not welcomed by taxpayers:
- the application of section 100A is expanded, largely through the limitation of arrangements that are excluded as ordinary family or commercial dealings;
- the PCG outlines something akin to a traffic light system to categorise conduct and arrangements, including a low risk white zone and green zone (to which compliance resources will not be dedicated), medium risk blue zone (with respect to which the ATO may ask questions), and high risk red zone (to which the ATO will dedicate compliance resources); and
- the alert details the Commissioner’s concern with the arrangements involving a distribution from a family trust to an adult child, where the parents have the economic benefit of that distribution.
The issue of this material however, both the timing and content, cannot be described as anything other than surprising.
As outlined in our recent article, in December 2021 Justice Logan gave his judgement in the matter of Guardian ( FCA 1619) and specifically addressed each element involved in the application of section 100A, including the exclusion for arrangements in the course of ordinary family or commercial dealings.
It is therefore interesting that in his draft ruling, the Commissioner has remained dogged in his approach to the ordinary family or commercial dealings exclusion, on which he has fixated for several years.
This includes, for example, the Commissioner’s statement that
“[a] dealing is not an ordinary family or commercial dealing merely because it is commonplace or involves no artificiality”
versus Justice Logan’s finding that
“…the adjective “ordinary” in “ordinary family or commercial dealing” has particular work to do. It is used in contradistinction to “extraordinary”. It refers to a dealing which contains no element of artificiality.”
The fact that the Commissioner has appealed Justice Logan’s judgment in Guardian does not in any way excuse the Commissioner’s actions in stating a position on the law that is completely inconsistent with the finding of a Justice of the Federal Court. Unless and until, the Full Court of the Federal Court give a judgment that overturns Justice Logan’s findings (or 50-year-old legislation is amended), his judgment is a statement of the law.
It will be particularly interesting to follow the development of the Commissioner’s material.
To further demonstrate the Commissioner’s changing positions, on the same day, the Commissioner also released an updated draft division 7A ruling which effectively overturns his own 2010 position on the use of corporate beneficiaries of discretionary trusts (and was itself controversial).
We will provide further analysis of the detail of the ruling, PCG and taxpayer alert shortly.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.