Presented at the Trusts Intensive on 6 – 7 June 2024

In recent years there has been a renewed push for the application of anti-avoidance provisions to the operation of trusts – including what would historically be regarded as typical family discretionary trust distributions.

Specifically, the application of Part IVA and section 100A of the Income Tax Assessment Act 1936 to trusts has been the focus of Australian Taxation Office (ATO) audit activity, public rulings (and other statements) and litigation.

This paper reviews the recent developments and, particularly the recent case law, in these areas.

Particularly, the paper considers the following aspects of tax integrity provisions being applied to trusts.

The possible direct application of Part IVA to trust distribution choices. This was the subject of the recent Minerva Financial Group litigation, and those cases (the original Federal Court and the later Full Federal Court decisions) will be considered in some detail. As the Full Federal Court decision has not been appealed, it stands as an important statement of the current law.
Part of the decision in the Guardian litigation also involved a direct application of Part IVA to trust distribution choices and will be, more briefly, considered.
How trusts have featured in the application of the dividend stripping provisions within Part IVA (section 177E) and for denial of franking credits.
While dividend stripping, by its nature, relates to corporates, particular features of trusts have been utilised in various arrangements to which those dividend stripping provisions have been sought to be applied. The relevant aspects of recent cases will be considered.
Where things stand on section 100A, as an integrity provision directly applicable to trusts. The current ATO position and the current state of the case law will be considered.

Part IVA – trust distributions generally

Recent cases

The manner in which distributions of the income or gains from small business, investment or other activities are made from a typical family discretionary trust has not, historically, been an area to which Part IVA of the Income Tax Assessment Act 1936 has been (at least directly) applied.

Some recent cases, however, have involved scenarios in which the manner of the distributions have been directly challenged under Part IVA.

It is helpful that those cases have turned on the dominant purpose aspect of Part IVA (after resolution of questions relating to tax benefit). The dominant purpose issue can be expected to be the critical issue going forward.

It is relevant and important to understand the facts and reasoning from these cases, to be able to manage the (heightened) risk of Part IVA applying to typical family discretionary trust distribution scenarios.

The section of the paper will consider:

Minerva Financial Group Pty Ltd v FCT [2022] FCA 1092;
the subsequent Full Federal Court appeal decision in Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC] 28; and
the aspects of the Full Federal Court appeal decision in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 relevant to the potential application of Part IVA to trust distributions (the section 100A aspects are considered separately below).

Minerva decision(s)

Minerva facts

The facts in Minerva were as follows.

The Liberty Group (Group) carried on a financial services business that involved lending for profit. Originally, the Group carried on its business in a corporate silo where earnings from its lending and securitisation activities were taxed at the 30% corporate tax rate. The Group was owned by non-resident entities that were residents of a lower tax jurisdiction.

The Group had, for an extended period, wanted to conduct an initial public offering (IPO) of “stapled securities” in the holding company, Minerva Financial Group Ltd (from 2008 a Pty Ltd company) (MFG) and a trust, Minerva Financial Group Trust (MFGT). It ultimately took the Group until 2020 to achieve this restructure, , with delays caused by various reasons, including the GFC.

The Group sought external advice on the best way to IPO and all the advice suggested that the Group restructure into a stapled structure with:

a corporate silo which did the loan origination, underwriting and servicing of financial assets and business; and
a trust silo which held the group’s wholesale and securitisation trusts and received interest income and fee income from borrowers.

To address a concern that the yields on stapled securities should not exceed 4 to 5%, which would have caused yield fluctuation and valuation issues, and to ensure that the corporate silo had funds to meet its cashflow requirements to carry on its business, two companies in the corporate silo were each issued with a discretionary unit from the Minerva Holding Trust (MHT). The MHT owned all the securitisation trusts in the trust silo. The discretionary unit provided the trustee of the MHT with the discretion to distribute a discretionary amount of trust income to the corporate unitholders from year to year.

The following diagram (extracted from the full Federal Court judgment and a little more detailed than that included in O’Callaghan J’s judgment), outlines the structure of the Group in 2007 and 2008, after the restructure (note the shares and units in the Group were not stapled until 2020 – after the relevant income years in dispute, being the 2012 to 2015 income years):

The tax effect of the restructure was that if the MHT trustee:

did not exercise its discretion to distribute income on the discretionary units, then the interest income it earned would flow to a non-resident (Jupiter and later Vesta) and be subject to 10% interest withholding tax; and
exercised its discretion to distribute income on the discretionary units, then such income would be taxed to the corporate silo at 30% – as it had prior to the restructure.

In the income years of concern, the MHT trustee only distributed 2% of its trust income to the corporate silo.

The ATO argued that Part IVA applied to the arrangements and that the corporate silo should be taxed on the MHT’s trust income. A particular concern of the ATO was that the restructure adversely affected the corporate silo’s capital adequacy ratios and resulted in the need for the MHT to make loans to the corporate silo so that it had sufficient working capital to carry on its business activities.

The ATO identified three Part IVA schemes arising from the arrangements:

first scheme:the restructure into the corporate and trust silos, and the nominating of MHT as the residual unitholder entitled to residual income from the securitisation trusts under MHT;
second scheme: the transfer of ownership of MFGT to Jupiter from MFG, the decision by MHT trustee to only distribute 2% of trust income to the corporate silo in the relevant income years and lending of funds by MHT to the corporate silo for its business activities;
third scheme: this scheme had the same steps as the second scheme, except that it did not contain the transfer of ownership of MFGT to Jupiter.

The taxpayer conceded that it had obtained a tax benefit under each of the schemes and so the focus of the case was on whether the schemes outlined by the ATO objectively displayed a dominant purpose of tax avoidance.

Federal Court (single judge) reasoning

O’Callaghan J decided that the first scheme did not evince a dominant purpose of tax avoidance, since the restructure reflected consistent external advice provided to the taxpayer that the best way to IPO was to use a stapled structure. The corporate silo was profitable after the restructure and delaying the restructure would have led to more costs at the IPO time when the Group’s asset holding would have to be restructured to get to the stapled structure. These additional costs included the CGT and duty that would have to be incurred to move the securitisation trusts under the MHT.

With respect to the second and third schemes, O’Callaghan J ruled that both were entered into for the dominant purpose of tax avoidance.

O’Callaghan J stepped through the eight factors in section 177D of Part IVA and decided the first and third factors supported the dominant purpose.

In particular, his Honour found the MHT trustee’s choice not to exercise its discretion to distribute more than the nominal 2% of income to the corporate silos in the income years in question objectively displayed a dominant purpose of tax avoidance.¹ O’Callaghan J noted that the taxpayer could not provide any commercial reasons why only a nominal amount of income was distributed, apart from an obscure unexplained comment that only nominal amounts were distributed as it would have been undesirable for a return on equity metric.

Because they are focused on the precise act of a trustee deciding how to distribute, and can be contrasted with the subsequent Full Federal Court’s reasoning, it is worth extracting the following critical paragraphs in the decision (when considering the first factor in section 177D):

“563 The applicant could only proffer one reason why a greater distribution of income from MHT to LF would not be desirable, that is, the so called return on equity “metric”. As I also explained, the applicant was unable to provide any evidence as to how the metric was calculated, what assumptions underpinned it, whether or why a lower return on equity metric would not be desirable or how that consideration outweighed the negative consequences of LF not receiving the income. See [502] [507].

564 The applicant was unable to provide any cogent reason, other than the tax benefit, why the decision was taken in each of the relevant years to direct no more than 2% of MHT’s net income to the special unitholders. The applicant submitted that neither LF nor Secure Credit had an “entitlement” to the income from the RIUs and that the power of the trustee of MHT to distribute income to the special unitholders was discretionary. So much, unsurprisingly, was accepted by the Commissioner. But neither factor goes to the relevant question of dominant purpose, objectively viewed.

565 In those circumstances, I agree with the Commissioner’s submission that, viewed objectively, the exercise of the choice in each of the relevant years (the manner in which the second part of the second scheme was carried out) was driven by the tax benefit of directing income away from LF. Having found that this factor is neutral insofar as it relates to the first part of the second scheme, I agree with the Commissioner’s submission that, objectively, the manner in which the second scheme was entered into is indicative of a dominant purpose of obtaining that tax benefit.”²

The fact that the MHT had to make loans to the corporate silo after the restructure was not seen by O’Callaghan J as relevant to assessing dominant purpose, his Honour determining that inter group loans are normal and there was no evidence showing that the corporate silos’ capital adequacy ratio was actually affected. On this basis, it was the non-exercise of a discretionary income power that provided the dominant purpose of tax avoidance.

The Minerva decision suggests that a trustee income distribution based solely on a lower marginal tax rate may be problematic for Part IVA purposes. It may be that this case is confined to its very particular facts where a corporate taxpayer restructures into two entities which are in substance held 100% by the one entity (Jupiter and then Vesta later on). This fact scenario is very different from a situation where a family discretionary trust is established from the outset as a discretionary trust and it has been operated on a discretionary basis from the outset. The main concern raised by Minerva is the lack of detailed analysis on ruling that the lack of exercise of a discretion in favour of a higher tax rate taxpayer translates generally to the wider taxpaying community.

Full Court reasoning

On appeal, the decision on the first scheme was not raised by the ATO, but a fourth scheme – consisting only of the non-exercise of the discretion of the trustee of MHT to make distributions to the special unitholders³ – was added to the second and third schemes.

That this fourth – and most narrow – scheme was raised is helpful. Taxpayers must grapple with the possible application of Part IVA in circumstances where there is the risk that, the more narrowly the ATO formulates the scheme to focus only on parts that directly have taxation effects (e.g. here, a trustee’s decision on distributions, but such simple matters as the act writing off bad debts or acts that otherwise realise tax losses) the more likely a dominant tax purpose may be found.

While the Full Court did not separately say a lot about this fourth scheme, it did expressly mention the fourth scheme in its consideration of the first and second factors of section 177D – in arriving at its rejection that those factors supported a dominant tax purpose (as discussed below).⁴

The Full Court by a joint decision allowed the appeal, finding that Part IVA did not apply to any of the schemes identified by the Commissioner. This included the fourth scheme.

Prior to considering the eight factors in section 177D the Full Court:

made comments on the ATO’s approach;
restated a number of principles in relation to the operation of Part IVA; and
explained where it disagreed with the earlier single judge decision.

These comments are a very helpful guide, and partly a correction, to the thinking that often arises around Part IVA.

The difficulties with the ATO’s approach, the Full Court highlighted, related to the ATO’s tendency to treat the Group’s underlying business activities as if they were static from before the reorganisation in 2007 – despite the rejection of that reorganisation as subject to Part IVA as the first scheme and despite very material changes since 2007. This was relevant to the objective facts to be considered in applying Part IVA.⁵

The Full Court restated 12 principles to be followed when applying Part IVA and in considering the eight factors in section 177D. They are worth extracting in full (bold emphasis added):

For Part IVA to apply it must be shown that having regard to the eight matters “it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme” or enabling the relevant taxpayer and one or more other taxpayers to obtain a tax benefit in connection with the scheme: s 177D; Commissioner of Taxation (Cth) v Hart [2004] HCA 26; (2004) 217 CLR 216 at [44].
The inquiry mandated by s 177D is directed at a conclusion to be drawn in respect of the dominant purpose of a person who entered into or carried out the scheme or any part of the scheme. It is not an enquiry about the purpose of a scheme or part of a scheme: Hart at [63].
The inquiry required by Part IVA is an objective, not subjective inquiry: Hart at [37].
The fact that a particular commercial transaction is chosen from a number of possible alternative courses of action because of tax benefits associated with its adoption does not of itself mean that there must be an affirmative answer to the question posed by s 177D: Hart at [15]. The bare fact that a taxpayer pays less tax, if one form of transaction rather than another is made, does not demonstrate that Part IVA applies: Hart at [53].
Even if a particular form of transaction carries a tax benefit, it does not follow that obtaining the tax benefit is the dominant purpose of the taxpayer in entering into the transaction: Hart at [15]. Simply to show that a taxpayer has obtained a tax benefit does not show that Part IVA applies: Hart [53].
Merely because a taxpayer chooses between two forms of transaction based on taxation considerations does not mean that it is to be concluded, having regard to the factors listed in s 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit: Hart at [15]. Part IVA does not apply merely because the Commissioner can identify another means of achieving the same or similar outcome which would have resulted in more tax being payable.
However, a transaction may take such a form that a conclusion of the kind described in s 177D is required even though the transaction also advances a wider commercial objective. There is a false dichotomy between rational commercial decisions and obtaining a tax benefit: Hart at [51]. The presence of a discernible commercial end does not determine the answer to the question posed by s 177D: Hart at [64]. The terms of Part IVA do not reference “bona fide commercial reasons” or any equivalent expression: Hart at [47].
There is a distinction between a taxpayer adopting a form of transaction that is influenced by taxation considerations (where the presence of a fiscal objective does not mean that it is to be concluded, having regard to the factors listed in s 177D, that the dominant purpose of the taxpayer was to obtain a tax benefit) and a taxpayer taking steps to maximise after-tax returns in a manner objectively indicating the presence of a dominant purpose to obtain a tax benefit: Hart at [16]–[18]; Commissioner of Taxation v Spotless Services Ltd [1996] HCA 34; (1996) 186 CLR 404 at 416, 423.
Although the conclusion as to purpose may be a conclusion to be drawn in respect of a person who only entered into or carried out part of the scheme, the factors are to be applied having regard to the scheme as a whole and not to part of the scheme: Commissioner of Taxation v Macquarie Bank Limited [2013] FCAFC 13; (2013) 210 FCR 164 at [199] (Middleton and Robertson JJ).
Although all of the eight factors must be considered, not all the factors in s 177D(2) will have the same relevance or the same importance in every case.
Statements about why the taxpayer acted as they did or about why a party to the transaction structured the transaction the way they did are not statements which are an answer to the question posed by s 177D(2). That section requires a conclusion about purpose to be drawn from the eight objective matters; it does not require or even permit any inquiry into the subjective motives of the taxpayer or others who entered into or carried out the scheme or any part of it: Hart at [65].
The inquiry directed by Part IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D will require consideration of what other possibilities existed to achieve the same commercial end: Hart at [66].

In following paragraphs, the Full Court made some concise summary statements:

Part IVA and in particular the conclusion to be drawn under s 177D is not drawn by looking only at the consequences of what was done or by comparing the tax consequences of what was done with the tax consequences of another possible transaction that achieved different commercial outcomes. It is a conclusion to be drawn by reference to the eight factors applied to the totality of the scheme considered in its wider context.⁶ (bold emphasis added)
That Part IVA does not pose a “but for” test and does not require that a taxpayer choose a form of transaction which results in the most tax or more tax being payable.⁷
The Explanatory Memorandum to the Bill which originally enacted Part IVA is set out extensively in the reasons of Callinan J in Hart at [86]. As the EM makes apparent, and consistent with the statutory text, it is the features of the scheme and its surrounding circumstances which are objectively examined through the s 177D factors. It is not an examination of the subjective purpose or subjective motive of any party to the scheme⁸. (bold emphasis added)
Purpose directs attention to object or aim. It is concerned with the reason why something has occurred or been allowed to occur. The objective dominant purpose of a party to a scheme (such as an action or course of action) that has enabled a person to obtain a tax benefit is determined by regard to what has happened and evaluating why it has happened. Obtaining the tax benefit is not enough. Desiring the tax benefit is not enough. The obtaining of the tax benefit must have been the main object or aim of what is said to be the scheme when viewed objectively in its surrounding context.⁹ (bold emphasis added)
In disagreeing with the earlier single judge decision, the Full Court focused on – and disagreed with – the reasoning of O’Callaghan J in paragraphs 563 and 564 as extracted above. The Court observed that:
O’Callaghan J’s reasoning elides the question posited by s 177D with an inquiry as to whether the trustee’s discretion would have been exercised differently but for the tax benefit¹⁰ – the Full Court rejecting the suggestion of a “but for” approach;
the relevant question posed by section 177D is not addressed by consideration of any subjective purpose – but rather the statutory question is to determine purpose by an objective assessment of objective facts.¹¹
On observing that the essence of each of the schemes on appeal focussed on the exercise of the discretion by the trustee of MHT to make distributions¹², the Full Court proceeded to consider the factors in section 177D together for all the schemes.
The Full Court did not find any factors that supported a dominant tax purpose conclusion (some were neutral). It particularly set out detailed reasoning for the first (manner carried out) and second (form and substance) factors.

Regarding the first factor, the difficulties with the ATO’s approach noted earlier – whereby the ATO tended to treat the Group’s underlying business activities as if they were static from before the reorganisation in 2007 (despite the rejection of that reorganisation as subject to Part IVA as the first scheme and despite very material changes since 2007) – led the Full Court to conclude on this first factor:
The trustee paid distributions in accordance with the terms of issue of the ordinary notes and the trust constitution. None of the contextual matters relied upon by the Commissioner cast any different light on the manner in which the scheme was entered into.¹³
It is worth noting a timing aspect to this reasoning. While the Full Court stressed the need to consider the wider context, that context was based on the (post 2007 reorganisation) commercial structure that existed at the time the discretion was exercised to pay the distributions.
Regarding the second factor, the form and substance were considered the same, so not supporting a dominant tax purpose. The ATO’s attempt (by a contention) to ignore the intervening financial dealings and structures and, essentially, argue that the cash flows ultimately flowed back to the same ultimate owners (but with less tax) was rejected – as conflating the concept of cash or funds with the concept of income.¹⁴

ATO Decision Impact Statement

The ATO issued a Decision Impact Statement (DIS) on the Full Court decision on 29 May 2024, which did not consider the decision to ‘disturb the Commissioner’s long-held view that schemes which include a trustee’s exercise of discretion to distribute income can attract the operation of Part IVA’ – but acknowledged each scheme will turn on the objective facts.

The ATO’s acknowledgment of the objective facts found by the Full Court, under the ‘Dominant purpose’ heading include:

The default position under the terms of the MHT constitution was for distributable income to be distributed to the ordinary unitholders such that there was nothing extraordinary about distributions flowing in accordance with the terms of the trust constitution. The objective facts were that special unitholders had no entitlement to the income of MHT absent the exercise of the discretion available under the trust constitution. This conclusion was also supported by the commercial context of the restructured business, and in particular the changes to LF’s role in that business.

The Full Court found that the same commercial outcome for the parties would not have been achieved had distributions been made instead to LF. The distribution of income to Jupiter and Vesta had real economic and financial consequences to them that would not have flowed had the income been distributed to LF. The Full Court relied upon these facts in finding that the fourth factor was neutral and that the sixth factor pointed away from a party having the requisite dominant purpose.

Guardian Full Court appeal

Guardian concerned two taxpayers: Guardian AIT Pty Ltd (Guardian), which acted as trustee of the Australian Investment Trust (AIT), and Mr Springer. Mr Spinger owned all the shares in Guardian AIT and was principal and a beneficiary of AIT.

AIT was an Australian-resident trust. Its income in the 2012, 2013 and 2014 income years was derived in Australia.

Mr Springer was a Vanuatu resident in each of the 2012, 2013 and 2014 income years.

As principal of AIT, Mr Springer had the power to appoint any person or corporation as a beneficiary. On 27 June 2012, AIT Corporate Services Pty Ltd (AITCS) was incorporated as part of a strategy recommended to Mr Spinger by his accountant. The shareholder of AITCS was AIT. On 29 June 2012, Mr Springer appointed AITCS as a beneficiary of AIT.

In 2012, the following steps were taken by Guardian, AIT and AITCS:

On 28 June 2012, Guardian resolved to distribute AIT’s income for the 2012 income year, of approximately $2.6 million, to AITCS.
Guardian did not pay the distribution to AITCS, creating an unpaid present entitlement.
In April 2013, around the time that AITCS was due to pay tax on its distribution from AIT, approximately $792k was drawn down by AITCS from its UPE – an amount equal to the tax payable on its distribution from AIT.
In May 2013, AITCS declared a fully-franked dividend of approximately $1.8 million. This dividend reduced the balance of AITCS’s UPE to nil.
On 23 June 2013, Guardian resolved that the net income of AIT attributable to franked dividends be set aside and held on trust absolutely for Mr Springer.

Similar steps were repeated by Guardian, AIT and AITCS in the 2013 and 2014 income years.

At audit, the ATO identified a primary scheme and three secondary schemes.

The primary scheme identified by the ATO consisted of each step taken by Mr Springer, Guardian, AIT and AITCS in relation to the 2012, 2013 and 2014 income years.
The three secondary schemes identified by the ATO consisted of the relevant steps taken by Mr Springer, Guardian, AIT and AITCS in relation to the 2012 distribution, the 2013 distribution and 2014 distributions each as a separate scheme.

Guardian decisions

At first instance, Logan J held that the section 177D did not apply to either the primary scheme or any of the secondary schemes.

On appeal to the Full Federal Court:

“145 The Commissioner’s case on appeal was thus focussed on the narrower 2012 related scheme and the 2013 related scheme. In relation to the 2012 related scheme, the Commissioner’s emphasis was on the steps involving the appointment of income to AITCS [the company beneficiary] and the subsequent dividend paid by AITCS to the AIT [the trust], rather than on the reasons for the incorporation of AITCS and its inclusion in the class of eligible beneficiaries.”¹⁵

Further:

“152 The 2012 related scheme and 2013 related scheme were each a “scheme” as defined in s 177A. The particular form of the 2012 related scheme as identified was not limited to the formation of AITCS or the inclusion of AITCS as an eligible beneficiary of the AIT, or even to the creation of the present entitlement of AITCS to net income of the AIT. The 2012 related scheme included the declaration and payment of the franked dividend by AITCS to AIT following the creation of AITCS’s unpaid present entitlement and the distribution by the AIT of that franked income to Mr Springer. The 2013 related scheme was likewise not limited to the creation of the present entitlement of AITCS to net income of the AIT but also included the declaration and payment of the franked dividend by AITCS to the AIT following the creation of AITCS’s unpaid present entitlement and the distribution by the AIT of that franked income to Mr Springer.”¹⁶

A tax benefit was identified by the Full Court:

“171 Accordingly, it is considered that Mr Springer obtained a tax benefit in each of the years ended 30 June 2012 and 30 June 2013 in the form of the non-inclusion of an amount in Mr Springer’s assessable income in those years.”¹⁷

If the income had been included in Mr Springer’s assessable income, Mr Springer would have paid Australian tax at the non-resident marginal rates, rather than the Australian tax being effectively capped at the company tax rate of AITCS, with no later dividend withholding tax applying.

The role the trust distributions by AIT played was:

firstly, that AIT distributed to AITCS; and
secondly, when AITCS paid a franked dividend to AIT (to offset/satisfy the unpaid entitlement created by the earlier distribution to AITCS), that franked distribution was distributed to Mr Springer who, as a non-resident, then did not pay any additional Australian tax.
The Full Court undertook the exercise of considering the dominant purpose question in a similar manner as the (later) Full Court in Minerva appeal. For example:
“179 As was made clear in Hart 217 CLR at 242–3 [63] (Gummow and Hayne JJ), the inquiry mandated by s 177D is directed at the dominant purpose of a party who enters into or carries out the scheme and not at ascertaining the purpose of the scheme itself.”¹⁸

Also:

“181 In considering the s 177D matters, it may be appropriate and necessary to have regard to the possibilities that existed outside of the scheme entered into or carried out. The various alternatives that were in fact considered may cast light on the conclusion to be drawn from the application of a particular s 177D matter …”¹⁹

The dominant purpose was found for the 2013 related scheme but not the 2012 related scheme.

The reasoning can be summarised from the following comments of the Full Court when considering the first factor under section 177D (manner scheme carried out):

“195 The essential difference between the 2012 related scheme and the 2013 related scheme was that objective circumstances would support a conclusion that, at the time AITCS’s present entitlement to the AIT income was created for the year ended 30 June 2013, Mr Springer (or those advising him) would procure the payment of a dividend by AITCS to clear out the present entitlement and, following the payment of tax by AITCS, flow the franked dividend income back to Mr Springer, giving him direct ownership and control of the value of that present entitlement. Far from the payment of a dividend by AITCS to clear out that present entitlement being wholly conjectural, it would be the most likely course of action.”²⁰

The Full Court concluded after considering all the factors under section 177D that, for the 2013 related scheme (only), Mr Springer, Guardian AIT (i.e. the trust) or AITCS (or those advising them) entered into or carried out the scheme for the dominant purpose.²¹

The Full Court decision did not rely on a narrow “but for” reasoning. The fact that funds flowed through to Mr Springer, rather than funds being substantively accumulated in AITCS for retention/investment, was a significant surrounding circumstance supporting the finding of the relevant dominant purpose.

Conclusions – Part IVA and trust distributions

It is suggested that the central point(s) to take from the Full Court decision in Minerva (which are consistent with the Full Court decision in Guardian) regarding dominant tax purpose is that the text of Part IVA requires a qualitative assessment (conclusion), having regard to the eight factors in section 177D:

of the objective, not subjective purpose
of a person (who is a party to the scheme), not of the scheme
in entering into the scheme as a whole and just a part of the scheme
made from the objective facts – including the actions taken, the objectives/aims of those actions and the consequences – relevant to the totality of the scheme considered in its wider context (to which the eight factors are applied)

The above leaves room for tax considerations to be part of decisions on how trustees may distribute trust income – even if the subject scheme is just the distribution choices (like the fourth scheme in Minerva) – without there being a dominant tax purpose.

For example, the distributions within a family may be part of a wider context – in which it can be objectively supported that the (albeit tax effective) distributions were part of a purpose of genuinely sharing of income within the family over the short and long-term.

In Minerva, the distributions (albeit tax effective) were accepted as being made within, and as part of, a wider commercial structure. There was a timing dimension in that the commercial structure as it already existed (without Part IVA applying to the changes that brought it into existence by the 2007 reorganisation) represented some limit on the wider context the Full Court considered relevant.

In Guardian also there was a timing dimension limiting the wider context, that caused the 2012 related scheme to be regarded differently to the 2013 related scheme.

This timing dimension/limitation for the context may assist either the ATO or the taxpayer but should be expressly considered.

The ATO’s DIS on the Minerva Full Court decision is not considered inconsistent with this thinking, with its confirmation of the objective facts as the determinative – and its acknowledgement of the commercial context found in that case.

Part IVA – trusts and dividend stripping

Recent cases

While dividend stripping (primarily dealt with under section 177E of Part IVA – and, in respect of denial of franking credits, by sections 207-145, 207-150 and 207-155 in the Income Tax Assessment Act 1997), by its nature involves companies, there have been recent instances where trusts have been an integral part of the arrangements.

Section 177E has the effect, where it applies, of deeming a tax benefit (so that a benefit cannot by denied or disproven) in the hands of the relevant taxpayer. Perhaps because of the 2012 changes to Part IVA making the identification of a tax benefit easier for the ATO, the use of section 177E to access this deeming of tax benefit may not now be as important as in prior years. In the decisions we consider below, the franking credit provisions relating to dividend stripping have been sought to be applied.

In this section, the paper will consider:

BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 and the subsequent full court appeal decision in B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89 – referenced as the BBlood Federal Courtsingle judge and Full Federal Court decisionsfor convenience
Michael John Hayes Trading Pty Ltd as trustee for MJH Trading Trust v FCT [2023] AATA 3005
Brief comment is made on Merchant v Commissioner of Taxation [2024] FCA 498 – but it is not considered to substantively relate to trusts.

BBlood

BBlood facts

This section of the paper is concerned with the dividend stripping aspects of the BBlood decisions. (Section 100A aspects are considered separately below.)

The trust (Illuka Park Trust) played a central role in the arrangement for which an assessment was made that denied franking credits to a company (BBlood Enterprises Pty Ltd) – on the basis of section 207-150(1)(g) applying, because the subject distribution that flow indirectly to the company was part of a “dividend stripping scheme” per section 207-150(1)(e).

It is sufficient for present purposes to note the arrangement as one in which:

the terms of the trust, through which a share buy-back was later passed, were amended;
the amendment caused the share buy-back amount, treated as an assessable dividend for tax purposes but which was treated as capital for trust law purposes, to be retained in the trust as capital;
the tax liability for the assessable dividend amount passed to a company beneficiary as part of the net income of the trust, so that franking credits limited the tax (i.e. no “top-up” tax over the company rate was paid); and
the capital amount was later passed out of the trust to individuals without further tax.

Federal Court (single judge) reasoning

Thawley J held that (if he was wrong about section 100A applying) the company,

has not discharged its onus of establishing that the notice of amended assessment of income tax in respect of the 2014 year was excessive. It has not shown that s 207-150(1)(e) does not apply. The Share Buy-Back Dividend was made as part of a scheme which was “in the nature of” dividend stripping within the meaning of s 207-155(a) and was one which “had substantially the effect of a scheme by way of, or in the nature of, dividend stripping” within the meaning of s 207-155(b).²²

The Full Court later disagreed that this company assessment could/should have been affirmed (even in this conditional manner) when the subject income was held as assessed to the trust (a different taxpayer) under section 100A.

But Thawley J’s reasoning on dividend stripping (and the Full Court’s later comments) is helpful to consider.

Thawley J provided the context of the legislation as:

295 Subsection 207-150(1) of the ITAA 1997 relevantly includes:

270-150 Distribution that flows indirectly to an entity

Whole of share of distribution manipulated

(1) If a *franked distribution *flows indirectly to an entity in an income year in one or more of the following circumstances:

…

(e) the distribution is made as part of a *dividend stripping operation;

…

then, for the purposes of this Act:

…

(g) the entity is not entitled to a *tax offset under this Division because of the distribution; and …

296 Section 207-155 provides:

207-155 When is a distribution made as part of a dividend stripping operation?

A distribution made to a *member of a *corporate tax entity is taken to be made as part of a dividend stripping operation if, and only if, the making of the distribution arose out of, or was made in the course of, a *scheme that:

(a) was by way of, or in the nature of, dividend stripping; or

(b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping.²³

The scheme was identified as:

“298 The “scheme” relied upon by the Commissioner as one falling within s 207-55 was constituted by the Illuka Park steps set out at [19] to [28] above. The scheme involved a distribution (the Share Buy-Back Dividend) made to a member (the IP Trust) of a corporate tax entity (IP Co). The making of the Share Buy-Back Dividend and its subsequent treatment were central features of the scheme. The critical question is whether the scheme falls within either the first or second limb of s 207-155.””²⁴

The history of the meaning of “dividend stripping” was considered in a level of detail not possible or relevant to repeat fully here.

The traditional view of a dividend strip is captured by the following extract from Thawley J’s judgment, from the explanatory memorandum to the Income Tax Assessment Bill 1972 (Cth) by which section 46A originally introduced the term into Australian legislation:

“In its simplest form, a dividend-stripping operation involves the purchase by a share trading company of shares in another company which has accumulated profits. A payment of a dividend is then made to the share-trading company which, in effect, wholly or substantially recoups its outlay on purchase of the shares that are then resold for a reduced price or are retained at a reduced value for income tax purposes.

Although, in a commercial sense, the share-trading company may make an overall profit on the transaction, no part of the deduction allowable for the cost price of the shares can be set off against dividend income to determine the part of the dividends included in taxable income on which the rebate is allowable. The result is that, while the dividends are effectively freed from tax by the rebate, the deduction allowed for the cost of acquiring the shares is applied against non-dividend income which thereby escapes full tax.”²⁵

An arrangement involving the purchase/sale of shares is not what occurred in BBlood. Much of Thawley J’s consideration is directed to determining the limits of the meaning of “dividend stripping” – or substantially the effect of a scheme by way of, or in the nature of, dividend stripping (the second limb of section 207-155) – in respect of the BBlood arrangements.

Thawley J:

did not read the authorities as excluding evidence from a taxpayer about the taxpayer’s subjective reasons for doing what the taxpayer did²⁶
regarded the meaning of “dividend stripping” as “protean” (i.e. tending or able to change frequently or easily), so as to encompass what was done in BBlood²⁷
appeared to see a high emphasis on purpose from the authorities, in considering whether a course of action was a dividend strip²⁸
He concluded on the first limb of section 207-155:
“356 Assessing the circumstances and events objectively, but also taking into account the evidence of subjective purpose, the predominant purpose of entering into the scheme was to move the profits of IP Co to its shareholder (IP Trustee) in capital form and without subjecting any person to tax beyond the level of corporate tax already paid on the profits, as reflected in the Franking Credits. Absent the scheme, dividends would have been declared and paid to the IP Trust and additional tax would have been paid. BE Co has not discharged the onus of establishing that the scheme was not undertaken for a tax avoidance purpose. The hallmark feature of tax avoidance necessary for both limbs of s 207-155 permeates the scheme.”²⁹
And, placing an emphasis on the statutory context of a “manipulation” of the imputation system, took a wide view of the second limb:
“365 Like former s 160APP(6), s 207-155 is directed to “manipulation” of the imputation system – see: the heading to s 207-150(1). A conclusion that the second limb of s 207-155 would apply only to a scheme that would be within the first limb, except for the fact that the distribution by the target company is not by way of a dividend or deemed dividend, would leave s 207-155(b) without much of the operation it was evidently intended to have: its principal purpose, read with s 207-150(1)(e) and (g), lies in denying an offset in relation to franking credits attached to distributions such as dividends.
366 BE Co has not discharged the onus of establishing that the scheme did not have “substantially the effect” of a scheme in the nature of dividend stripping falling within the ‘second limb’ of s 207-155.”³⁰

Full Court reasoning

The Full Court held that the company’s appeal against its assessment (as dividend stripping) should be allowed, essentially, because the orders of the primary judge incorrectly maintained two inconsistent assessments.

When section 100A was held to tax the trust, the assessment of the company based on section 207-150, which required that the franked distribution flow indirectly to the company, should not have been affirmed.³¹

Despite this conclusion, the Full Court proceeded to make some observations about section 207-155, which are relevant to consider. The expressed differences in reasoning from that followed by Thawley J are instructive.

The Full Court also reviewed the history of the meaning of “dividend stripping”. It is convenient to extract its summary from paragraphs 101 to 103:

“101 In Consolidated Press Holdings (No 1), the Full Court observed that the four cases referred to by Gibbs J in Patcorp had the following five characteristics in common (at 561 [136]):

a target company, which had substantial undistributed profits creating a potential tax liability either for the company or its shareholders;
the sale or allotment of shares in the target company to another party (a company in three cases and individuals resident in the then Territory of New Guinea in Bell);
the payment of a dividend to the purchaser or allottee of the shares out of the target company’s profits;
the purchaser escaping Australian income tax on the dividend so declared (whether by reason of a s 46 rebate, an offsetting loss on the sale of the shares, or the fact that the shareholders were resident outside Australia); and
the vendor shareholders receiving a capital sum for their shares in an amount the same as or very close to the dividends paid to the purchasers (there being no capital gains tax at the relevant times).

102 The Full Court added that a further common characteristic was a predominant or sole purpose of the vendor shareholders avoiding tax on a distribution of dividends by the target company: Consolidated Press Holdings (No 1) at 561 [137].

103 Together, these six characteristics were said by the Full Court to be the “central characteristics of a dividend stripping scheme”: at 566 [157]. A dividend stripping scheme takes its character from the content of the scheme and its purpose: see 571–2 [183].”³²

The Full Court seemed to place more importance on the purchase/sale aspects of a dividend strip, including when it noted:

“None of the cases involved a payment out of retained earnings to an entity that was an existing shareholder of the company.”³³

The Full Court noted the following matters, which included some differences from the reasoning adopted by Thawley J (as the primary judge).

Firstly:

“… determining whether a scheme is by way of or in the nature of dividend stripping did not involve an inquiry into the subjective purpose of any participant in the scheme. The purpose of the scheme was to be assessed objectively: Consolidated Press Holdings (No 1) at 570 [174]”³⁴

Regarding the first limb:
“In characterising a scheme as being by way of or in the nature of dividend stripping, it is necessary to look at the content, purpose and effect of the scheme. A scheme is not characterised as being by way of or in the nature of dividend stripping by looking only at the purpose of the scheme. Whilst the purpose of avoiding tax on a dividend is the typical characteristic of a dividend stripping scheme, perhaps an essential characteristic, it is not the only characteristic.”³⁵ (bold emphasis added)
“As for content of the scheme – In so far as the content of the scheme is concerned, whilst it may be accepted that the term “in the nature of dividend stripping” is capable of encompassing schemes that depart from the paradigm of a dividend stripping operation, the term cannot be so protean as to be meaningless. It may be doubted that a scheme can be by way of dividend stripping without a participant in the scheme acting as a dividend stripper. Although it is not necessary to express a concluded view, there is room to doubt whether a scheme can be in the nature of dividend stripping where the scheme involves a payment of a deemed dividend between a company and long-standing shareholder.”³⁶ (bold emphasis added)
“As for effect of the scheme – such schemes historically resulted in the receipt by the vendor shareholder of a sum that was not income for tax purposes. The receipt by the vendor shareholder was described as a “capital sum” in contradistinction to an income receipt for income tax purposes. In this context, “capital” was not used in a trust law sense but in the tax law sense. It is observed that the Illuka Park Steps resulted in the existing vendor shareholder receiving a tax law deemed dividend that was taxable as a dividend. The retained earnings of IP Co were not moved from IP Co to the shareholder in a form that was recognised for tax law purposes as capital.”³⁷
The Full Court considered that the second limb raised difficult issues, but it did not make a determination of those issues, regarding them as best addressed in circumstances where any tax liability depends upon their resolution.³⁸ But the issues included:
“…It is an open question as to whether a scheme can have substantially the same effect as a scheme by way of or in the nature of dividend stripping if the scheme involves an existing shareholder receiving a payment in the form of a tax law dividend or deemed dividend.”³⁹
“…If s 207-155(1)(b) has the meaning ascribed to it by the primary judge, it would never be necessary to look past the effect of the scheme.”⁴⁰ This is in the context that the Full Court had doubted, in terms of the content (vs effect) of a scheme, that a dividend strip could exist where a payment is made to a long-standing shareholder (as that shareholder would not be a “dividend stripper” as historically understood).

The sense from the Full Court decision is that there must be a limit to the meaning of a “dividend strip”, which could mean that the involvement of trusts (such as in BBlood) may mean that certain

arrangements fall outside that meaning. Of course, other provisions could then apply. Section 100A was the main focus of the ATO in BBlood.

Also, the Full Court (consistent with the way the Minerva was decided by the Full Court) sought to look at all of the content, purpose and effect of the subject scheme – not just purpose, and certainly not subjective purpose.

Hayes

Hayes facts

The subject assessments were issued to four trusts that were public trading trusts treated as companies for some but not all tax purposes. The assessments were made under section 207-155, applying the dividend franking provisions in respect of “dividend strips” to deny the franking credits to those trusts.

The facts are complex, including because of the multiple entities brought into existence as part of the major restructure. Given the focus of this paper is on integrity provisions relevant to trusts, it is sufficient, for present purposes, to note the arrangements from the AAT’s background comments:

“1. The present applications concern whether fully franked dividends paid in May 2010 by each of four Hayes Group Operating Companies to the Applicants constituted distributions ‘made as part of a dividend stripping operation’ within the meaning of s 207-155 of the 1997 Assessment Act.

2. Each of the four Hayes Group Operating Companies had profits available for distribution to shareholders. Each of them also had franking account balances to enable the dividends that were paid to be franked, and each of them paid significant dividends to new shareholders (the Applicants) in respect of newly created and issued shares.

3. The Applicants are companies who act as trustees of four trusts that are treated as companies by the Assessment Acts for some tax purposes. [This comment noting the public trading trusts status of the trusts.] The four (trustee) companies were acquired in February 2010 by members of the Hayes family and shortly thereafter became trustees of trusts that were formed with particular features or attributes (so as to attract the Trading Trust rules) to participate as Trading Trusts in a reorganisation of the Hayes Group late in the 2010 Year.

4. Shortly after the Applicants were formed, in different combinations two of the Applicants each acquired 10 Z Class shares (shares with special rights) for $1 per share in three of the four Hayes Group Operating Companies, and the other two Applicants each acquired 10 Z Class shares for $1 per share in each of the four Hayes Group Operating Companies. The Z Class shares acquired ‘proved to be a good bargain’. Later, on the day the Applicants acquired those shares, the four Hayes Group Operating Companies declared and paid fully franked dividends totalling $8,008,459.72 to the holders of the Z Class shares.

5. In their 2010 Year income tax returns, each Applicant included the franked dividend amounts and the associated franking credit amounts in its assessable income and claimed tax offsets on account of those franking credits. The effect of the tax offset was to shelter the franked dividends from tax: in cash flow and economic terms the franked dividends were received free of any tax burden. Each Applicant contends it was entitled to the tax offsets claimed.

6. The Commissioner disagrees. He says that all of the dividends that were paid to the Applicants were distributions made as part of a dividend stripping operation because those dividends were paid pursuant to a scheme that:

(a) was by way of, or in the nature of, dividend stripping; or

(b) had substantially the effect of a scheme by way of, or in the nature of, dividend stripping,

with the effect that the amounts of the franking credits associated with the dividends are not included in the Applicants’ assessable income, and the Applicants are not entitled to tax offsets for these amounts, while the dividends received remain included in the Applicants’ assessable incomes.

7. At the core of the dispute is whether the relevant purpose in carrying out the 2010 Hayes Group reorganisation was tax avoidance. The Applicants contend that it was not, and that the purpose was to secure better asset protection features of the asset ownership arrangements within a group of family entities, and to streamline those arrangements. The Commissioner contends the purpose was to avoid tax.

8. The Commissioner does not allege that the transactions were shams. He accepts that the transactions entered into produced the legal and or equitable effect they purport to have produced. Further, the Commissioner has not sought to apply Part IVA of the 1936 Assessment Act to a tax benefit comprising an assumed payment of a dividend to any alternative recipient, or to any amount of tax benefit that may otherwise have arisen for Hayes family members or entities, or to arrangements that allowed loans to be made by entities that were treated as companies for some purposes but not Division 7A purposes.”⁴¹

The public trading trust status allowed income of those trusts to be taxed at the company rate (nil when franking credits were offset) but for loans made by those trusts not to be subject to Division 7A. So, the trusts played that critical role in the arrangements.

AAT decision

The AAT held that the distribution of fully franked dividends following the group restructure was not a part of a dividend stripping scheme because the shareholders did not receive a capital sum as a substitute for taxable dividends paid and there was no tax avoidance purpose.

The AAT summarised the three elements of a dividend stripping scheme that were in dispute:

“… only three elements of a dividend stripping operation that are disputed, namely whether:

(a) the dividends in the Applicants’ hands were taxed;

(b) the original shareholders (as represented by the Hayes brothers) received any, and if so what, capital sum as a substitute for taxable dividends; and

(c) the schemes had the requisite tax avoidance purpose.”⁴²

On the first point, it was rejected that the dividends had been taxed. The “net of franking credits” position – of no tax payable – was considered to be required by the authorities and to sensibly apply the dividend stripping rules.

On the second point (of a capital sum as a substitute for taxable dividends):

The AAT noted that only 30.46% of value made its way to the original shareholders (the Hayes brothers, even if the loan could be seen as a capital sum – considerably less than needed to constitute a dividend stripping operation.⁴³
The majority of the funds paid out by the subject dividends was seen as being returned to source (the operating companies) and, even that minority paid to the Hayes brothers was seen as a refinancing (only) by them of their obligations – neither the “receipt” of capital by the original shareholders.

This analysis did not directly address whether the change of the nature of the loans owed by the Hayes brothers, from being loans subject to Division 7A, to loans which were outside of those rules (because of the public trading trust status of the trusts that received the subject dividends), could amount to a capital sum.

That change of status provided an open-end nature to the funds provided to the Hayes brothers, albeit still subject to ultimate repayment.

On the third point (tax purpose):

The AAT acknowledged the Full Federal Court comments in BBlood, endorsing earlier authority, that the purpose was to be ascertained by an objective assessment of the transactions.⁴⁴
Motivation and factors such as asset protection, non-transformation into non-taxable amounts and non-movement of value beyond the Hayes family, were considered to exclude a conclusion that the sole or dominant purpose was to avoid tax.⁴⁵

Having already defined the three matters in dispute as noted previously – of which purpose was the last – the AAT did not widen its consideration to include the content and effect of the scheme on which the Full Court in BBlood had commented. This seems a function of how the case was run before the AAT and what had been agreed between the parties.

Also, there was no wider discussion of how the issue of the Z class shares (with their dividend rights), related to the first or second limbs of the meaning of a “dividend strip”, including the relevance of the dividends being paid to trusts with the special characteristics of public trading trusts and whether those trusts were to be identified as being the same as the long-standing shareholders (the Hayes brothers).

The long-term advantage (in terms of Division 7A – the advantage that loans could remain outstanding without repayment) of the public trading trusts seemed not to be within contextual time span the AAT considered relevant.

Merchant

The decision by Thawley J, handed down on 14 May 2024, in Merchant v Commissioner of Taxation [2024] FCA 498 is not outside its appeal period.

The decision did not particularly involve trust distributions or particular features of a trust – such as the characterisation of a buy-back dividend as capital in BBlood or the use of public trading trust status in Hayes.

For these reasons, in the context of this paper on trust tax integrity measures, Merchant will only be commented on briefly.

A trust was involved but only as the entity that happened to make the tax loss under the scheme, which Thawley J held was disallowed under Part IVA (generally, not as a dividend strip).

A dividend strip under section 177E was also held to arise, in respect of certain loan forgiveness schemes that, on their implementation, redirected value to that loss trust and out of the creditor companies, when the trust sold shares in the debtor company (its value having been increased by the debt forgiveness).

Conclusion – trusts and dividend stripping

From the recent cases examined, the use of particular features of trusts in arrangements that result in the movement of value out of companies, may not always fall within the scope of a “dividend strip”.

The Full Court in BBlood – but importantly as observations and not part of its decision – has expressed the need to consider:

all of the content, purpose and effect of the subject scheme – not just purpose, and certainly not subjective purpose
a possible limit to any expanded meaning of “dividend strip” – such as, whether a dividend strip could exist where a payment is made to a long-standing shareholder that could be a trust, where the passing of the payment/dividend through the trust could change its character in a tax advantageous way (as in BBlood)

If the AAT is correct in Hayes, certain unique features of trusts – the non-application of the Division 7A rules to public trading trusts in Hayes – may not be sufficient to cause a capital sum to be taken to be paid to which would enliven the dividend stripping rules. We will need to see if the Full Federal Court expresses different views in the appeal.

Of course, anti-avoidance rules other than the dividend stripping rules could still apply (section 100A, Part IVA generally) to circumstances involving trusts.

100A – current state of play

In seeking to summarise the current state of play, this section will comment on⁴⁶:

The ATO position – the history and current guidance in Taxation Ruling TR 2022/4
The aspects of the BBlood cases relating to section 100A – BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 and the subsequent full court appeal decision in B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89, again referenced as the BBlood Federal Courtsingle judge and Full Federal Court decisionsfor convenience.
Because the Full Federal Court appeal, which was limited to the application of section 100A(8) relating to tax purpose, many aspects of the Federal Courtsingle judge decision of Thawley J remain the current statement of the law – including importantly, for current purposes, the meaning of ordinary family dealing
The aspects of the Full Federal Court appeal decision in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 relevant to section 100A – relating to an agreement.

ATO History

The history of the current ATO guidance on section 100A starts with the administrative position published on the ATO website in July 2014, titled “Trust taxation – reimbursement agreement” (https://www.ato.gov.au/law/view/document?DocID=SGM/trusttaxation) – still referred to at paragraph 54 of PCG 2022/2 (under Date of effect), on the basis that the ATO will “stand by” that 2014 administrative position if more favourable to a taxpayer’s circumstances for entitlements arising before 1 July 2022.

This a fairly meaningless concession. The July 2014 ATO guidance made general statements and did not state a reasoned legal basis for the ATO’s views. It was more in the nature of an “ambit claim”.

Example 1 of that July 2014 guidance includes the following (bold emphasis added):

“Example 1 – trust estate

The trustee of a trust estate makes a beneficiary entitled to trust income.

Instead of paying the amount of trust income to the beneficiary, the trustee gives, or lends on interest-free terms, the money to another person. The other person benefits from the trust income but is not assessed on any part of it.

The arrangement does not constitute ordinary commercial or family dealing.

This arrangement would generally constitute a reimbursement agreement if it was intended that the beneficiary who was made presently entitled to the trust income pays a lower amount of tax than would have been payable by the person who actually enjoyed the economic benefits of that income.”

Consistent with the sense of this example, from 2014 the ATO’s focus has been to seek to interpret section 100A by reference to tax purpose. (The other family dealing examples offered in 2014 were uncontroversial, being related to a trust established under will and to family lending at commercial terms.)

The ATO commenced audits on this basis, some of which are still ongoing or are at objection stage.

But taxpayers had to wait until 23 February 2022 before the ATO was prepared to provide a public statement of the claimed legal basis for its views, by way of draft Taxation Ruling TR 2022/D1 and accompanying draft Practical Compliance Guideline PCG 2022/D1. This is despite the ATO promising since October 2018 to provide such a draft ruling. The long history of the repeatedly deferred estimated dates for delivery of the draft ruling has since been (unhelpfully, for taxpayers) deleted from the ATO website.

During this time, taxpayers under audit also experienced delays with the issue of ATO position papers. When ultimately provided, such position papers were described as the “TCN approved view”, in advance of the issue of TR 2022/D1.

Some such audit position papers were being issued in December 2020, a very long time after the July 2014 ATO guidance and numerous earlier promised dates for the draft ruling.

The long delay in the public issue of TR 2022/D1 is difficult to understand, when audits had already been commenced.

When finally issued, TR 2022/D1 sought to accommodate the ATO’s views on the decision of Logan J in Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation [2021] FCA 1619 (handed down on 21 December 2021) – but noted the decision was on appeal and, in parts, maintained alternative views.

TR 2022/4 and PCG 2022/2, as issued on 8 December 2022, include material differences from TR 2022/D1 and PCG 2022/D1 – largely due to the ATO seeking to accommodate the decision of Thawley J in BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 (handed down 19 September 2022).

Not long after the issue of TR 2022/4, the Full Federal Court appeal in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 (Guardian Full Court) was handed down (on 24 January 2023).

The ATO issued a Decision Impact Statement (DIS) on the Guardian Full Court appeal decision (on 24 April 2023). In terms of section 100A, some changes to TR 2022/4 (as issued on 8 December 2022) were made by an Addendum on 27 September 2023, to take account of the Full Court’s observations on the existence of an agreement (particularly, consensus and adoption, as noted below) – including whether a beneficiary must be a party to the agreement and the adoption of plans or recommendations from advisers. The ATO changes still seek to maintain the widest possible meaning of agreement.

All this history has been difficult for taxpayers under audit.

Where exactly do the ATO views sit now, per (the last updated September 2023) TR 2022/4?

TR 2022/4 – general approach

Paragraph 5 of TR 2022/4 sets out the ATO approach at the highest level. Fully extracted, that paragraph states (bold emphasis added);

“5. This Ruling provides the Commissioner’s view about these arrangements and the 4 basic requirements for section 100A to apply, namely that:

• The following 3 requirements are satisfied:

− ‘Connection requirement’ – broadly stated, the present entitlement (or amount paid or applied for the benefit of the beneficiary) must have arisen out of, as a result of or in connection with a reimbursement agreement (being an agreement, understanding or arrangement that has the 3 qualities described in the following points in this paragraph).

− ‘Benefit to another requirement’ – the agreement must provide for the payment of money or transfer of property to, or provision of services or other benefits for, a person other than that beneficiary.

− ‘Tax reduction purpose requirement’ – a purpose of one or more of the parties to the agreement must be that a person would be liable to pay less income tax for a year of income.

• The ‘ordinary dealing exception’ is not satisfied – the agreement must not be one that has been ‘entered into in the course of ordinary family or commercial dealing’.”

More comment is made below (under ”Issues with ATO guidance”) but, at this point and as already foreshadowed above, it can be noted that stating the structure of section 100A this way – particularly the characterisation by the ATO of tax purpose matters as relating to a requirement rather than acknowledging the absence of tax purpose as an exception (just like the ordinary dealing exception) – does not accord with the words of section 100A.

The grouping in TR 2022/4 of the meaning of “agreement” with the “arose out of” requirement also tends to distract from the primacy, and starting point, of the existence of a “reimbursement agreement” under the structure of section 100A – before any consideration of the exceptions for no tax purpose and for ordinary dealing.

It is reasonable to expect that adherence to the exact structure and the exact words of section 100A would provide the most reliable guidance.

As already noted, such departure from the exact words and exact structure of section 100A in TR 2022/4 appears to be an attempt to promote a focus on tax purpose.

Agreement

In paragraphs 66 to 70D (paragraphs 70A to 70D added in September 2023) of the Appendix 1 – Explanation part of TR 2022/4, the widest possible approach to the existence of an agreement is taken, relying sometimes on case law from former section 260 and other provisions. There appears to be an intention to regard repeated cooperation, such as occurs within families, as constituting an agreement.

This is particularly evident from comments in paragraphs 70 to 70D about such matters as tacit adoption, concerted action, an understanding over a period of time (footnotes omitted, bold emphasis added):

“70. An agreement could be:

• informal concerted action by which 2 or more parties may arrange their affairs towards a purpose; an example in the particular context of section 100A would be an ‘arrangement or understanding’ that the beneficiary would act in accordance with the wishes of another person or group, or

• an understanding that the parties will implement a series of steps undertaken individually or collectively by those parties over a period of time, or

• the actual implementation of such a series of steps.

70A. The parties to the agreement may include advisers who formulate the documentation and implement the agreement with the knowledge and assent of one or more parties to the transactions (or the party’s controllers, where relevant).

70B. A person can be made a party to an agreement without knowing its terms where another person is authorised to act on their behalf or where they have agreed to follow the decisions of another person in relation to the management of certain affairs. Whether these conclusions can be reached in a specific case is a question of fact, which may turn on the documentary and other evidence relevant to determining whether an agreement, arrangement or understanding exists. The Courts have not prescribed what being authorised to act means, but have observed that authorisation would not be established simply by showing a general practice of following advice.

70C. Section 100A applies according to its terms, which do not require a presently entitled beneficiary to be a party to the agreement. However the Courts have recognised in some cases that it cannot be concluded that there is an agreement that meets the conditions of being a reimbursement agreement unless the presently entitled beneficiary, or at least their controller or representative, is a party to that agreement. For example, where an alleged reimbursement agreement requires a presently entitled corporate beneficiary to declare and pay a franked dividend in favour of the trustee to achieve the intended taxation outcome of that dividend being appointed to another beneficiary, the beneficiary or their controller would ordinarily have to be a party to that agreement. For other cases, whether a beneficiary will be required to be a party to the agreement for it to be a reimbursement agreement will depend on the particular circumstances and documentation.

70D. Consistent with the approaches of the Courts where the meaning of the words ‘agreement’, ‘arrangement’ or ‘understanding’ have been otherwise considered:

Where, as provided by subsection 100A(13), an agreement can be implied, it is open to infer that an agreement exists from the surrounding circumstances or the conduct of the parties. In the particular context of section 100A, examples of where it is possible that this inference may be drawn include

-where the conduct of the trustee and others is inconsistent with the rights and duties imposed by the trust deed and the general law

-where parties act in accordance with the advice of a professional adviser (or rely on the professional adviser) in undertaking a series of steps or taking concerted action, and it is open to infer that the parties had knowledge of, and had assented to a relevant plan formulated by the adviser.

While an ‘arrangement or understanding’ must have been entered into consensually, the parties’ acceptance or adoption may be tacit and it is not essential that they be committed or bound to support it. The arrangement may be both informal and unenforceable, and the parties may be free to withdraw from it or to act inconsistently with it, notwithstanding their adoption of it. An arrangement or understanding may lack formality and precision.”

Further, at paragraph 74, it is acknowledged that an expectation is not an agreement, but an emphasis on conduct before and after the time an entitlement arises seeks to extend what will constitute an agreement (footnotes omitted):

“74. Where a present entitlement arises from an agreement or a payment or application of trust income results from an agreement, naturally, the relevant agreement must be in existence at the time when the present entitlement arises or the payment is made or funds applied. An expectation that some arrangement will be entered into after the creation of the present entitlement is not sufficient for the purposes of section 100A. The existence of an agreement might be established by evidence of the conduct of the parties before and after the time the present entitlement is created.”

The ATO modified some of its prior paragraph 74 comments to allow for the Guardian appeal decision to add the second sentence acknowledging that an expectation is not sufficient.

Connection requirement

The breadth of the ATO’s view about a present entitlement arising from a reimbursement agreement is probably best summarised in paragraph 73 (footnotes omitted) (bold emphasis added):

“73. It is sufficient for there to be a connection between the reimbursement agreement and some other act, transaction or circumstance from which the entitlement has arisen. If the beneficiary’s present entitlement or the payment or application of income to or for them was one of the consequences of any act, transaction or circumstance that occurred in ‘connection with’ or ‘as a result of’ the reimbursement agreement, this aspect of subsections 100A(1) or (2) would be satisfied. The existence of such a connection will depend on the facts of a particular case.”

Taxpayers should take care about the evidence they should retain and be able to present, in addressing the onus the ATO will demand be satisfied in respect of claims about what would have been distributed to the beneficiary absent any reimbursement agreement – per paragraph 76 (footnotes omitted):

“76. The taxpayer has the onus of establishing a reasonable expectation that the beneficiary would have been presently entitled to the original amount if the reimbursement agreement had not been entered into. A ‘reasonable expectation’ requires more than a possibility. It involves a prediction as to events which would have taken place if the reimbursement agreement had not been entered into. The prediction must be sufficiently reliable for it to be regarded as ‘reasonable’.”

Benefits to another

The wide scope of how a benefit may arise to someone other than the beneficiary is set out in paragraphs 79 and 80.

This includes (consistent with the BBlood decision, commented on below) that a reimbursement agreement does not need to involve a payment to – and so a “reimbursement” back from – a beneficiary.

“79. Subsection 100A(7) does not limit who can be the provider of the money, property, services or other benefits. It also does not require that a benefit be provided directly.

80. Similarly, it is not a requirement of subsection 100A(7) that the ‘relevant trust income’, to which the beneficiary is presently entitled or has paid or applied for their benefit, also be the precise form or amount of the benefits that are provided to another person under the agreement. It is sufficient that someone other than the beneficiary benefits, such as by the provision of money, property, services or other benefits, whether directly or indirectly procured by (or in connection to or as result of) the beneficiary’s present entitlement (or the income paid or applied for the beneficiary).”

Tax reduction purpose

The ATO adopts from the words of section 100A(8) (and from the BBlood decision commented on below) a view that it is the tax “purpose of one or more parties to the agreement”⁴⁷ that is relevant – not the tax purpose or effect of the agreement.

Paragraphs 84, 84A (both replaced or added in September 2023) and 85 summarise the narrowness of the bases on which a tax purpose may be taken not to exist (footnotes omitted):

“84. An agreement is entered into for a tax reduction purpose if any of the parties to the agreement entered into the agreement for that purpose. For there to be a tax reduction purpose, ‘[i]t is not part of the statutory task to establish what the parties would have done if the agreement had not been entered into.

84A. In BBlood FCFCA, the Court observed that:

An inquiry as to the purpose of a party (as required by s 100A(8)) is, on the other hand, an historical inquiry of why [a] party entered into the agreement in fact entered into. The inquiry is not a prediction. Nor is it an examination of a comparative position or comparative outcomes for a particular taxpayer requiring you to remove from the proposed future what was done and positing what might have been done: Ludekens at 192.

85. To meet the tax reduction purpose requirement:

the person whose tax liability is to be reduced or eliminated need not be a party to the reimbursement agreement

the income tax liability to be reduced can be in relation to any year of income, meaning that a purpose of deferring tax to a later year would be sufficient to demonstrate the tax reduction purpose
a person can have a purpose of securing a reduction in tax for subsection 100A(8) even where that purpose is not achieved or ceases to be held at some time following the entry into the agreement
there is also no requirement that the tax reduction purpose be the sole or dominant purpose of the party or parties for entering into the agreement. It need only be one of the purposes of the relevant party or parties for entering into the agreement”

Ordinary dealing

As for TR 2022/D1 before, the ATO’s views on the ordinary dealing exception are likely to remain the most contested parts of TR 2022/4 – especially about what is in the course of ordinary family dealing.

(The author found particularly surprising the prior ATO statement at paragraph 163 of TR 2022/D1 presuming to identify the “contemporary meaning” adopted by Parliament, without any reference to the principles of statutory interpretation. That statement has been removed in TR 2022/4 without explanation, or acknowledgement of its error.)

The ATO has had to adapt its views previously expressed in TR 2022/D1, as a consequence of the BBlood decision by Thawley J.

In TR 2022/D1 the ATO sought to directly apply the predication test from Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 as the meaning of “entered into in the course of ordinary family or commercial dealing” in section 100A.⁴⁸

Because Thawley J in BBlood did not mention Newton in his reasoning on the ordinary family or commercial dealing exclusion, the ATO has in TR 2022/4 altered its reasoning to be about a supposed “core test” of family and commercial objectives:

“98. The core test is that ordinary family or commercial dealing is explained by the family or commercial objectives that the dealing will achieve…”

The ATO still seeks, albeit less directly, to rely on the Newton reasoning by making those objectives primarily about tax purpose, as illustrated by paragraphs 99 and 100 (footnotes omitted) (bold emphasis added):

“99. The method for applying the core test is to ask whether a dealing can be explained by, or is founded in, the achievement of family or commercial objectives. In one sense, this closely parallels the predication test in former section 260, first expressed in Newton and applied in later High Court authorities on that section. Under the predication test, as originally formulated by Lord Denning on behalf of the Judicial Committee of the Privy Council, for the Commissioner to establish that an arrangement had the purpose or effect of avoiding tax, that purpose had to appear on the face of the arrangement. If having regard to the overt acts by which an arrangement was implemented, it was ‘capable of explanation by reference to ordinary business of family dealing, without necessarily being labelled as a means to avoid tax’, section 260 would not apply.

100. The Courts that have considered section 100A and observed that the wording of the ordinary family or commercial dealing test derives from the decision in Newton have also cautioned that there are differences in the statutory tests as between sections 100A and 260. Notwithstanding these differences, the principles drawn from the authorities on former section 260 can be helpful in demonstrating whether family or commercial objectives explain, found or (to adapt the language of the section 260 cases) are the predicate of the dealing to which the core test is being applied.”

In expounding these (new) views about family or commercial objectives:

the core test is stated to involve “an inquiry into what the objectives of the dealing are, whether the transactions achieve that objective and whether they are better explained by achieving some other objective”;⁴⁹
it is maintained that lack of artificiality does not make a dealing ordinary;⁵⁰ but
contrivance, artificiality, (excessive) complexity and being tax-driven are advanced as pointing against ordinariness.⁵¹

In essence, the dichotomy (from Newton) that a dealing cannot be both tax-driven and be ordinary is sought to be maintained.⁵²

Paragraph 106 sets out instances (of an arrangement) which call for close examination of whether the contrivance, artificiality, (excessive) complexity and tax-driven factors – that indicate non-ordinariness – exist:

the manner in which an arrangement is carried out has contrived or artificial features
family or commercial objectives could have been achieved more directly; for example, could the arrangement instead have simply or directly provided the benefit to the person who actually benefited, such as by making that person presently entitled to trust income
the complexity of the arrangement and the presence of additional steps that achieve no commercial purpose
the conduct of the arrangement is inconsistent with the legal and economic consequences of the beneficiary’s entitlement (such as an asset or funds representing the entitlement are purportedly lent to others without any intention of being repaid), and
income entitlements have actually been remitted to the beneficiary, amounts were subsequently returned or other benefits or services were provided, by way of gift or otherwise to another person (such as the trustee, another beneficiary or an associate, whether by the beneficiary or by the trustee either independently or under a power of attorney).”

The ATO repeats from TR 2022/D1, and elevates to an example in TR 2022/4 at paragraph 96, a family member’s medical costs as a contextual fact for family objectives accepted as not extraordinary:

Example 1 – identifying family objectives

“96. In an income year, family members agree to gift their trust distributions to one family member, Paul, who has significant medical bills. The arrangement is implemented via trust distributions to the family members and a gift by each of them to Paul. That Paul has significant medical bills is not a part of the agreement; however, it is a highly relevant contextual fact which demonstrates the content of the family objectives

The ATO introduces in paragraphs 109 to 113 of TR 2022/4 the idea (and examples) of cultural factors that may explain gifting between family members:

“109. The test is objective. Cultural factors inform the question whether a dealing is to achieve family or commercial objectives.

Example 2 – cultural practice of gifting

110. Azra is a member of an extended family whose members’ cultural values include grandparents gifting money or goods to younger members of the family during the festive season. This cultural practice is relevant in considering whether transactions that involve Azra gifting money to her grandchildren out of funds from a trust distribution she has received have been entered into in the course of ordinary family or commercial dealing.

Example 3 – cultural practice to support older relatives

111. Jack lives by the practices that have been common for centuries in the culture that he draws his heritage from. One of those practices is that children will meet the needs for shelter and living of their parents and other older relatives when they are no longer participating in the workforce. This is founded in notions of respect for elders and is practiced irrespective of what means those relatives would have to fund their own needs from available resources. This cultural practice is relevant in considering whether Jack’s direction to the trustee of a trust to apply his entitlements to meet mortgage repayments for his aunt, who has retired from her employment working in a factory, is in the course of ordinary family or commercial dealing.

112. Cultural factors refer to the distinct and observable ideas, customs or practices of people or certain groups within a society. The existence of a cultural factor which is not widely understood in the broader community can be demonstrated by evidence. As the core test is applied to the whole of the agreement, rather than the individual steps, whether the presence of a cultural factor determines if a dealing is entered into in the course of ordinary family or commercial dealing will depend on the facts of the case.

Example 4 – cultural practice of not accepting entitlement

113. Max and the trustee of a trust he controls agree to distribute certain income of the trust to Asher, a non-resident who for religious reasons will not accept the entitlement. While Asher’s beliefs are a cultural factor that explains why the entitlement will not be called for, in these circumstances they do not, without more, explain the objectives for making the resolution to distribute in the first place.”

These cultural examples are the closest the ATO comes to directly addressing whether “simple” family sharing or joint consumption of income/assets is ordinary. Even then, the favourable examples⁵³ are heavily limited by:

gifting during a festive season; and
the gift being made irrespective of what means the giftee relative would have to fund their own needs – and described as based on a practice that has been “common for centuries”!

BBlood

Full Court appeal – tax purpose

The Full Court appeal only dealt with the limited matter of tax purpose under section 100A(8) combined with the effect of section 100A(9).

The Full Court found such a purpose existed and dismissed the taxpayer’s appeal.

While the Full Court did not find the relevant purpose was a person’s subjective purpose, it did note the following points in its reasoning:

The purpose to be identified is not an objective purpose of an agreement but the purpose of a person who is a party to the agreement⁵⁴
Section 100A(8) will be satisfied if the proscribed purpose is one of the purposes of a party. There is no requirement that the proscribed purpose be the sole or dominant purpose⁵⁵
The advisers formulating the documentation and implementing the arrangement with the knowledge and assent of the controllers of the entities who were parties to the transactions are themselves parties to the reimbursement agreement⁵⁶
An inquiry as to the purpose of a party (as required by s 100A(8)) is, on the other hand, an historical inquiry of why party entered into the agreement in fact entered into. The inquiry is not a prediction⁵⁷
The relevant purpose is that a party intends that, by entering into the agreement, someone — “a person” — is liable to pay “less tax” or no tax in a year of income. Whether that intention would in fact be realised is not to the point. It is not part of the statutory task to establish what a particular person’s hypothesised tax position would necessarily have been in a particular income year in coming to a view about the purpose of a person⁵⁸
The conclusion as to purpose is to be drawn in light of the established facts⁵⁹
An investigation as to the purpose of a party in entering into an arrangement may include a consideration of the circumstances leading up to and surrounding that entry⁶⁰

It is suggested that it will be very difficult to exclude a finding of tax purpose under section 100A(8), even in the simple scenario of distributing income from a trust across family members. The typical calculations made of the income of each family member and resulting matching of distributions to the tax thresholds for margin tax rates, will themselves provide evidence of that tax purpose.

But the other aspects of section 100A, may still exclude its application.

Federal Court (single judge) reasoning – excluding tax purpose

Example 11 in TR 2022/4 appears to relate to the type of arrangement dealt with in BBlood.

While the taxpayer in this case was unsuccessful, in the author’s view the reasoning adopted by Thawley J in his decision is very helpful to taxpayers in general – particularly by providing some clear guidance in respect of the exclusion from an agreement under s 100A(13) of “an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing”. The following comments focus on what was held regarding that ordinary dealing exception.

As already summarised under the dividend stripping section, the arrangement as one in which:

the terms of a trust through which a share buy-back was later passed was amended;
that amendment caused the share buy-back amount to be treated as an assessable dividend for tax purposes, but which was capital for general trust purposes, to be retained in the trust as capital;
the tax liability for the assessable dividend amount passed to a company beneficiary as part of the net income of the trust, so that with franking credits tax was limited (i.e. no “top-up” tax over the company rate was paid); and
the capital amount was later passed out to individuals without further tax.

After stating the provisions of section 100A, Thawley J identified the issues raised for the potential application of section 100A as follows:

“The issues raised by s 100A in its potential application to the present case include:

(1) Issue 2(1): whether there was an agreement, arrangement or understanding and, if so, whether it included the “initiation of” and “planning for” the Illuka Park steps as opposed to the agreement to implement, and implementation, of the transaction;

(2) Issue 2(2): whether the agreement, arrangement or understanding was entered into in the course of ordinary family or commercial dealing;

(3) Issue 2(3): whether a “reimbursement agreement” for the purposes of s 100A requires that the “payment” referred to in s 100A(7) be, in substance, a reimbursement for the relevant beneficiary being made presently entitled to the income of the trust;

(4) Issue 2(4): whether, in the terms of s 100A(8) and (9), any party to the “agreement” entered into the agreement for the purpose, or for purposes that included the purpose, of securing that a person who, if the agreement had not been entered into, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the agreement had not been entered into;

(5) Issue 2(5): whether, in the terms of s 100A(1)(b), any or all of BE Co’s present entitlement to income of the IP Trust arose out of the “reimbursement agreement” (if there was one) or arose by reason of any act transaction or circumstance that occurred in connection with, or as a result of the reimbursement agreement.”⁶¹

Thawley J did not mix the questions of:

agreement
arose out of

as the ATO does in TR 2022/4 and, in his following analysis, treated both the matters of:

ordinary dealing
tax purpose

as separate exceptions, in accordance with the words of section 100A.

Agreement

Regarding an agreement, it was held⁶² that the “Iluka steps”⁶³ were an agreement within section 100A(13).

But Thawley J rejected ATO submissions that initiation and planning were part of the agreement⁶⁴, stating at paragraph 90:“90. There either is or is not an “agreement” (which can include a non-legally binding “understanding”) within the meaning of s 100A(13). If the Commissioner contends that there is one, he should identify it. A statement that the “agreement” includes “initiation” and “planning” says nothing about what the contended “agreement” is.”⁶⁵

Ordinary family or commercial dealing

Regarding the ordinary dealing exception, Thawley J firstly directs attention⁶⁶ to the relevant statutory question as being whether:

the agreement was entered into in the course of ordinary family or commercial dealing. He stresses that it is not whether individual steps carried out in implementing the agreement, viewed in isolation, could be characterised as steps entered into in the course of ordinary family or commercial dealing; and
the agreement was entered into in the course of ordinary family or commercial dealing, not whether the agreement was an ordinary family or commercial dealing.

It is made clear⁶⁷ that individual steps might be considered – but the statutory question is different.

Secondly, Thawley J acknowledges⁶⁸ that this statutory question “is distinct to the inquiry about purpose required by s 100A(8) and (9)” and then explains⁶⁹some matters that may be looked at in determining the statutory question.

Those matters include:

what is “said to be” the object to be achieved by a dealing – in the course of which the relevant agreement was entered into;
the relevance, to the claimed object, of particular steps under the agreement;
whether particular steps might be explained by objectives different to the objectives “said to be” behind the ordinary or commercial dealing;
that a dealing might not be an ordinary family or commercial dealing if it is overly contrived, or artificial; and
that a dealing might not be an ordinary family or commercial dealing if it involves more than is required to achieve the relevant objective – such as additional steps not necessary to achieving the (claimed) objective.

It is noteworthy that no mention of the decision in Newton v FCT (1958) 98 CLR 1 is made by Thawley J in relation to section 100A(13).

Thirdly, consistent with these observations about tax purpose, in explaining⁷⁰ the relevance of the decision in FCT v Prestige Motors Pty Ltd (1998) 82 FCR 195 to determining the relevant statutory question under s 100A(13), Thawley J is careful not to refer to tax purpose as the determining factor but to instead cite the references made in Prestige Motors to an absence of:

“commercial motivation” for one transaction⁷¹;

• “commercial justification”, leaving “the only explanation for the entry into the agreement as the elimination or reduction of tax liabilities”⁷²; and

• “commercial necessity or justification for the transaction” or “commercial reason to raise capital from outside the group“⁷³.

Ultimately, Thawley J held the arrangements were not entered into in the course of ordinary family or commercial dealing after he considered the various attributes of the arrangement as a whole – which included but was not limited to its objectives.

It is worth extracting the relevant paragraphs in full, given their importance as direct authority on the ordinary dealing question (bold emphasis added):

“100 The agreement comprising the Illuka Park steps as a whole was not an agreement “entered into in the course of ordinary family or commercial dealing”. Nor was the agreement to implement the Illuka Park steps. Whether the agreement is viewed as the agreement to enter into the steps, or the steps as a whole, the agreement was unusual. Its complexity was not shown to be necessary to achieving a specific outcome sought to be achieved by a dealing aptly described as “an ordinary family or commercial dealing”. It was not explicable, for example, as having been entered into for family succession purposes. Nor was it explicable as having been entered into as part of an ordinary commercial dealing.

101 As I have said, whilst it may be relevant to the statutory inquiry, it is not necessarily persuasive that an individual step can be seen to be “ordinary”. Viewed in isolation, the generation of income in IP Co of about $300,000 might be something done in the course of an ordinary family or commercial dealing. Even that is doubtful because this was the first time this had occurred and was accordingly not consistent with the historical behaviour of the parties. Moreover, this component of the Illuka Park steps does not suggest that the agreement to implement the Illuka Park steps or the agreement comprising all of the Illuka Park steps were “ordinary”.

102 It might be said that a buy-back is an ordinary commercial transaction. The statutory question, however, is whether the agreement as a whole was entered into in the course of an “ordinary family or commercial dealing”. In any event, even viewed in isolation, the applicants did not establish a sensible commercial or family rationale for adopting the buy-back procedure. As is explained further below, the explanations given for the buy-back component of the agreement are unlikely. The buy-back was not conducted for the purpose of simplifying the corporate structure as suggested. Nor was it done for succession planning purposes as suggested.

103 It might be said that the variations to the IP Trust Deed were, viewed in isolation, an ordinary family or commercial transaction. Although relevant, that is not the issue. The issue is whether the agreement as a whole was entered into in the course of a family or commercial dealing. 104 Having examined the agreement as a whole, I am not satisfied that the agreement to implement the Illuka Park steps was an agreement which was entered into in the course of ordinary family or commercial dealing. I am also not satisfied that the agreement comprised of the Illuka Park steps as a whole was an agreement which was entered into in the course of ordinary family or commercial dealing.”⁷⁴

Guardian Appeal

Regarding section 100A, the most important reasoning the Full Court appeal decision in Guardian has added to that of the earlier (single judge) Guardian decision by Logan J, is that supporting there being no agreement within the meaning of section 100A(13) – and accordingly that there could not be any “reimbursement agreement” for the purposes of section 100A(7)⁷⁵.

An interesting part of the Full Court’s reasoning was a rejection of the ATO’s arguments seeking to draw on Part IVA case law, about attributing the purpose of an adviser to a client, to support the client being a party to an agreement⁷⁶. This point is acknowledged in the ATO’s DIS on the decision.

The reasoning incidentally highlighted the important difference between Part IVA and section 100A – that the focus of section 100A is on the existence of a relevant agreement, not on purpose (bold emphasis added)⁷⁷:

“123 … the entire object of s 177D is to require a conclusion be drawn in respect of the purpose of a party based on the factors specified in s 177D. That purpose is not the party’s actual subjective purpose but an attributed purpose …

124 The inquiry in relation to the existence of a reimbursement agreement in s 100A is different. It requires the existence of an “agreement” (as defined in s 100A(10)[sic]) invoking, as it does, a requirement of consensus and adoption. The scope for attribution in that context is far more limited.”

Also, regarding expectation versus agreement⁷⁸:

“111 … By contrast, an expectation that an arrangement will be entered into after the creation of the present entitlement is not sufficient for the purposes of s 100A.”

Unresolved issues with ATO guidance – risks

In considering the issues raised below regarding TR 2022/4, the Compendium to TR 2022/4 (providing ATO responses to comments received on Draft Taxation Ruling TR 2022/D1) can be a useful source of additional insight into the ATO reasoning underlying TR 2022/4:

https://www.ato.gov.au/law/view/document?LocID=%22CTR%2FTR2022EC4%2FNAT%2FATO%2F00001%22&PiT=99991231235958

This is particularly so because some of the issues raised are matters that were also raised in respect of TR 2022/D1, but which the ATO has not accepted or to which the ATO has not fully responded.

Approach in TR 2022/4 – versus the words and structure of section 100A

As already previewed above in section 3.2, there is a reason to question the ATO’s overall approach as set out in paragraph 5 of TR 2022/4, of:

“The following 3 requirements are satisfied:
- ‘Connection requirement’;
- ‘Benefit to another requirement’;
- ‘Tax reduction purpose requirement’; and
The ‘ordinary dealing exception’ is not satisfied”

It is true that these four dots points also appeared, but as equal points, in TR 2022/D1 (and, with hindsight, did not get the attention deserved at that time). But, in TR 2022/4, the ATO has sought to exaggerate the incorrect distinction between tax purpose as a requirement and the ordinary dealing as an exception, by the grouping the three requirements together separately from what is represented as a sole exception.

By doing so, paragraph 5 of ATO 2022/4 incorrectly represents both the words of section 100A and the approach taken in the case law.

It:

distracts from the primacy, and starting point, of the existence of “reimbursement agreement” in applying section 100A; and
misrepresents the role of the tax purpose (in misstating it as a requirement) by both:
- taking tax purpose to be part of the positive process of determining what arrangements are included in a “reimbursement agreement” – rather than correctly reflecting the absence of tax purpose as solely a basis for exclusion from what is the correct primary focus – of whether there a “reimbursement agreement”; and
- by that incorrect statement of the role of tax purpose – also failing to adhere to the limitation of the relevance of questions of tax purpose to consideration of the entirely separate and equally important second exception of ordinary dealing.

It is difficult to understand why the words of section 100A are not more faithfully reflected in TR 2022/4. After all, it has been eight years since the ATO first commenced agitating section 100A matters, with its 2014 examples.

It invites the conclusion that it is a deliberate decision, made to advance (continue) the ATO’s preferred views about tax purpose being more central to the operation of section 100A than the actual words of the section (and the case law) allow.

Scope of agreement

The approach adopted in TR 2022/4 of claiming the existence of an agreement:

based on tacit adoption, concerted action, an understanding over a period of time⁷⁹: and
from conduct before and after the time an entitlement arises⁸⁰,

goes too far.

It is inconsistent with the reasoning from the Guardian Full Court appeal – it does not adequately reflect the need for consensus and adoption.

It is noteworthy that:

the ATO seeks to adopt the widest possible views of “agreement” so as to find a “reimbursement agreement” from informal understandings; and
in contrast, when addressing what is an ordinary family dealing, the ATO does not seek to recognise/discuss the many and long-term understandings that exist in any typical family (regardless of culture) – including about the sharing of financial, physical, emotional, etc. resources – that make up the course of ordinary family dealing.

Ordinary dealing – “core test” concept

TR 2022/4 introduces the new concept of the “core test” relating to, and seeking to limit, the ordinary family or commercial dealing exceptions. Such a core test, as framed by the ATO, has no direct case law basis.

While in BBlood Thawley J had reference to objectives in applying the ordinary family dealing exception, objectives were not (and were not stated to be) the core test. Objectives were part (only) of the overall consideration (of the full wider context) undertaken by Thawley J.

In TR 2022/4, the ATO has “repackaged” its prior references to and focus on tax purpose, as drawn from Newton, to instead be “family objectives” as part of this claimed core test – while still retaining the same “predication test” reasoning from Newton.

There is nothing in BBlood that prioritises objectives as a “core test”, much less tax-related objectives. Only (what will be referred to here as) a “whole of dealing” approach – considering all of the actual steps taken, complexity, artificiality, objectives, etc. – as undertaken by Thawley J in BBlood is authorised by that decision.

The comment is made in TR 2022/4 (at paragraph 28) – “If the objective of a dealing can properly be explained as the payment of less tax to maximise group wealth, rather than some other objective which is a family or commercial objective, it is not an ordinary family or commercial dealing.”

This comment is an express continuation (re-packaged) of the ATO’s prior tax purpose-based reasoning from Newton.

The ATO’s refusal to depart from its Newton derived approach is also indirectly evident from the ATO’s persistence in equating “tax avoidance” with having a “tax purpose” when considering the ordinary dealing exception. This labelling (in advance) of certain behaviour as tax avoidance flags the preconceived conclusion the ATO wishes to see realised from section 100A – that the section applies to confirm having a tax purpose as being tax avoidance – regardless of the actual words of section 100A.

Under the “whole of dealing” approach undertaken in BBlood, ordinariness is not excluded by having a tax purpose/objective. Ordinariness is instead judged by reference to (all) the types of matters noted in TR 2022/4 at paragraph 27 – whether artificial or contrived, overly complex, the objectives, the actual steps, extra steps (but without some overriding tax purpose related exclusion).

In that context, there is usually no conflict between what is ordinary and what is commonplace in family dealings – which includes the “simple” and frequent decisions by adult family members (based on the whole complexity of family relationships, values, etc.) to share resources within the family.

The distinction that the ATO has sought/still seeks to maintain from Newton – to exclude tax influenced family cooperation from being ordinary – does not apply, on a proper reading of section 100A and the case law.

Simple family sharing – what medical conditions justify sharing?

This ATO refusal to acknowledge “simple” family sharing as ordinary in the context of reimbursement agreements reflects in the ATO’s Example 1 in TR 2022/4, regarding Paul’s medical expenses being funded by gifts from family members (noted under section 3.7 above).

The ATO acknowledgement that Paul’s medical costs are a relevant contextual fact or circumstance suggests that there must be some such “special” reason for family sharing of resources, for it to be ordinary.

This approach is both unnecessary on the words and structure of section 100A and naturally leads to challenges – does the ATO intend to publish guidance on what medical conditions qualify as sufficiently “special” to justify family sharing being ordinary?

In its refusal to engage with simple family sharing as being objectively ordinary, the ATO is reserving to itself the right to make what will necessarily amount to value judgements, when it seeks to undertake a more in-depth assessment of a family’s interactions. Such a more in-depth assessment of simple sharing within a family is not required (or authorised) by the words and structure of section 100A.

Simple family sharing – not so different between cultures

Rather than introducing new concepts that are not supported by the words of section 100A, such as cultural issues, TR 2022/4 should have directly addressed the simple and commonplace acts of sharing and of collective use/consumption within families.

The words of section 100A refer to “family”, not culture as now introduced in TR 2022/4.

That simple family sharing (including to maximise wealth) may be regarded as non-ordinary, can only be a sustainable argument under the tax purpose-based reasoning from Newton – by which ordinary family dealing is mutually exclusive with a tax purpose-based arrangement.

TR 2022/4 acknowledges⁸¹ that BBlood did not contain a reference to Newton in Thawley J’s reasoning on the ordinary dealing exception – which is in conflict with TR 2022/4’s claim of BBlood as legal authority for the ATO’s Newton based reasoning in respect of the ordinary dealing exception.

Agreement and reimbursement agreement

So, where are we on the questions of agreement and reimbursement agreement?

The meaning of the complete phrase “reimbursement agreement” is drawn from two provisions within section 100A:

section 100A(13), which provides a definition for “agreement”; and
section 100A(7) which sets out when an agreement becomes a reimbursement agreement.

Those sections, when considered together, set out when a set of arrangements will be a reimbursement agreement.

What is an “agreement” in section 100A(13)?

Section 100A(13) defines “agreement” as follows (bold emphasis added):

“any agreement, arrangement or understanding, whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings, but does not include an agreement, arrangement or understanding entered into in the course of ordinary family or commercial dealing.”

There are three features to note in the definition:

“agreement, arrangement or understanding” is very broad drafting which is likely to capture most if not all arrangements;
whether or not there is an enforceable arrangement is irrelevant – this means informal arrangements such as non-binding discussions between parties are potentially an agreement for the purposes of section 100A; and
finally, an arrangement is not an agreement where it is entered into in the course of ordinary family or commercial dealings – which is considered under its own heading below.

The phrase “agreement, arrangement or understanding” is drafted very broadly.

But, despite this breadth, there must still be an actual agreement – the Guardian Full Court decision tells us that there must be consensus and adoption⁸². And it must occur before the present entitlement arises⁸³. The ATO may wish to point to a pattern of behaviour between trustees and beneficiaries within a family as evidence of an agreement – such as repeated occurrences over years of distributions to beneficiaries who then allow the value of the distribution to be used for the benefit of/controlled by other family members.

The ATO can be expected to claim that an agreement exists from circumstances of tacit adoption, concerted action, an understanding over a period of time and/or conduct of before and after the time an entitlement arises.

But if each of the trustee and the beneficiary act unilaterally in each of their decisions to distribute and to not call upon payment, respectively, such a pattern of conduct does not constitute an agreement, arrangement or understanding – whether formal or informal, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings.

While the correspondence of (genuine voluntary cooperation evidenced by) such unilateral behaviour for mutual benefit would not be credible in non-family (commercial) situations, it is entirely to be expected in family situations.

But, to resist ATO claims, families will need to be attentive to establishing evidence of such genuine unilateral (even if cooperative) actions. The practical suggestions at the end of the paper are partly directed to that evidence.

Reimbursement agreements under section 100A(7)

A “reimbursement agreement” involves:

an agreement that provides for certain actions or outcomes; and
those actions or outcomes being a payment of money, transfer of property, provision of services or other benefit to pass to a person other than the beneficiary that is presently entitled.

The act of making the beneficiary presently entitled (usually the unilateral act of the trustee) does not “provide for” the actions or outcomes noted in the second dot point.

This fits with the view that it is not the distribution itself with which section 100A is concerned, regardless of the tax planning that may be behind the distribution. Something more – the relevant “agreement” – is needed to cause (to provide for) the actions or outcomes.

As for the actions/outcomes, they will often be the everyday ways a person will always consume or use their assets or choose to pass value to another person.

When a person:

buys something in a shop – they “pay money” to another person.
pays a bill for themselves or a relative – they “pay money” and/or “provide benefits” to another person.
donates money – they “pay money” to another person.
gives a gift of property – they “transfer property”.
helps in the family business – they “provide services”.

The scope of these actions/outcomes is vast. As the BBlood facts show, the actions/outcomes can even arise (by a benefit arising to another) without the beneficiary receiving and passing on any value.

But section 100A does not apply to most of such actions/outcomes because:

they will not have been provided for under any agreement – before the person became presently entitled to a trust distribution; and
even if so provided for, either:
- no person will have entered into the relevant agreement with the required tax purpose; or
- the relevant agreement will have been entered into in the course of ordinary dealing.

The attention of section 100A is always focussed on the agreement that provides for these actions/outcomes – as the essence of what defines a “reimbursement agreement”.

On the words of the section, questions of tax purpose do not cause anything to be included in section 100A, only for certain agreements to be excluded. This is as one of the two separate and independently operating exceptions. The other, of course, is the ordinary dealing exception discussed following.

Ordinary family or commercial dealings

Where are we on the meaning of “entered into in the course of ordinary family or commercial dealing”?

As will be apparent from the earlier comments, the ATO has sought (still seeks) to interpret the ordinary dealing exception in section 100A(13) as limited by tax purpose in the manner of the reasoning from Newton.

It is submitted that this has never been the correct law:

from the words of the section and principles of statutory interpretation; and
from the (albeit limited) direct case law.

In TR 2022/D1 the ATO failed to fully cite the comments made by Hill and Sackville JJ in FCT v Prestige Motors Pty Ltd as trustee of the Prestige Toyota Trust 98 ATC 4241 at 4262 (bold emphasis added):“There is a danger that, when words used in a judgment are translated into the legislation, the change of context may alter the meaning of the words from that which they originally bore. It is clear from both the judgment of the Privy Council and from the language of the High Court on the same case (FCT v Newton (1957) 96 CLR 578 ) that s 260 was regarded as involving a dichotomy. A transaction was either stamped as one entered into to avoid tax or as one about which it could be predicted that it was entered into in the course of ordinary family or commercial dealing. In the former case the transaction was caught by s 260 ; in the latter case it was outside the section. We do not need to decide in the present case whether s 100A imports a similar dichotomy. In particular we do not

need to decide whether if an agreement is shown to have been “entered into the course of ordinary commercial dealing”, the operation of s 100A is spent, regardless of whether the commercial purpose was subsidiary to the purpose of tax avoidance. In our view, none of the transactions was entered into in the course of ordinary commercial dealing.”

Thawley J in BBlood applied Prestige Motors and did not adopt the Newton dichotomy – so the ATO has adjusted its comments in TR 2022/4. But, in TR 2022/4, the ATO has still sought to retain that dichotomy – recall⁸⁴.

“28. If the objective of a dealing can properly be explained as the payment of less tax to maximise group wealth, rather than some other objective which is a family or commercial objective, it is not an ordinary family or commercial dealing.”

Against these current ATO views (which may need to be dealt with in an audit), it is submitted the correct approach, supported by the case law, is to determine whether an agreement has been ”entered onto in the course of ordinary family or commercial dealing” on the basis of the “whole of dealing” approach undertaken in BBlood.

The cases on section 100A to date have involved arrangements with some special element. This is unsurprising, in that those special elements are what have led to the dispute. This is not to say that any special elements necessarily mean that the ordinary dealing exception cannot apply to family or commercial matters.

But because commercial dealings can generally be expected to be conducted on a basis of self-interest, a strong tax reduction purpose – even though that is not itself the test – tends to result in commercial dealings that are “non-ordinary” in objective ways, even ignoring tax purpose. This has been the story of the historical case law dealing with section 100A (e.g. Prestige Motors).

While BBlood related to a family, there were special elements – such as the change of trust deed and the resulting separation of the tax liability from the benefit of the capital part of the share buy-back.

The simplest scenario – of sharing and collective use/consumption within families (by family members gifting and lending to each other) – has not been the subject of direct judicial consideration. But (from direct experience) ATO auditors have been regarding such family sharing and collective use/consumption as “non-ordinary” and subject to section 100A in audits since 2014.

Applying the “whole of dealing” approach undertaken in BBlood to the simple family sharing scenario, should include a recognition that the relevant ordinary family dealing in the course of which such simple family sharing occurs, is inseparable from the wider family relations.

Such family relations are complex. They are relationship based, not transactional. Consequently, they are long-term and, by their nature, are not self-interested in the same way as commercial dealings. It is submitted that some tax purpose can very well co-exist with other family purposes and actions that do not follow self-interest, and which may seem “non-ordinary” if (as the ATO seeks to maintain) tax purpose is the primary measure.

It is submitted as being in the course of ordinary family dealing, in a modern context:

for the “caretakers” of family wealth (typically parents) to be trusted to manage the family wealth for best possible return and use – conduct which is undertaken based on the very natural goal of seeking to maximise family wealth through prudent management to, among other things, ensure sufficient finances for future emergencies, care for family members who cannot finance their own care (due to age, illness or mental incapacity) or preserve value for successive generations of the family.
for all family members to contribute to the family wealth, as they choose/are able – not just parents to children, also adult children to parents/wider family.
for “unexpended” family wealth to be returned to/concentrated in a family trust, including possibly the family trust from which the trust entitlements originally flowed – as that trust structure, by which no one family member owns that wealth, may best provide (non-tax based) protection against the risks of claims against any one family member.

Family members, including beneficiaries of family trusts, can naturally be expected to co-operate in these endeavours for the simple reason that families have long term emotional connections. If a more mercenary view is required, family members do so because, by participating in this management, the family member can expect benefits to return to them if they require them in the future, due to illness or incapacity, or through intergenerational wealth transfer. Either way, joint management and consumption of their assets and income it is what families do, in the ordinary course.

If a family cooperating to prudently preserve and deploy its wealth is ordinary, then the scenario where a trustee makes a beneficiary presently entitled to income, that beneficiary then not calling on that entitlement to be paid but instead allowing the value that entitlement represents to be used for family purposes, should be taken to be an ordinary family dealing.

It is also part of this family co-operation that family members often do not require a detailed accounting of their entitlements – as long as there is trust in the “caretakers” of the family wealth (typically parents).

In terms of the types of matters noted in TR 2022/4 at paragraph 27, such simple sharing and collective use/consumption within families is not artificial or contrived, is not overly complex, achieves family objectives (of funding whatever is the object of the sharing or collective use/consumption) and does not involve any extra steps.

Any suggestion that the trust distributions “should have” gone direct to the persons with whom the family member chooses to share, ignores that it is not an extra step for a family member beneficiary to be genuinely made entitled to trust income, so that they may choose to share (or not to share) that entitlement at their discretion.

Entitlement arose out of

Even if an agreement exists, does the “arose out of” nexus exist?

The subject present entitlement must be one that “arose out of” or “arose by reason of” the reimbursement agreement (or any act, transaction or circumstance that occurred in connection with, or as a result of the agreement).

Where the family member would be entirely free to use their entitlement at their sole discretion, can it correctly be said that the entitlement (the distribution decision) arose out of the reimbursement agreement?

If the trustee would have distributed the same way – for family reasons – regardless of what the beneficiary chose to do with their entitlement, the distribution would have been made and the entitlement would have arisen even if the reimbursement agreement had not existed.

It is suggested that acceptance – for personal reasons of family affection, family obligation, etc – of the “risk” of the family member not complying with any prior expectation, breaks the “arose out of” nexus between any reimbursement agreement and the creation of the entitlement.

In such circumstances, it could not be said that – but for the transactions which form part of the reimbursement agreement – the present entitlement would not have arisen.

These are important issues that need addressing in family situations in determining whether a present entitlement is one that “arose out of” or “arose by reason of” any claimed reimbursement agreement.

Even if the meaning of “agreement” may be wide enough to extend to unenforceable and implied understandings of which a trustee may be party, the very loose nature of such an “agreement” is consistent with a trustee – who still chooses to make a distribution in family situations (based only on such an “understanding”) – having made that distribution independently of any such “agreement” and instead because of reasons of family affection, obligation, etc.

Practical suggestions to avoid and manage the risks

From all of the above, there are steps that can be suggested for taxpayers to take, to help avoid/manage section 100A risks. The following comments focus on family situations, being seen as the area most in need of guidance.

As a first step, taxpayers should avoid poor trust administration matters by:

advising all beneficiaries of their entitlements each year – in writing; and
obtaining the written authority of beneficiaries for the non-payment of their entitlements, or for the payment (as satisfaction) of their entitlements to other persons or as loans/goods/services for other persons. Such authority could be by way of a general confirmation after the relevant payments, loans etc. have been made.

It is important that this advising, and obtaining of confirmations from beneficiaries does not become a “paper exercise” (i.e. “sign here”). Care should be taken to create an environment in which the beneficiary is genuinely made aware that they may call for direct payment of their entitlement and that they alone may authorise or not authorise its satisfaction by being otherwise used/directed.

Ensuring the trust can demonstrate a financial position (from available funds or from borrowings against trust assets) to make payment of a beneficiary’s entitlement (if called to do so) would be helpful (adding credibility).

It can be seen that the above matters are directed to supporting that any sharing of their entitlement will be a unilateral act of the beneficiary.

Remember that, in an audit or dispute, beneficiaries may be called upon in formal interviews with the ATO or, ultimately, to give evidence in court, to confirm these matters.

So that there is no agreement when the trust distribution is made, it would seem to be better for trustees not to discuss intended distributions with potential beneficiaries – only advise them afterwards.

From the ATO’s insistent in TR2022/4 (even after the September 2023 changes) on the widest possible meaning of an agreement, taxpayers may well still find themselves in dispute with the ATO – and so need to be prepared to argue the ‘ordinary family dealing’ exception.

To enhance access to the ordinary dealing exception, bearing in mind the onus of proof rests on taxpayers, attention should be given to maintaining some records evidencing what is “ordinary family dealing” for the particular family. This may involve keeping a record of the (or summarising, now, the past) pattern/history of substantive sharing of the family resources across the family.

This is not to suggest that families need to track all of their collective expenditure – though the more that can be proven the better.

But it will assist to be able to demonstrate/prove a pattern of substantial and material family sharing – such as, funds shared/collectively deployed to fund family houses, as family loans, as support provided for family members in illness, misfortune, etc.

But, given the ATO’s insistence in TR2022/4 about the narrowness of what is ‘ordinary’ in terms of this exception (in contrast to the ATO’s insistence on the widest views for agreement), taxpayers may, again, still find themselves in dispute with the ATO about the exception.

To support that the trust distribution did not arise out of any reimbursement agreement, the trustee should be prepared to confirm and evidence that they distributed to the beneficiary in the full expectation of paying the beneficiary their entitlement in cash if called upon by the beneficiary to do so – accepting that any other outcome would be entirely the unilateral choice of the beneficiary.

Also, a trustee should be prepared to confirm that their distribution decision is not related to any services the beneficiary may have provided/will provide to any party (e.g. to a family business) – but only flows from their status as a beneficiary.

Concluding comments

Whether seeking to determine an objective dominant purpose for Part IVA, assessing if an agreement was entered into in the course of ordinary family or commercial dealing for Section 100A or some other statutory task, the author sees some common threads being reinforced in the recent decisions considered in this paper.

The Federal Court is stressing adherence to the statutory text. First, correctly identify the statutory task from the text. Is it to determine objective dominant purpose? Is it to determine objectively if an agreement has been entered into in the course of an ordinary family dealing?
While the focus of what is being objectively determined may differ (e.g. dominant purpose, whether in the course of ordinary family dealing, etc) one should look to all the relevant context/surrounding circumstances that relate to the statutory task.
The overall context of an arrangement, agreement, scheme, etc will involve matters such as the objectives of those involved, the steps taken, the outcomes achieved. One does not narrow the consideration and exclude aspects of the relevant context/surrounding circumstances, except for reasons to be found in the statutory text about the statutory task (e.g. a purpose is distinct from an outcome, an ordinary family dealing is not limited by purpose).
There does seem to be a timing dimension/limitation that can apply to the relevant context/surrounding circumstances. If a particular commercial and legal structure already exists (as in Minerva), that structure provides the limits of the wider context in which the existence of a dominant tax purpose is determined (as long as the creation of the structure is not part of the scheme). The commercial, investment or family use of that pre-existing structure may then weigh against any finding of a dominant tax purpose.
This timing dimension also arises in relation to identifying the course of ordinary family dealings. Those family dealings can be argued to arise/persist over long periods (even over generations), but the ATO seems to seek only to consider periods of/around single income years.

But taxpayers and their advisers must also be mindful of the recurring importance of discharging the onus of proof in respect of the relevant context/surrounding circumstances to be relied upon – in the event of a dispute involving the tax integrity provisions.

Repeatedly in decisions (including in the cases considered in this paper) taxpayers are described as having failed to satisfy the onus of proof.

Nothing should be assumed to be obvious and accepted. Rather, a consistent approach is needed to record and retain evidence of the facts relating to context/surrounding circumstances – and a realistic view should be taken of what those facts will objectively support when completing the relevant statutory task, before embarking on an arrangement/scheme.

Footnotes

Minerva Financial Group Pty Ltd v FCT [2022] FCA 1092 at paragraphs 562 to 565 and 572. ↩︎
Ibid paragraphs 563-565. ↩︎
Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 at paragraph 52. ↩︎
Ibid paragraphs 70 and 86. ↩︎
Ibid paragraphs 56 to 59. ↩︎
Ibid paragraph 61. ↩︎
Ibid paragraph 62. ↩︎
Ibid paragraph 63. ↩︎
Ibid paragraph 65. ↩︎
Ibid paragraph 68. ↩︎
Ibid paragraph 68. ↩︎
Ibid paragraph 69. ↩︎
Ibid paragraph 85. ↩︎
Ibid paragraph 89. ↩︎
Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 at paragraph 145. ↩︎
Ibid paragraph 152. ↩︎
Ibid paragraph 171. ↩︎
Ibid paragraph 179. ↩︎
Ibid paragraph 181. ↩︎
Ibid paragraph 195. ↩︎
Ibid paragraph 196. ↩︎
BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 at paragraph 367. ↩︎
Ibid paragraphs 295 and 296. ↩︎
Ibid paragraph 298. ↩︎
Ibid paragraph 304. ↩︎
Ibid paragraph 315. ↩︎
Ibid paragraphs 357 and 358. ↩︎
Ibid paragraph 316. ↩︎
Ibid paragraph 356. ↩︎
Ibid paragraph 365 and 366. ↩︎
B&F Investments Pty Ltd as trustee for the Illuka Park Trust v Commissioner of Taxation [2023] FCAFC 89 at paragraphs 82 to 86. ↩︎
Ibid paragraphs 101 to 103. ↩︎
Ibid paragraph 104. ↩︎
Ibid paragraph 108. ↩︎
Ibid paragraph 111(1). ↩︎
Ibid paragraph 111(2). ↩︎
Ibid paragraph 111(3). ↩︎
Ibid paragraph 116(2) and 117. ↩︎
Ibid paragraph 116(1). ↩︎
Ibid paragraph 116(2). ↩︎
Michael John Hayes Trading Pty Ltd as trustee for MJH Trading Trust v FCT [2023] AATA 3005 paragraphs 1 to 8. ↩︎
Ibid paragraph 89. ↩︎
Ibid paragraph 94. ↩︎
Ibid paragraph 97. ↩︎
Ibid paragraphs 98 to 105. ↩︎
The comments in this section of the paper are largely drawn (and updated) from earlier articles M West and A Whitney, “Trusts — 100A reimbursement agreements; identifying and reducing taxpayer risks”, a paper presented at The Tax
Institute’s Queensland Tax Forum in May 2021; M West, “Section 100A and tax purpose”, (2022) 56(11) Taxation in Australia 701: and M West, “Section 100A and trust reimbursement agreements”, (2023) 57(11) Taxation in Australia 674. ↩︎
TR 2022/4 paragraph 86. ↩︎
TR 2022/D1 paragraphs 78 and 79. ↩︎
TR 2022/4 paragraph 105 (first sentence). ↩︎
TR 2022/4 paragraph 105 (first sentence after the bullet points). ↩︎
TR 2022/4 paragraph 105 (bullet points). ↩︎
Paragraph 28 of TR 2022/4 – “If the objective of a dealing can properly be explained as the payment of less tax to maximise group wealth, rather than some other objective which is a family or commercial objective, it is not an ordinary family or commercial dealing.” ↩︎
TR 2022/4 paragraphs 110 and 111. ↩︎
BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA paragraph 42. ↩︎
Ibid paragraph 43. ↩︎
Ibid paragraph 44. ↩︎
Ibid paragraph 47. ↩︎
Ibid paragraph 49. ↩︎
Ibid paragraph 54 ↩︎
Ibid paragraph 59 ↩︎
BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 paragraph 76. ↩︎
Ibid paragraph 83. ↩︎
Ibid paragraphs 19 to 28. ↩︎
Ibid paragraphs 84 to 90. ↩︎
Ibid paragraphs 84 to 90. ↩︎
Ibid paragraph 91 ↩︎
Ibid paragraph 92. ↩︎
Ibid paragraph 94 ↩︎
Ibid paragraph 94 to 96. ↩︎
Ibid paragraph 97. ↩︎
FCT v Prestige Motors Pty Ltd (1998) 82 FCR 195 at 222F-G. ↩︎
Ibid paragraph 223C. ↩︎
Ibid paragraph 223E-F. ↩︎
BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 paragraphs 100 to 104. ↩︎
ommissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 at paragraph 125. ↩︎
Ibid paragraph 121 to 124. ↩︎
Ibid paragraph 123 to 124. ↩︎
Ibid paragraph 111. ↩︎
Paragraphs 69 to 70D of TR 2022/4 as noted earlier. ↩︎
Paragraph 74 of TR 2022/4 as noted earlier. ↩︎
Paragraph 197 of TR 2022/4. ↩︎
Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 at 124. ↩︎
Ibid paragraph 111. ↩︎
Paragraph 28 of TR 2022/4 ↩︎

Part IVA – trust distributions generally

Recent cases

Minerva decision(s)

Minerva facts

Federal Court (single judge) reasoning

Full Court reasoning

ATO Decision Impact Statement

Guardian Full Court appeal

Guardian decisions

Conclusions – Part IVA and trust distributions

Part IVA – trusts and dividend stripping

Recent cases

BBlood

BBlood facts

Full Court reasoning

Hayes

Hayes facts

AAT decision

Merchant

Conclusion – trusts and dividend stripping

100A – current state of play

ATO History

TR 2022/4 – general approach

Connection requirement

Benefits to another

Tax reduction purpose

Ordinary dealing

Example 1 – identifying family objectives

Example 2 – cultural practice of gifting

Example 3 – cultural practice to support older relatives

Example 4 – cultural practice of not accepting entitlement

BBlood

Full Court appeal – tax purpose

Federal Court (single judge) reasoning – excluding tax purpose

Agreement

Ordinary family or commercial dealing

Guardian Appeal

Unresolved issues with ATO guidance – risks

Approach in TR 2022/4 – versus the words and structure of section 100A

Scope of agreement

Ordinary dealing – “core test” concept

Simple family sharing – what medical conditions justify sharing?

Simple family sharing – not so different between cultures

Agreement and reimbursement agreement

What is an “agreement” in section 100A(13)?

Reimbursement agreements under section 100A(7)

Ordinary family or commercial dealings

Entitlement arose out of

Practical suggestions to avoid and manage the risks

Concluding comments

Footnotes

About the author

Mark West

Specializations

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