2022: year of the Tiger 100A

Quoting Winston Churchill, we said that the Federal Court decision in Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT [2021] FCA 1619 (Guardian AIT) concerning section 100A of the Income Tax Assessment Act 1936 is perhaps the “end of the beginning” of what may become increased clarity on the judicial and administrative approach to that section.

Keeping with that theme, on 8 February 2022, the Australian Taxation Office (ATO) appealed the Guardian AIT decision and on 23 February 2022, the ATO released three guidance products, two in draft, on section 100A that we have written on:

• Draft Taxation Ruling TR 2022/D1 (Draft Ruling);

• Draft Practical Compliance Guideline PCG 2022/D1 (Draft Guideline); and

• Taxpayer Alert TA 2022/1 (Alert).

As well as the Guardian AIT appeal, we understand that there is at least one other section 100A case before the courts.

This article looks at what the ATO guidance and court cases may mean for taxpayers and their arrangements.

Section 100A is difficult to interpret and apply. The statutory interpretation task is onerous and the exclusion for “in the course of ordinary family or commercial dealing” (Ordinary Dealing) comes from 1950s case law.

On the first point (statutory interpretation), Logan J commented in Guardian AIT that “meaning and effect must be given to the text chosen by parliament”. When reading subsection 100A(8) (below) one must wonder if parliament had come back from a long lunch!

A reference in subsection (7) to an agreement shall be read as not including a reference to an agreement that was not entered into 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.

While one could wish for a legislative amendment to clarify section 100A, the chances of that happening are somewhere between slim and none with greater odds on the none.

Submissions on the Draft Ruling and Draft Guideline are due by 8 April 2022. Taxpayers may hope that the submissions may result in changes to the ATO views. However, based on the submissions process for Practical Compliance Guideline PCG 2021/4 on professional firm profits, we do not expect that submissions on the Draft Ruling and Draft Guideline will result in fundamental changes in the ATO views. (Particularly given the long gestation period for the ATO to prepare those documents).

What could change the ATO views, particularly in the Draft Ruling, would be decisions of the Full Federal Court or High Court that are contrary to the ATO views. We do note that the ATO issued the section 100A guidance after the unfavourable (to the ATO) decision in Guardian AIT.

The impact of court decisions on the Draft Guideline may be less significant than on the Draft Ruling.

As the ATO says, the Draft Guideline is not law, nor does the Draft Guideline replace, alter, or affect the ATO's interpretation of the law. What the Draft Guideline does is set “out a practical administration approach to assist taxpayers in complying with” section 100A.

Unfavourable (to the ATO) court decisions, particularly on Ordinary Dealing, could cause change to some of the examples in the Draft Guideline but the risk matrix upon which the ATO allocates compliance resources is likely to remain a feature.

Given that background, what should taxpayers do?

The Draft Guideline includes a form of grandfathering for trust entitlements conferred before 1 July 2022. The ATO says it will stand by any administrative position reflected in Trust taxation - reimbursement agreement (Website Guidance), first published on its website in July 2014, to the extent it is more favourable to the taxpayer's circumstances than in the finalised Guideline.

For taxpayers’ pre-1 July 2022 arrangements, they should:

1. print a copy of the Website Guidance and keep that copy with their taxation records as the ATO may remove (or change) the Website Guidance at the time the Draft Ruling and Draft Guideline are finalised;

2. identify the risk level of pre-1 July 2022 arrangements based on the Draft Guideline and, for Blue zone or Red zone arrangements, determine and document why the Website Guidance is more favourable to your circumstances;

3. be aware that the Website Guidance has some generalised positions – the use of words such as “may”, “generally”, “in the absence of other factors” - that may mean that the Website Guidance may not be a sword during an audit and may, at best, be a (poor) shield; and

4. if the Website Guidance does not apply to your pre-1 July 2022 Blue or Red zone arrangements, get advice on the best options to deal with that historic tax risk (bearing in mind that section 100A has an unlimited period of review).

For present entitlements created on or after 1 July 2022, if taxpayer’s pre-1 July 2022 arrangements were in the Blue or Red zone there will be significant risk of ATO compliance activity if there is a ‘rolling-over’ of proforma resolutions, accounting entries, and documentation to the 30 June 2023 year.

For advisors, the threat in the Alert of the promoter penalty provisions and / or referral to the Tax Practitioner’s Board is a blunt indication of the ATO’s views of the gravity of arrangements that are subject to section 100A. It is also a disappointing “slap in the face” for tax agents that have just been managing to get back to some form of normal practice after carrying a large amount of the burden in assisting the Government and taxpayers in managing the COVID-19 relief measures of the last two years.

While the courts in Guardian AIT and other cases may inform the final ATO views, planning based on the draft views – planning for the worst-case scenario rather than the “known unknowns” of favourable for the taxpayer court outcomes – may be prudent tax risk management.

Whatever the outcome, 2022 is shaping as the year of 100A (and the Tiger).

Sladen Legal’s tax team regularly advises on section 100A. If you have any questions about what the ATO views may mean for you and your arrangements, please contact:

Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au

Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 |  T +61 3 9611 0105
E: dsmedley@sladen.com.au

Edward Hennebry
Senior Associate
T +61 3 9611 0113 | M +61 405 847 261
E: ehennebry@sladen.com.au

Laura Spencer
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au

Lucy Liang
Lawyer
T +61 9611 0131
E lliang@sladen.com.au