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Guardian AIT: 100A or ATO’s Part IVA angel in disguise?

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This time last year, we published an article querying whether the Federal Court decision in Guardian AIT Pty Ltd ATF Australian Investment Trust v FCT [2021] FCA 1619 (First Instance Decision) would ignite an administrative and judicial quest for clarity on the interpretation of section 100A of the Income Tax Assessment Act 1936 (ITAA 1936).

Although the Commissioner’s appeal to the Full Federal Court (which was decided on 24 January 2023 (Guardian Appeal)) removes some ambiguity on what constitutes a “reimbursement agreement” under section 100A, the legislative concept of “entered into in the course of ordinary family or commercial dealing”, one of the key exceptions in section 100A, remains a source of limited judicial interpretation.  

Despite the First Instance Decision generating significant discussion on section 100A, it may be that the Guardian Appeal will be remembered for the analysis on the general anti-avoidance rules under the Part IVA of the ITAA 1936. Perhaps the pronouncements in the Guardian Appeal will be the Australian Taxation Office’s (ATO) new weapon in administering Part IVA? 

Facts

Very generally, the facts are that for the 2012 and 2013 income years:

  • the trustee (Guardian) for the AIT Trust (Trust) made a new corporate beneficiary (AITCS) presently entitled to its net income (which was recorded as an unpaid present entitlement (UPE));

  • AITCS paid its income tax liability by drawing on the UPE;

  • AITCS declared a fully franked dividend to its shareholder (also Guardian) and AITCS and Guardian offset the amount that AITCS owed Guardian for the dividend against the UPE; and

  • Guardian resolved to distribute all the fully franked dividends it received to Mr Springer, a non-resident beneficiary of the Trust.

Guardian was successful at first instance in arguing that Section 100A and Part IVA did not apply to the above fact scenario. The Commissioner appealed, arguing that:

  • section 100A applied in the 2013 income year; and

  • Part IVA applied in the 2012 and 2013 income years.

The Full Court found for the taxpayer on section 100A and on Part IVA in 2012 but found for the ATO on the application of Part IVA in 2013.

Section 100A

In the Guardian Appeal, it was unanimously held that section 100A did not apply in the 2013 income year. This is because, at the time of the conferral of the present entitlement from AIT to AITCS (23 June 2013), it could not be said that there was a “reimbursement agreement” for AITCS to declare a dividend to AIT (for an amount very similar to the amount of the present entitlement).

Based on the written and contemporaneous evidence led by the taxpayer, it was not possible to infer (contrary to the Commissioner’s arguments) that there was an understanding between Mr Springer (the controller of the entities) and his tax advisors at the time that an entity other than AITCS would benefit from the AIT’s income.

It was highlighted that the scope of attributing a common understanding between a taxpayer and their advisor in a section 100A analysis is not as broad as compared to a Part IVA analysis (as Part IVA does not take into account subjective purpose). Accordingly, the Commissioner’s reliance on the High Court case of Consolidated Press Holdings (where a tax advisor’s purpose was attributed to a taxpayer) was misplaced as that case concerned Part IVA.

Therefore, despite Mr Springer generally following the advice of his tax advisors, there was insufficient evidence for the purposes of section 100A to substantiate that Mr Springer’s tax advisors had authority to act on behalf of Mr Springer and his entities. 

Consolidated Press Holdings was also raised at first instance in BBlood (discussed here) but Thawley J, in that case, said it was unnecessary to consider the conclusions (from Consolidated Press Holdings) in finding for the ATO in BBlood.

Part IVA

The Commissioner’s Part IVA contentions in the Guardian Appeal concerned two narrowly defined schemes, being the “2012 related scheme” and the “2013 related scheme.” These schemes were very similar to the facts outlined above.

The Commissioner submitted that, if the 2012 related scheme and the 2013 related scheme not been entered into, Mr Springer (not AITCS) would likely have been made presently entitled to AIT’s net income (thereby receiving a substantially higher amount of assessable income).

The judges in the Guardian Appeal accepted that both the 2012 related and the 2013 related scheme conferred “tax benefits” on Mr Springer. Significant to this finding was:

  • the failure of Mr Springer to discharge his onus of proof and to show the Court what might reasonably be expected to have happened in the absence of the schemes (for instance, that AIT would have accumulated its income instead);

  • that, because AITCS was not used as a wealth-collection vehicle in the 2012 and 2013 income years (as it declared a dividend to AIT of the post-tax amount of the present entitlement conferred on it by AIT), it was not an unreliable prediction that, but for the schemes, Mr Springer would have been presently entitled to a larger amount of AIT’s net income; and 

  • at least for the 2013 related scheme, the Court’s emphasis on the 2013 legislative changes to Part IVA meant that it was not permissible, in forming a reasonable alternative postulate to the 2013 related scheme, to consider the higher Australian income tax cost that would have applied to Mr Springer if he had received AIT’s net income directly. 

However, it was ultimately concluded that Part IVA only applied to the 2013 related scheme. This is because, unlike the 2012 related scheme, “the form of the 2013 related scheme was not the product of an evolving set of circumstances, but was the implementation of a strategy that had been developed with the evolution and implementation of the 2012 related scheme.”

The objective enquiry as to assessing “dominant purpose” mandated by Part IVA was critical to the Court’s conclusions. Objectively viewed, the Court considered that the manner in which the 2012 related scheme was implemented set the scene for informing how the 2013 related scheme would be implemented, and the reasonable expectation that AITCS would (similar to in 2012), not retain its income but rather declare a fully franked dividend to AIT so as to ultimately benefit Mr Springer.

So where to from here?

In the context of section 100A, the Guardian Appeal:

  • reinforces that, for section 100A to have application, it is necessary that the “reimbursement agreement” exists at or prior to the time a beneficiary is conferred a present entitlement to the net income of the trust;

  • brings into question whether the ATO’s views as to the meaning of a “reimbursement agreement” in Taxation Ruling TR 2022/4 may warrant review (see in particular paragraph 73 and 74) and the limitations of inferring the existence of a reimbursement agreement prior to the conferral of present entitlement;

  • highlights that facts which exhibit similarities to a “washing machine” arrangement (described in Example 12 of TR 2022/4), may not always be in breach of section 100A, particularly when there is strong evidence (including evidence of no agreement at or prior to the present entitlement);

  • clarifies the distinction between section 100A and Part IVA when deciphering if the conduct of a taxpayer’s advisor can be attributed to the taxpayer;

However, and perhaps frustratingly, the Guardian Appeal will do little to reduce the commotion generated by section 100A, particularly in light of the recently finalised ATO guidance products and the appeal of BBlood.

Rather, the Guardian Appeal appears to amplify the ATO’s ability to successfully apply Part IVA to fact patterns involving discretionary trust distributions and non-resident taxpayers receiving Australian fully franked dividends. If the decision in Minerva (discussed here) was not sufficient, taxpayers and their advisors should now be alert to such practices.

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

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

Rob Warnock
Principal Lawyer
T +61 3 9611 0155 | M +61 419 892 115
E: rwarnock@sladen.com.au

Neil Brydges