This week in our section 100A series, we consider the second primary defence to section 100A, which is to show that there was no “agreement” that could give rise to a “reimbursement agreement”.
The key requirement to invoking section 100A is to identify a “reimbursement agreement”. This is broadly an agreement to provide benefits to a person other than the beneficiary.[1] Put more simply, this is an agreement to make the trust distribution to one person and for another to use the value that is generated. As a focus is to identify an “agreement”, a primary defence to section 100A is to show that — notwithstanding that the economic benefit of the trust income has been provided to someone other than the beneficiary — this was not part of any “agreement”.
What is an “agreement”?
The meaning of “agreement” for the purposes of section 100A has a very wide meaning. It is capable of applying to “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”.[2] An “agreement” therefore does not need to be legally enforceable. A non-binding understanding can be sufficient.
Case law has also confirmed that:
- the trust does not need to be in existence at the time that the “agreement” was entered into;[3] and
- the trustee and beneficiary do not even need to be parties to the “agreement”.[4]
Having said that, there is still a requirement for some sort of “agreement, arrangement or understanding”. Arguably, this means that there must be an arrangement agreed between two or more persons. A unilateral act by a person would not constitute as an “agreement”. On this basis, the following may not constitute as an “agreement”:
- a unilateral act by the beneficiary to deal with his/her entitlement by providing the benefits of the trust income to someone else;
- a unilateral act by the trustee to distribute the trust income to the beneficiary; and
- a unilateral act by the trustee to permit the funds constituting as the unpaid distribution to be used by someone other than the beneficiary.
What can you do to prepare for this primary defence?
Whether there is an “agreement” will be a question of fact. Evidence is key to show that there was no “agreement” that could constitute as a “reimbursement agreement”. It will be important to gather all relevant and available evidence to show that the provision of any benefits to a person other than the beneficiary was not the result of an “agreement” but a result of one or more unilateral acts.
Relevant evidence may include correspondences such as letters and emails, minutes of meetings, company resolutions and documentation relating to the transactions to show the ordinary pattern of behaviour of the relevant parties. Early preparation is key given that the Commissioner has an unlimited period to review and invoke section 100A and evidence on actions undertaken many years ago can be difficult to find.
If the section 100A risk is in respect of a current or anticipated distribution, preparing contemporaneous evidence is sensible. This can include obtaining statements from relevant persons and drafting fulsome trustee resolutions or minutes to show the unilateral intention of all relevant persons.
Stay tuned
Next week, we consider the third primary defence to section 100A: the “agreement” was entered into in the course of “ordinary family or commercial dealings”. This primary defence is likely to be the main battleground to section 100A disputes.
[1] Section 100A(7) of the Income Tax Assessment Act 1936 (Cth).
[2] Section 100A(13) of the Income Tax Assessment Act 1936 (Cth).
[3] Commissioner of Taxation v Prestige Motors ATF Prestige Toyota Trust [1998] FCA 221.
[4] Idlecroft v Commissioner of Taxation [2005] FCAFC 141 and Raftland Pty Ltd ATF the Raftland Trust v Federal Commissioner of Taxation [2008] HCA 21.
