This week in our section 100A series, we consider the third primary defence to section 100A, which is to show that the agreement was not a “reimbursement agreement” because it was entered into in the course of “ordinary family or commercial dealing”. Such an agreement is expressly carved-out from the operation of section 100A.
What is that meaning of “ordinary family or commercial dealing”?
The meaning of “ordinary family or commercial dealing” for the purposes of section 100A is presently unclear. The legislation does not define what an “ordinary family or commercial dealing” is, nor does case law provide a clear meaning of the term in the context of section 100A. The genesis of the term came from a Privy Council decision in Newton v Federal Commissioner of Taxation (1958) 98 CLR 1. That case, however, was about section 260 of the Income Tax Assessment Act 1936 (Cth) — the predecessor to Part IVA — and not about section 100A.
The Commissioner’s anticipated draft taxation ruling on section 100A will provide the Commissioner’s views on the meaning of “ordinary family or commercial dealing”. The meaning of this term and the scope of this carve out from an “agreement” is also likely to be the main battleground in section 100A disputes with the Commissioner, given the wide meaning of an “agreement”.
In our view, the following is a sensible interpretation of what constitutes as an agreement entered into in the course of “ordinary family or commercial dealing”:
- An agreement can be entered into in the course of “ordinary family or commercial dealing” if it is entered into either in the course of an “ordinary family dealing” or an “ordinary commercial dealing”. The term “ordinary” applies to both “family dealing” and “commercial dealing”. This is an interpretation consistent with the Federal Court’s decision in Commissioner of Taxation v Prestige Motors ATF Prestige Toyota Trust  FCA 221. It is not required that the agreement is entered into in the course of an “ordinary family and commercial dealing”.
- In assessing whether an agreement has been entered into in the course of an “ordinary family dealing” or an “ordinary commercial dealing”, both a subjective and objective test should be adopted. All relevant facts should be considered, including the behaviour and relationships of the parties to the agreement. However, whether an agreement is “ordinary” will be determined objectively — i.e. would a reasonable person consider the agreement to be “ordinary” having regard to the particular facts and relationships of the parties? On this basis, an arrangement may be an “ordinary family or commercial dealing” for a family group but not one for another family group. Interest-free loans between family members may be usual for a family group but highly unusual for another family group.
This, however, leads to an interesting question – would a one-off arrangement entered into during COVID fail to satisfy the carve out on the basis that it would not be “ordinary” but “extraordinary”, given that COVID is a once-in-a-generation pandemic?
- It will be important to identify the specific “agreement” to be assessed and all of the parties to the agreement, noting that the trustee and beneficiary are not required to be parties to the agreement.
- An agreement can be entered into in the course of “ordinary family or commercial dealing” even if it has a tax avoidance purpose. In our view, section 100A does not import a dichotomy.
What can you do to prepare for this primary defence?
As the question of whether an agreement has been entered into in the course of “ordinary family or commercial dealing” is one of fact, the best preparation for this primary defence is to gather evidence on what constitutes as an “ordinary family dealing” or “ordinary commercial dealing” for the family group and/or parties to the agreement.
The preparation is similar to the second primary defence discussed last week. Relevant evidence may include correspondences such as letters and emails, minutes of meetings, company resolutions and documentation relating to 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 conduct undertaken years ago can take time to find.
If the section 100A risk is in respect of a current or anticipated distribution, preparing contemporaneous evidence now will be appropriate. This can include obtaining statements from relevant persons and drafting fulsome trustee resolutions or minutes that show the unilateral intention of all relevant persons.
Next week, we wrap up our series on section 100A and consider the section 100A tax risk and potential defences in two case studies.