‘Bblood’ – A win for the ATO on Section 100A

The Full Federal Court recently handed down its decision in B&F Investments v FCT [2023] FCAFC 89 (Bblood).  

The case concerns the application of the trust ‘reimbursement agreement’ provisions in section 100A of the Income Tax Assessment Act 1936 (Cth), and comes hot on the heels of the Full Federal Court’s decision in FCT v Guardian AIT Pty Ltd atf Australian Investment Trust [2023] FCAFC 3 (Guardian).  The decision also arrives in the midst of increased focus by the ATO on section 100A, culminating in the release of Taxation Ruling TR 2022/4 and Practical Compliance Guidance PCG 2022/2 in late 2022.

In Bblood, the taxpayer was unsuccessful in overturning the decision of Thawley J at first instance that section 100A did apply to the arrangements at issue.  The case is particularly interesting for what is said about the role of advisers in formulating arrangements that include ‘reimbursement agreements’.

Key takeaways

• The Court reconfirmed[1] that a ‘reimbursement agreement’ does not actually need to include any form of reimbursement, nor any payment of consideration of any kind, by the non-beneficiary recipient of the amount of income at issue.
• In particular, retention of trust funds by a trustee may constitute the payment of money to a person other than a beneficiary for the purposes of the definition of ‘reimbursement agreement’.
• Consistent with the decision of Logan J at first instance in Guardian[2], the plain words of section 100A are to be construed without reference to extraneous material – this would include policy statements in the Explanatory Memorandum to the bill which introduced section 100A.[3]
• Section 100A requires a historical inquiry into whether a person had a purpose at the time of entering into a ‘reimbursement agreement’ that someone (not necessarily the person with the requisite purpose) would pay no or less tax than if the agreement had not been entered into. The relevant purpose does not need to be the person’s ‘dominant’ purpose - just ‘a’ purpose.
• Advisers formulating and implementing an arrangement, with the knowledge and assent of the controllers of the relevant entities, can have the relevant purpose and are taken to be parties to the ‘reimbursement agreement’ - this appears to differ in some respects from the Commissioner’s approach to the role of advisers in TR 2022/4.
• Unlike the general anti-avoidance rule in Part IVA, section 100A(8) does not call for a comparison with what might otherwise have occurred had the scheme not been entered into.
• Because the taxpayer was unsuccessful in arguing that section 100A did not apply in the circumstances, the Commissioner’s alternative dividend-stripping assessment issued to the beneficiary of the trust was held to be excessive.

What was it about?

In the 2014 income year:

• a discretionary trust, Illuka Park Trust (IP Trust), received approximately $300,000 in ordinary income from another trust estate within the broader private group;
• IP Trust also held shares in a company (Illuka Park Pty Ltd (IP Co)) and entered into a share buy-back transaction with respect to that shareholding. The majority of the proceeds of the buy-back (approximately $10 million) were deemed to be a dividend under section 159GZZZP of the Income Tax Assessment Act 1936 (1936 Act) which was fully franked;
• Bblood Enterprises Pty Limited (BE Co) was incorporated and appointed as a new beneficiary of the IP Trust;
• the IP Trust deed was amended to define ‘income’ as “income of the trust according to ordinary concepts” (whereas previously it was defined as net income for the purposes of section 95(1) of the 1936 Act);
• prior to 30 June 2014, the trustee of the IP Trust created a present entitlement to all of the trust income for BE Co;
• the effect of the present entitlement coupled with the amendment to the IP Trust Deed was, while the buy-back proceeds were deemed to be a dividend for tax law purposes, the proceeds constituted corpus of the IP Trust for trust law purposes and as such the trust income for the 2014 year was the $300,000 in ordinary income that had been received by IP Trust;
• as BE Co was presently entitled to all of the trust income of the IP Trust for the 2014 year (being the $300,000), it was assessed on the net income of the IP Trust for that year (which included the $10 million buy-back dividend). BE Co was entitled to the franking credits attached that buy-back dividend with the effect that it was not liable to pay any additional tax on the buy-back dividend; and
• the deemed dividend amounts were retained in the IP Trust as corpus of that trust estate.

Whose purpose?

In broad terms, where a beneficiary’s present entitlement to trust income arises out of a ‘reimbursement agreement’, section 100A operates to ‘switch off’ their present entitlement for tax law purposes, with the result that the trustee is taxed on the beneficiary’s share of the trust’s net income.

The focus of the appeal decision was on the construction and application of section 100A(8) which includes within the scope of section 100A only those agreements that are:

• entered into for the purpose, or purposes, of securing that:
  • a person would not be liable to pay income tax where the person would have been liable to pay income tax if the agreement had not been entered into; or
  • a person would be liable to pay less income tax than if the agreement had not been entered into.

It was held that the relevant purpose:

• is assessed at the time of entry into a ‘reimbursement agreement’;
• can be the purpose of any party to the agreement;
• is not the objective purpose of an agreement; and
• need not be the sole or dominant purpose of the party.

Role of professional advisers

Importantly, the Court held that advisers formulating and implementing an arrangement ‘with the knowledge and assent of the controllers of the entities who are parties to the transaction’ are themselves parties to the ‘reimbursement agreement’.  Although a different conclusion was drawn on the facts of the case, this is consistent with Hespe J’s decision in Guardian, in which her Honour held that the accountant’s understanding could not be imputed to the taxpayer in the absence of express consensus between client and advisor.

The requirements of the ‘knowledge and assent of controllers’ appear to differ in some respects from the Commissioner’s views in TR 2022/4 in respect of advisers’ purposes in the context of section 100A:

Where the adviser is a party to the agreement, the purpose of the adviser will be directly relevant. Further, the purpose of the adviser may be imputed to a party to the relevant agreement who acts in accordance with the adviser's advice.[4]

When considered in light of the decisions in Bblood and Guardian, we suggest that this position in TR 2022/4 may need to be refined.

In Bblood, it was found that the trustee of the IP Trust was liable to tax on the net income of the IP Trust that was attributable to the deemed dividend on the basis of their finding that a purpose of Mr Buckley – an advisor to the taxpayer group and appointer of the IP Trust - in implementing the arrangement was to ensure the retained earnings of IP Co could be distributed to and retained by the IP Trust without the trustee being liable to tax.

The decision on the purpose of the arrangement (and in particular, Mr Buckley’s purpose) was predicated on the following:

• the intended arrangement involved a departure from historical patterns of behaviour, particularly the payment of income distributions and dividends to the IP Trust;
• the trust deed was varied without commercial justification;
• BE Co was incorporated near the date of the implementation of the arrangement;
• the strategy was brought to IP Co and IP Trust by advisers who were also taking the strategy to other clients; and
• there were alternative ways to achieve the same outcome through an ordinary commercial transaction, such as IP Co paying a dividend to IP Trust, which would not have resulted in the retention of corpus in the IP Trust.

100A v Part IVA

The Full Court also held that section 100A(8) does not call for a comparison of alternative postulates to the actual arrangement entered into as is undertaken when applying the general anti-avoidance provision in Part IVA.  Rather, what is required is a historical inquiry as to why a party entered into the ‘reimbursement agreement’.  

Their Honours did, however, consider that the non-tax outcomes of an arrangement may be relevant and that to ignore the non-tax outcomes ‘may be a sterile and meaningless exercise in the context of assessing purpose’.  Their Honours held that consideration of such non-tax purposes is relevant ‘only to the extent it casts light on the purpose of a party in adopting the means in fact adopted’[5].

In practice, as the Guardian case illustrated, there are likely to be cases where the Commissioner will seek to apply both section 100A and Part IVA.

Dividend stripping alternative assessment

Because section 100A applied to the arrangements with the effect that no franked distribution was taken to have flowed to a beneficiary of the IP Trust, the assessment which applied the dividend stripping provisions to BE Co was ‘necessarily an alternative assessment’.[6]  The Full Federal Court allowed BE Co’s appeal against the alternative assessment on the basis that it was excessive:

Whilst it is open to the Commissioner to issue alternative assessments which are necessarily inconsistent, once the true state of facts is determined and the liability of the correct taxpayer has been established, the alternative inconsistent assessment is necessarily excessive.[7]

While not the ‘main game’ of the decision, their Honours’ pronouncement on the fate of alternative assessments in circumstances where primary assessments are sustained is helpful.