1. Section 100A – Trust Reimbursement Agreements

Overview:

Section 100A targets certain trust distributions where a beneficiary is made presently entitled to trust income but does not actually receive the benefit of that income due to an arrangement (a “reimbursement agreement”).

Example Scenario:

A trust makes a distribution to an adult child (who has a low tax rate) but instead of giving them the funds, the money is returned to a parent or business entity. This may trigger Section 100A if it is not an “ordinary family dealing.”

2. Division 7A – Private Company Loans to Shareholders and Associates

Overview:

Division 7A prevents private companies from avoiding tax by distributing profits to shareholders (or their associates) in the form of loans, payments, or debt forgiveness instead of taxable dividends.

Key Elements:

• Applies to Loans, Payments, and Debt Forgiveness: If a private company provides financial benefits to shareholders or their associates without proper loan terms, it may be treated as an unfranked dividend.
• Loan Repayments or Complying Loan Agreements: If a company lends money to a shareholder, it must be under a compliant Division 7A loan agreement with:
  • A minimum interest rate (benchmark rate).
  • A maximum loan term (7 years for unsecured loans, 25 years for secured loans).
  • Required annual minimum repayments.
• Tax Consequences: If a loan does not comply with Division 7A rules, the amount may be deemed an unfranked dividend, which is taxable to the recipient.

Example Scenario:

A private company loans $500,000 to a director-shareholder without a proper loan agreement. If not repaid under Division 7A rules, the amount may be treated as an unfranked dividend, taxed at the shareholder’s marginal tax rate.

How Section 100A and Division 7A Interact

• If a trust distributes income to a corporate beneficiary (a “bucket company”) but the cash is instead used by an individual (e.g., a shareholder of the company), Division 7A may apply.
• If a trust distributes income to a low-tax-rate beneficiary but the real benefit is directed elsewhere, Section 100A could apply.
• A situation can trigger both provisions: If a trust distributes income to a company, but the funds are loaned out to a shareholder without complying loan terms, both Section 100A (if a reimbursement agreement exists) and Division 7A (if the loan is non-compliant) could be relevant.

Key Takeaways

• Section 100A applies to trust income where the real economic benefit is diverted away from the entitled beneficiary.
• Division 7A applies to private company benefits (loans, payments, or forgiven debts) to shareholders or their associates.
• The provisions work to prevent tax avoidance by ensuring income is taxed correctly and benefits are not redirected to avoid tax.
• Ordinary family dealings are exempt from Section 100A, and Division 7A loans can be structured to avoid deemed dividends.

Would you like further clarification on any specific scenarios?