Insights / September 28th, 2022

Latest Section 100A Case: Is the Commissioner out for more Blood?

28 September 2022

A significant new trust reimbursement case has recently been handed down by the Federal Court of Australia.

In BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112, Thawley J found that the taxpayer had breached section 100A of the Income Tax Assessment Act 1936 (Cth).  As a result of section 100A applying, the trustee was assessed on its tax net income at the top marginal rate.

Broadly, the case involved the following situation:

  • A discretionary trust (IP Trust) in the taxpayer’s private group entered into a share buy-back during the 2014 income year.  The sale proceeds received gave rise to a deemed dividend to the IP Trust of approximately $10 million under the share buy-back provisions that was fully-franked (buy-back dividend).

  • The IP Trust received distributions of approximately $300,000 of ordinary income from other entities within the group for the 2014 income year.

  • Prior to 30 June 2014, the trust deed for the IP Trust was amended to redefine the trust income from section 95(1) net income (tax net income) to income according to ordinary concepts.

  • Also prior to 30 June 2014, the IP Trust created a present entitlement to all of its trust income (i.e. $300,000) in a newly incorporated company (BE Co). 

  • Applying the proportionate approach from Bamford’s case, BE Co was assessed on all of the tax net income (including the $10 million buy-back dividend) notwithstanding BE Co only had a present entitlement to the ordinary income of approximately $300,000.    

  • BE Co used the franking credits it accrued on the buy-back dividend to offset its tax payable.

The end result of this arrangement was that although no tax was payable on the buy-back dividend, the tax-free sale proceeds from the share buy-back were able to be accrued as the capital of the IP Trust.

Key Takeaways

The key takeaways from the Court’s decision may be summarised as follows:

  • The Court confirmed that the phrase “reimbursement” should not limit the application of section 100A. The definition of a “reimbursement agreement” is clearly intended to capture all manner of arrangements which may or may not involve a reimbursement in the ordinary sense of the term.


  • When determining if an arrangement constitutes an “ordinary family or commercial dealing” (an exception to section 100A), it is necessary to consider the arrangement as a whole.  It is insufficient to reason that because one or more individual steps in an arrangement can be described as “ordinary” that the arrangement is an “ordinary family or commercial dealing”. 


  • When viewed as a whole, the Court found that the particular arrangement did not constitute an ordinary family or commercial dealing.  The arrangement was found to be overly complex and unusual in nature.  In particular, the Court found that the steps involved were not necessary to achieve the stated objectives of the taxpayer in simplifying the corporate structure and facilitate succession planning of the group.


  • The arrangement was one which possessed the necessary tax reduction purpose as required under section 100A.  In this regard, it was only necessary for the Commissioner to establish that one of the purposes for implementing the arrangement was to reduce income tax.  The Court regarded the following factors as being important to this finding:

    • statements by the taxpayer’s advisers;

    • the utilisation of IP Trust for the receipt of distributions for the first time and its essential role in creating a mismatch in trust income and tax net income;

    • the variation in the IP Trust’s trust deed which hard-wired the treatment of the buy-back sale proceeds as trust capital; and

    • the adoption of the buy-back procedure which could not be adequately explained by reference to the objectives purported by the taxpayer (e.g. simplification of the group’s corporate structures and succession planning).


  • The Court also held that even if section 100A did not apply, the arrangement was in the nature of a “dividend stripping operation” as defined under the dividend stripping measures.

Practical Observations

This case demonstrates that the Commissioner of Taxation is prepared to cast a wide net in the application of section 100A.  In particular, the Commissioner may seek to apply the provision to a broad range of commercial transactions that give rise to an ostensible tax benefit where a person other than the presently entitled beneficiary receives a benefit.

Notwithstanding that the ATO has agreed to further consultation on draft Practical Compliance Guideline PCG 2022/D1, taxpayers should be on notice that the Commissioner is prepared to agitate issues identified in the draft PCG that fall within the “red zone”.  In this regard, the issue challenged in this case is already largely identified in draft PCG 2022/D1 under example 10.   

It remains to be seen whether the taxpayer will lodge an appeal of Thawley J’s decision to the Full Federal Court. 

It might be expected that more section 100A disputes will arise in the near future.  Thus, a regular “watching brief” should be maintained on section 100A going forward including any appeal decision on this case. 

What now seems clear is that section 100A is likely to become a constant issue in the preparation of, and advice in relation to, year-end trust distribution minutes.

Cowell Clarke is well placed to assist in advising you or your clients of their section 100A income tax obligations.  If you would like more information or require our assistance or advice, please contact us.

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