Section 3: What amount do you have to include in your assessable income?
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
End of attention
This section is relevant only if you are an attributable taxpayer in relation to a non-resident trust estate.
You must follow the steps in subsection 1 to work out your attributable income if you can obtain the necessary information.
If you cannot reasonably be expected to have access to the necessary information, work out the amount to be included in your assessable income following the steps in subsection 2.
Once you have worked out the amount to include in your assessable income, you may be able to apply for a reduction of this amount. Subsection 3 explains how to do this.
Subsection 1: Working out your assessable income where information is available
Working out the attributable income of a non-resident trust estate
To determine the attributable income of a non-resident trust estate you must first work out its net income. The net income of a trust estate is worked out as though the trust estate were an Australian resident and taxpayer. The foreign loss quarantining rules will, for instance, apply when working out the net income of the trust estate.
Note: The government announced in the May 2005 Budget that the foreign loss quarantining restrictions are to be removed, with effect for losses incurred in income years first commencing on or after the relevant legislation receives royal assent. This will mean that foreign losses may be offset against domestic income. However, foreign losses that arise before then continue to be treated under the current rules.
In working out the net income of a non-resident trust estate, you need to identify whether it is a listed country trust estate.
If it is a listed country trust estate, only the trust's eligible designated concession income is taken into account when working out the net income. The balance of the income of the trust estate is treated as exempt income.
If it is an unlisted country trust estate, all its income or gains are included in working out its net income.
A non-resident trust estate is treated as a listed country trust estate if all the income of the trust estate - other than eligible designated concession income - is either subject to tax in a listed country or is assessable in Australia in the hands of the trustee or a beneficiary.
Amounts that may be excluded from attributable income
In determining the attributable amount, the net income of a non-resident trust estate is reduced by the following amounts to the extent they relate to amounts included in the net income of the trust estate:
- amounts that have been included in the assessable income of a beneficiary under section 97 of the Act - that is, amounts to which a beneficiary is presently entitled
- amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 98 of the Act - for example, on behalf of a resident beneficiary under a legal disability
- amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 99 or 99A - for example, where the trust has undistributed Australian source income
- amounts paid to beneficiaries who are residents of a listed country if those amounts are paid during the non-resident trust estate's income year or within one month after the end of the income year. These amounts must be subject to tax in a listed country in a tax accounting period ending before the income year or commencing during the income year
- franked dividends - that is, dividends paid by Australian companies or similar amounts paid by corporate unit trusts and public trading trusts, out of profits that have been subject to Australian tax
- amounts included in the assessable income of the trustee of a trust estate where a dividend is grossed up for dividend imputation purposes
- amounts received by a trustee from another trust estate to the extent that the amount has already been attributed to a transferor
- amounts received by the trustee that are referable to the income or profits of a CFC that have been included in the assessable income of any resident taxpayer under the CFC measures
- income or profits of the trust estate - other than eligible designated concession income - that are subject to tax in any listed country in a tax accounting period ending before the end of, or commencing during, the non-resident trust estate's income year
- foreign investment fund (FIF) income attributed to the trust estate for a notional accounting period of a company FIF if a share of the attributable income of the company FIF is included in your assessable income under the CFC measures for
- a statutory accounting period coinciding with the notional accounting period of the company FIF, or
- statutory accounting periods ending and commencing during the notional accounting period of the company FIF
- amounts of foreign tax or Australian tax paid by the trustee or a beneficiary on amounts included in the attributable income of the trust estate.
For a listed country trust estate, exclude only the amounts that relate to the part of the net income that consists of eligible designated concession income.
Modifications made to Australian tax law
Rules that do not apply in working out the attributable income of a trust estate
The following rules do not apply in working out the attributable income of a trust estate:
- the general currency conversion rules
- the exemption for distributions from profits that have been taxed under the CFC measures
- the rules in sections 38 to 43 dealing with the taxation of a business only partly carried on in Australia
- the exemption for amounts that have been subject to withholding tax in Australia, and
- the CFC measures.
Conversion of income and expenses to Australian dollars
When calculating attributable income you must convert all amounts into Australian currency. This conversion is done using the conversion rules under the usual operation of the Act. For more information see Translation (conversion) rules.
Choice to use functional currency
The transferor trust may choose to have its attributable income calculated in the sole or predominant currency in which it keeps its accounts (ledgers, journals, statements of financial performance etc). This sole or predominant currency is called the 'applicable functional currency'.
When calculating attributable income in functional currency, all amounts that are not in the applicable functional currency (including Australian currency amounts) must be converted into the applicable functional currency. This conversion is done using the conversion rules under the usual operation of the Act. However, when applying these rules, the applicable functional currency is taken not to be foreign currency and all other amounts (including Australian currency amounts) are taken to be foreign currency.
Once the attributable income is calculated, it is converted into Australian currency in accordance with the relevant conversion rules.
The choice of applicable functional currency must be in writing but the transferor trust is not required to notify the Commissioner. The transferor trust must keep written evidence of the choice for as long as it is required to keep its tax records.
Generally, the choice will apply to the income year immediately following the one in which the choice is made. However, it will apply to the income year in which the choice is made where the choice is made within 90 days of the beginning of that income year, or by 16 January 2004 (if this is later).
The choice to use the applicable functional currency applies until you withdraw it. You can only withdraw a choice where the functional currency has ceased to be the sole or predominant currency in which the trust keeps its accounts. The withdrawal has effect from immediately after the end of the income year in which the choice is withdrawn. The withdrawal must be in writing and retained with your tax records. You may make a new choice applicable to subsequent income years.
Modified application of trading stock provisions
All items of trading stock are to be valued at cost when brought to account by a non-resident trust estate.
Modified application of depreciation provisions
A non-resident trust estate is allowed depreciation on the same basis as a resident taxpayer. However, assets are treated as having been held for the production of assessable income in income years where there was no calculation of attributable income.
Where the trustee has used a property during an income year partly for producing exempt income and partly for producing assessable income, the Tax Office can determine the amount that is an allowable deduction.
Modified application of the transfer pricing rules
The Tax Office can make adjustments reflecting arm's length values to amounts used in working out the attributable income of a trust estate. To avoid double taxation, the Tax Office can make a corresponding adjustment to an amount in determining the taxable income of another taxpayer.
Modifications relating to capital gains tax
The capital gains tax provisions of the Act - that is, Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 - apply as if the non-resident trust estate were a resident trust for CGT purposes. This ensures that a capital gain on the disposal of a CGT asset which is not taxable Australian property is taken into account under the transferor trust measures. It also ensures that the pre 20 September 1985 status of assets is retained.
Special rules apply to prevent double taxation of capital gains where a trust estate was formerly a resident of Australia. In this case, the cost base of assets that were taxed under the capital gains tax provisions at the residence change time is taken to be the market value of the assets at that time.
Modification of loss provisions
Losses are not available for income years before the year starting 1 July 1990.
De minimis exemption
The de minimis exemption ensures that the transferor trust measures do not apply to small amounts derived by a trust estate in a listed country.
The de minimis exemption is worked out having regard to the total of the attributable incomes of all trust estates for which a taxpayer is an attributable taxpayer. The de minimis exemption will be satisfied if the total of the attributable incomes of all the trust estates is equal to or less than the lesser of:
- $20,000, or
- 10% of the total of the net incomes of those trust estates.
If these tests are satisfied, the attributable income of listed country trust estates will not be included in the assessable income of the attributable taxpayer. The attributable income from unlisted country trust estates would still be included.
Working out the amount of attributable income to include in your assessable income
If you are an attributable taxpayer in relation to a non-resident trust estate, all the attributable income of the non-resident trust estate for an income year coinciding with your income year is included in your assessable income.
If there is more than one attributable taxpayer, the Tax Office may allow a reduction of the amount of attributable income to be included in the assessable income of each attributable taxpayer. To obtain the reduction, the taxpayer must apply to the Tax Office - see subsection 3 for more information.
Resident for part of a year
If you are a resident for only part of the income year, the attributable income included in your assessable income is reduced. The amount included is worked out as follows:
Notional attributable income × (the number of days during the period that you were a resident ÷ total number of days in the period)
Example 3: Part-year residency
George is a resident of Australia for 200 days out of the 365 days in the income year 1 July 2004 to 30 June 2005. He is an attributable taxpayer in relation to YZ trust that was a non-resident trust with the same income year. The attributable income of the trust estate was $40,000.
The amount George is required to include in assessable income for 2004-05 is:
$40,000 × (200 ÷ 365) = $21,917
End of example
Overlapping years of income
If you are an attributable taxpayer and your income year is different from that of a non-resident trust estate, the trust estate's attributable income for the two income years which overlap your income year is apportioned using the number of days that fall within your current income year.
Example 4: Overlapping years of residency
Helen's current income year is 1 July 2004 to 30 June 2005. She is an attributable taxpayer in relation to XY trust estate. The trust estate's income years are 1 January 2004 to 31 December 2004 and 1 January 2005 to 31 December 2005. The attributable income of the trust estate is $30,000 for the 2004 income year and $40,000 for the 2005 income year.
The amount worked out for the trust estate's 2004 income year is:
$30,000 × (184 ÷ 365) = $15,123
For the trust estate's 2005 income year, the amount is:
$40,000 × (181 ÷ 365) = $19,835
Helen adds the amounts to give a total attributable income of $34,958 for her 2004-05 income year.
End of example
Partnerships and trusts
The attributable income from a trust estate is included in working out the net income of a partnership or a trust estate and is treated as having a foreign source.
Where a partner of a partnership or a beneficiary of a trust estate is an Australian resident for the whole income year, they are to include in their assessable income their share of the net income - including attributable income - of the partnership or trust estate.
Where a partner or beneficiary is a non-resident of Australia at all times during an income year, they would not include any attributable income of the partnership or trust estate in their assessable income.
Subsection 2: Working out your assessable income where you do not have sufficient information to work out attributable income
If you are unable to obtain the information necessary to work out the attributable income of a trust estate, you must include an amount worked out using the following formula in your assessable income.
The formula is to be used for each transfer of property or services you made to the trust estate that is subject to the transferor trust measures.
The amount to include in your assessable income is worked out by applying a deemed rate of return to the market value of the property or services you transferred to the trust estate. The market value is adjusted for this calculation to reflect deemed returns for previous periods. The deemed rate of return applicable to assessments for the income year commencing 1 July 2006 is 5% above the rate of interest that applies for that period under section 8AAD(2) of the Taxation Administration Act 1953. If there are two or more rates of interest for the income year, you use the weighted average of these rates for the income year.
Use the following formulas to determine the amount to include in your assessable income for transfers of property or services after 12 April 1989.
Transfers made after 12 April 1989
Amount to be included in assessable income:
Adjusted value of the transfer × weighted statutory interest rate plus 5%
The adjusted value for transfers made during the current income year is worked out as follows.
Adjusted value of the transfer:
Market value, immediately before the transfer of property or services × (days after the transfer to the end of the income year ÷ days in income year)
Example 5: Transfer during current income year
An attributable taxpayer transferred property worth $30,000 to a non-resident trust estate on 31 May 2007. There are 30 days between the transfer on 31 May and the end of the year - 30 June 2007.
The adjusted value is worked out as follows:
$30,000 × (30 ÷ 365) = $2,465
End of example
If the transfer occurred before the taxpayer's current income year, the adjusted value of the transfer is the total of:
- the market value, immediately before the transfer, of the property or services transferred, and
- the total of the amounts that would have been included in the transferor's assessable income for that transfer in the income years preceding the taxpayer's current income year, if this method had been used in those years.
Where more than one transfer was made after 12 April 1989, the formula is applied separately to each transfer and then the relevant amounts are added together.
Transfers made before 12 April 1989
Use the following formula to determine the amount to include in your assessable income for transfers of property or services before 12 April 1989.
Amount to be included in assessable income:
Adjusted net worth of the trust estate × weighted statutory interest rate plus 5%
The adjusted net worth of a trust estate is its net worth adjusted for the deemed return on the property or services transferred before 12 April 1989.
The net worth of the trust estate is determined on 1 July 1990. Its net worth on that date is the market value of its assets at 1 July 1990, reduced by its liabilities on 1 July 1990.
To determine the adjusted net worth, the net worth is increased by the total of amounts that would be worked out in each previous income year commencing on or after 1 July 1990 using the above formula.
When using the formula method to work out the amount to include in your assessable income, if two or more taxpayers have transferred property or services to the trust estate, the Tax Office is empowered to provide relief along lines similar to those referred to in subsection 3.
Subsection 3: What happens if there is more than one transferor?
The assessable income of a transferor in relation to a non-resident trust estate will include the part of the attributable income of the trust estate relating to the period that the transferor was a resident of Australia. This can have the effect of subjecting more than one person to tax for the same income.
The Tax Office can reduce the amount included in your assessable income if there is more than one transferor. When determining the amount of the reduction, the Tax Office takes into account the amount of attributable income of the trust estate that relates to the property or services transferred to the trust estate and to any other matters that are considered relevant. You will need to apply to the Tax Office for the reduction.
Last modified: 18 May 2020QC 19443