• Part 2: Application of section 99B, and the interest charge for beneficiaries of non-resident trust estates

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    Warning:

    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 part explains how distributions received by Australian residents from non-resident trusts are taxed under section 99B of the Act.

    It also explains when an interest charge will be payable on these distributions.

    Section 1

    Have you received an assessable distribution from a non-resident trust estate?

    Section 2

    Do you have to pay an interest charge?

    Section 1: Have you received an assessable distribution from a non-resident trust estate?

    This section broadly explains the tax treatment under section 99B of distributions made by a non-resident trust estate.

    Is the distribution assessable?

    Broadly, under section 99B, distributions made by a non-resident trust estate to or for the benefit of Australian resident beneficiaries are assessable in the hands of the beneficiaries, except in the following cases:

    1.

    the distribution is corpus of the trust estate (an amount derived by the trust estate which would have been included in assessable income if it had been derived by a resident taxpayer will not be taken to represent corpus)

    2.

    the distribution is an amount that has been taxed or is liable to tax in the hands of the beneficiary under section 97 or in the hands of the trustee under sections 98, 99 or 99A

    3.

    the distribution is an amount that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of that other trust is assessed and liable to pay tax under subsection 98(4)

    4.

    an amount that is non-assessable non-exempt income of the beneficiary as conduit foreign income under section 802-17 of the ITAA 1997

    5.

    the distribution paid to or applied for the benefit of a resident taxpayer (other than a company not acting in the capacity as a trustee) represents an amount of attributable income of a non-resident trust estate that has previously been included in the assessable income of any taxpayer

    6.

    the distribution paid or applied for the benefit of a company represents an amount of attributable income of a non-resident trust estate that has previously been included in the assessable income of that same company. This exemption applies where the company is acting as a beneficiary, not as a trustee

    7.

    the distribution is from any amount that would not have been assessable income in the hands of a resident taxpayer (for example, exempt income or non-assessable non-exempt income). This would include an amount that, if it had been derived by a resident taxpayer, would have been not assessable under section 23AH

    8.

    the distribution is of an amount included in the assessable income of any taxpayer under the transferor trust provisions.

    Section 2: Do you have to pay an interest charge?

    If you are an Australian resident beneficiary of a non-resident trust estate and section 99B includes a distribution of accumulated income from the non-resident trust estate in your assessable income, you may be liable to pay additional tax in the nature of an interest charge on the distribution.

    The interest charge may apply to a distribution of profits from a non-resident trust estate to the extent the distribution was made from profits that:

    • are referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or
    • were not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country.

    The charge is not applicable for distributions from a public unit trust unless it is a controlled foreign trust.

    The interest charge does not apply to an amount included in your assessable income if you received the amount from the estate of a deceased person where the amount was paid to, or applied for the benefit of, you as a beneficiary of the estate beneficiary within three years of the death of that person.

    Working out the amount of the interest charge

    The amount on which interest is payable is worked out using the following formula:

    Amount on which interest is payable

    =

    (distributed amount x applicable rate of tax)

    _

    foreign income tax offset

    Distributed amount

    The distributed amount is the amount of the distribution that is included in your assessable income under section 99B. This amount is grossed up for any foreign tax you can claim on that share.

    Applicable rate of tax

    The applicable rate of tax for a company is the general rate of Australian tax imposed on companies for the income year in which the company receives a trust distribution. The general rate will apply irrespective of the actual rate of tax applicable to the company.

    For a taxpayer other than a company, the applicable rate of tax is the maximum marginal rate that applies for the income year of the taxpayer in which the trust distribution is received. The maximum rate would apply irrespective of the actual marginal rate of tax applicable to the taxpayer.

    Foreign income tax offset

    The foreign income tax offset is the amount you can claim for foreign income tax paid on an amount included in your assessable income for the distribution made by the non-resident trust.

    Example 6
    Unlisted country trust estate

    During the 2008-09 income year, a resident individual received a distribution of $10,000 from an unlisted country trust estate. The entire amount was included in the taxpayer's assessable income under section 99B. The distribution was paid from $20,000 foreign income derived by the trust in the 1998-99 income year. The income was not subject to tax in a listed country and the trust paid foreign tax of $5,000.

    Interest is payable on the distributed amount of $10,000 grossed up by the amount of foreign tax relating to the distributed amount ($3,333) multiplied by the applicable rate of tax (45%) less the amount of foreign tax credit.

    ($13,333 x 45%) - $3,333 = $2,666

    The foreign income tax offset is worked out by allocating, on a pro rata basis, the foreign tax paid by the trust estate on its foreign income. The profits and income of the trust estate that were available for distribution were:

    $20,000 - $5,000

    $15,000

    Amount of the distribution

    $10,000

    Foreign tax attributable to the distribution =

    $10,000 x $5,000
    15,000

    $3,333

    Period over which the interest charge accrues

    The interest charge accrues as follows:

    • where the trust distribution is paid out of trust income or profits accumulated before 1990-91, the charge will accrue from the start of the beneficiary's 1990-91 income year
    • where the trust distribution is paid out of trust income accumulated by the non-resident trust estate in the 1990-91 or a subsequent income year, the charge will accrue from the start of the beneficiary's next income year - that is, the income year first following the income year of the trust estate for which the income would have been included in the assessable income of the trust if the trust had been a resident trust estate.

    The interest charge will cease to accrue on the last day of the income year in which the distributed amount is included in the assessable income of the beneficiary.

    What interest rate applies?

    The rate of interest that applies from 14 September 2006 is the applicable rate under section 8AAD of the Taxation Administration Act 1953. The applicable rate of interest prior to 14 September 2006 is:

    • from 1 July 1999 until 14 September 2006 - the rate applying under section 214A of the ITAA 1936
    • from 1 July 1994 until 30 June 1999 - the rate applying under section 214A of the ITAA 1936 less four (4) percentage points
    • before 1 July 1994 - the rate applying under section 10 of the Taxation (Interest on overpayments) Act 1983.
    Last modified: 28 Jun 2012QC 25628