• Special tax-paid deeming rules for beneficiaries of trust estates

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    A specific rule deems a taxpayer to have paid the relevant foreign income tax where they are presently entitled to a share of the trust income that can be directly or indirectly attributed to income received by the trust on which foreign income tax has already been paid. This tax-paid deeming rule applies where:

    • section 6B of the ITAA 1936 treats an amount of assessable income as being attributable to another amount of income having a particular character or source
    • foreign income tax has been paid in respect of the other amount of income, and
    • the assessable income attributed under section 6B is less than it would have been if the foreign income tax had not been paid.

    When applied together, these rules ensure that a beneficiary of a trust can be deemed to have paid any tax on its share of trust income that is attributable to income that flows through the trust (or chain of trusts) on which foreign income tax is paid by another entity.

    The amount of the foreign income tax that is taken to have been paid by the taxpayer is the amount by which the income included in their assessable income has been reduced because of the payment of the foreign income tax paid.

    Example 1

    Holly is the sole beneficiary of the B trust estate and is presently entitled to all of its income. On its only activity (a portfolio investment in foreign company X), B derives foreign dividend income of $100,000 on which foreign dividend withholding tax of $10,000 is paid. B subsequently distributes all its income to Holly (that is, $90,000 net of withholding). As Holly's share of the trust income is attributable to the dividend income received by B (by virtue of section 6B of the ITAA 1936), she can treat the withholding tax paid on the dividend as having been paid by her.

    Example 2

    Tim, an Australian resident, is the only unit holder in Managed Fund A, which in turn is the only unit holder in Managed Fund B, which has an interest in a US company. Both managed funds are unit trusts. The US company pays a dividend of $1,000 to Managed Fund B, on which withholding tax of $150 is payable, making the net distribution $850. This amount of $850 flows through both managed funds to Tim. The terms and conditions of the two managed funds are such that Tim is the beneficial owner of the shares on which the dividend was paid.

    Tim correctly includes the $850 attributable to the US source dividend in his assessable income as he is presently entitled to all the income of Managed Fund A. As Tim's share of the trust income is attributable to the dividend income received by Managed Fund B, he can treat the withholding tax paid on the dividend as having been paid by him (even though the amount included in his assessable income is attributable to the dividend income that has flowed through a chain of trusts).

    Last modified: 23 Jul 2009QC 22894