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  • Rules for non-resident trustee beneficiaries

    Operation of subsections 98(4)

    A trustee is liable to pay tax in respect of a trustee beneficiary's share of the trust's net income attributable to Australian sources if the trustee beneficiary is a non-resident at the end of that income year. If the beneficiary trust has more than one trustee, subsection 98(4) will apply if at least one trustee is a non-resident at that time.

    Rate of tax

    The rate of tax that a trustee pays in relation to a non-resident trustee beneficiary is the top tax rate for a non-resident individual (currently 45%).

    Trustee tax – not a final tax

    If the trustee is assessed under subsection 98(4) in respect of a trustee beneficiary, the trustee beneficiary and any later trustee in the chain of trusts is not assessed again on that amount under section 98, 99 or 99A. However, an amount may be taxed to an ultimate individual or company beneficiary under subsection 97, 98A(3) or 100 and allowed a credit under section 98B.

    Example – chain of trusts

    This example of a chain of trusts explains the taxation of trust net income for non-resident beneficiaries.

    Example – chain of trusts

    Assume the following in this example:

    • The only income of Trust 1 is Australian sourced rental income.
    • Trust 2 is not a foreign trust for the purposes of the Foreign Investment Fund provisions Part XI ITAA 1936.
    • Trust 2 is presently entitled to 100% of the income of Trust 1.
    • Each of the five beneficiaries of Trust 2 is presently entitled to 20% of the income of that trust and none is under a legal disability.
    • Trust 3 has no presently entitled beneficiary.
    • Trust 2 and Trust 3 have derived no income apart from that flowing from Trust 1 nor can they reduce that income by any allowable deductions.

    The residency status of each entity is as indicated: R = resident; NR = non-resident.

    Diagramatic view of chain of trusts example.

    For this example, a chain of trusts exists where a trustee of one trust is a beneficiary of another trust. The relationship between Trust 1, 2 and 3 would be a chain of trusts.

    End of example

    Trustee assessment under subsection 98(4) – not a final tax

    A trustee is liable to pay tax in respect of a non-resident trustee beneficiary's share of the trust's net income attributable to Australian sources if the trustee beneficiary is a non-resident at the end of that income year – subsection 98(4).

    The trustee of Trust 1 is assessed in relation to Trust 2's share (100%) of Trust 1's net income.

    The tax paid by a trustee in respect of a non-resident trustee beneficiary's share of net income is not a final tax. That is, the ultimate beneficiaries may be able to claim a credit for tax paid by a trustee.

    Position of trustee beneficiary and other trustees in chain

    If a trustee is assessed under subsection 98(4) in respect of a trustee beneficiary, neither the trustee beneficiary nor any later trustee in the chain of trusts is assessed under section 98, 99 or 99A on an amount that is reasonably attributable to the amount assessed under subsection 98(4) – section 99E.

    • The trustee of Trust 2 is not assessed under section 98 in respect of non-resident beneficiary C or D.
    • The trustee of Trust 3 is not assessed under sections 99 or 99A.

    Position of ultimate beneficiaries

    An amount (or part of it) that has been assessed to a trustee under subsection 98(4) may also be assessed to an ultimate individual or company beneficiary. This table sets out the provisions under which such a beneficiary may be assessed:

    Provisions for assessing a beneficiary

    Beneficiary is

    resident at the end of income year and …

    non-resident at the end of income year and …

    Presently entitled to trust income and not under a legal disability

    97(1)

    98A(3)

    Under a legal disability or deemed to be presently entitled

    100(1), 100(1B)

    98A(3)

    A beneficiary who is assessed under any of the provisions referred to in the table on an amount that is reasonably attributable to an amount assessed to a trustee under subsection 98(4), is entitled to deduct from their tax payable a proportion of the tax paid by the trustee under subsection 98(4). If the amount the beneficiary is able to deduct exceeds their tax liability, they are entitled to a refund of the difference – see section 98B.

    • Beneficiaries C and D are assessed under subsection 98A(3) on their share of Trust 2's net income, and section 98B allows them to deduct from their tax payable a portion of the tax paid by the trustee of Trust 1.
    • Beneficiaries E and F are assessed under section 97 on their share of Trust 2's net income, and section 98B allows them to deduct from their tax payable a portion of the tax paid by the trustee of Trust 1.

    Calculating the credit for tax paid under subsection 98(4)

    The amount of the deduction is a proportion of the tax paid by the trustee under subsection 98(4). That proportion is the same as the proportion of the amount assessed to the trustee under subsection 98(4) that gave rise to the amount assessed to the ultimate beneficiary.

    The total amount that all relevant beneficiaries entitled to a section 98B credit can deduct cannot exceed the total of the tax paid by the trustee on the net income of the trust under subsection 98(4).

    If an ultimate beneficiary does not include an amount in assessable income that is reasonably attributable to net income on which a trustee has paid tax under subsection 98(4) (for example, because expenses and losses have been offset against that amount as it flows through the chain of trusts), the beneficiary is not entitled to a deduction for the tax the trustee paid.

    Beneficiaries C, D, E and F can deduct from their tax payable 20% of the tax paid by the trustee of Trust 1 under subsection 98(4).

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      Last modified: 21 Jun 2021QC 19548