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  • Rules on particular amounts in net income

    Special rules apply to particular amounts included in net income. These include:

    Dividends, interest and royalties

    Same as before, income taxed under the withholding tax rules or excluded from those rules is not taxed again to the trustee under section 98 (or to a beneficiary). A beneficiary is liable, under the withholding tax rules in Division 11A of Part III, for tax on Australian dividends, interest and royalties to which they are presently entitled while a non-resident. The withholding tax is collected from the trustee under the pay as you go withholding rules in the Taxation Administration Act 1953.

    Distributions declared to be conduit foreign income

    Section 802-17 of the Income Tax Assessment Act 1997 (ITAA 1997) ensures that distributions declared to be conduit foreign income are able to flow through trusts to non-resident beneficiaries, free of Australian tax.

    If an Australian company makes an unfranked frankable distribution that it declares to be conduit foreign income to a trustee, that trustee is not liable to pay tax in relation to a non-resident beneficiary's share of the net income of the trust that is reasonably attributable to all or part of that distribution. The non-resident beneficiary must be presently entitled to the share of the trust income that is reasonably attributable to all or part of that unfranked distribution for this to apply.

    Also, a non-resident beneficiary is not assessed on their share of the net income of a trust to the extent the share of the net income is reasonably attributable to a distribution declared to be conduit foreign income.

    Capital gains

    If the amount of net income on which a trustee is assessed in relation to a non-resident trustee or company beneficiary includes a discount capital gain, the trustee is assessed as if the discount had not applied to the capital gain - sections 115-220 and 115-222 of the ITAA 1997.

    Ultimate (trustee) beneficiary reporting rules

    Changes were made to the reporting obligations for trustees of closely held trusts with effect from 1 July 2008. A transitional rule applies for the 2006/07 and 2007/08 income years to ensure that where a share of net income has been taxed under subsection 98(4) the trustee of a closely held trust will not be liable to pay ultimate beneficiary non-disclosure tax under existing sections 102UK or 102UM.

    The section 98 changes outlined above will affect the reporting obligations for trustees of closely held trusts under the trustee beneficiary reporting rules. Effective from 1 July 2008 a trustee of a closely held trust will not be required to include in a trustee beneficiary statement details of the net income of the trust in respect of which the trustee is assessed under subsection 98(4) or which is reasonably attributable to an amount that has previously been assessed under that provision.

    Example – chain of trusts

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

    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 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.

    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 will be 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).

      Last modified: 31 May 2019QC 19548