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 does not apply if the amount included in your assessable income was paid from profits that have previously been taxed on an accruals basis under the transferor trust measures.
The charge is also not applicable for distributions from a public unit trust unless it is a controlled foreign trust.
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 broad-exemption listed country or
- were not subject to tax in a broad-exemption listed country and were derived in an income year when the trust was a resident of a non-broad-exemption listed country.
Listed countries are to be treated as broad-exemption listed countries for this purpose if the trust estate's income year commences before 1 July 1997.
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 × applicable rate of tax) − foreign tax
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 tax credit
The foreign tax credit is the credit you can claim on the amount included in your assessable income for the distribution made by the non-resident trust.
Example 6: Non-broad-exemption country trust estate
During the 1997-98 income year, a resident individual received a distribution of $10,000 from a non-broad-exemption listed 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 1990-91 income year. The income was not subject to tax in a broad-exemption 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 - 47% - less the amount of foreign tax credit.
($13,333 × 47% ) − $3,333 = $2,934
Note: The foreign tax credit 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
Amount of the distribution
Foreign tax attributable to the distribution=
$10,000 × $5,000 ÷ $15,000
End of example
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 before 1 July 1994 is the rate applicable under section 10 of the Taxation (Interest on overpayments) Act 1983. The rate after 30 June 1994 is the rate applying under section 214A of the Income Tax Assessment Act 1936 less 4 percentage points.