Foreign income return form guide

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Chapter 2: Transferor trust and related measures

This chapter:

  • helps Australian residents who have transferred, or are deemed to have transferred, property or services to a non-resident trust estate to:
    • determine whether, under the transferor trust measures, any income or capital gains derived by the trust estate should be attributed to them for inclusion in their assessable income
    • work out the amount to be attributed
  • helps Australian beneficiaries who have received a distribution from a non-resident trust estate to determine whether an interest charge applies to the distribution.

Introduction

The transferor trust measures operate to accruals tax residents of Australia who have transferred property or services to a non-resident trust estate on certain profits derived by the trust.

Related measures also operate to impose an interest charge on certain trust distributions from non-resident trusts that are included in the assessable income of a resident beneficiary. Broadly, the interest charge applies if the profits of the trust from which the distribution was made were not subject to tax:

  • in a broad-exemption listed country or
  • on an attribution basis under the transferor trust measures.

Refer to the glossary in appe ndix 2 to find the meaning of certain words and expressions used in this chapter.

Summary of chapter 2

Part 1

Are you subject to the transferor trust measures?

Part 2

Interest charge for beneficiaries of non-resident trust estates

Part 1 - Are you subject to the transferor trust measures?

This part helps you determine whether you are subject to the transferor trust measures. It also shows how to work out the amount to include in your assessable income if the measures do apply.

Summary of part 1

Section 1

Are you a transferor in relation to a non-resident trust estate?

Section 2

Are you subject to the measures?

Section 3

What amount do you have to include in your assessable income?

  • See subsection 1 if information is available from the trust.
  • See subsection 2 if information is not available from the trust.

Is there more than 1 transferor?

Section 1 - Are you a transferor in relation to a non-resident trust estate?

Transfers of property or services

If you have transferred property or services to a non-resident trust estate, the profits of the trust may be attributed to you - that is, the profits may be included in your assessable income even though you have not received a distribution from the trust.

You will be regarded as a transferor if you:

  • have at any time transferred property or services to a non-resident discretionary trust estate or
  • transferred property or services after 7.30 p. m. on 12 April 1989 to a non-resident trust estate that is non-discretionary for either no consideration or for consideration less than an arms length amount.

Deemed transfers

Certain transfers of property or services made to another entity may be deemed to have been made to a trust estate if the transfer is connected with a transfer to the trust estate.

Example 1

Deemed transfer to a trust estate

  • Entity A transfers property to Entity B on condition that Entity B transfers the property to a trust estate. In this case, Entity A would be deemed to have transferred to the trust estate the property transferred by Entity B.

Example 2

Marketing of units in a unit trust

  • The trustee of a unit trust issues units to Entity A, which acts as manager, underwriter or dealer for the placement of the units. Entity A then disposes of the units to Entity B, which transfers property or services to Entity A as consideration for the acquisition of the units.

    In this case, Entity B is deemed to have transferred the property or services that Entity A originally transferred to the unit trust. In the circumstances, Entity A will not be taken to have transferred property or services to the trust estate.

Where a partnership has transferred property or services to a non-resident trust estate, each partner is deemed to have transferred property or services in proportion to their interest in the partnership.

Where a trust estate has transferred property or services to a non-resident trust estate, each person who has transferred property or services to the first mentioned trust estate is deemed to have transferred property or services to the second mentioned trust estate.

If the partnership or trust estate is in existence at the end of the non-resident trust estate's year of income, any attributable income of the non-resident trust estate is attributed to the partnership or trust estate. If the partnership or trust estate is not in existence at the end of the non-resident trust estate's year of income, any attributable income of the non-resident trust estate is attributed to the partners of the partnership or the original transferors to the trust estate.

The ATO may also treat you as having transferred property or services to a trust if you benefited from a transfer by a company, partnership or trust that ceases to exist.

If you need further information on deemed transfers, contact the ATO.

Section 2 - Are you subject to the measures?

The amount to be included in the assessable income of a resident transferor for profits derived by a non-resident trust estate is called 'attributable income' and the resident transferor to whom it is attributed is called an 'attributable taxpayer'.

Exemptions from the transferor trust measures

A number of exemptions are provided from the transferor trust measures. These exemptions depend on the type of trust estate to which you have transferred property or services.

Public unit trusts

The transferor trust measures do not apply to a transfer of property or services to a non-resident trust estate if:

  • the trust estate is a public unit trust at all times during the transferor's year of income
  • the transfer was made for arm's length consideration
  • the sole purpose of the transfer was the arm's length acquisition of units in the unit trust.

A unit trust will be a public unit trust if, at any time during the income year, any of the units were listed on a stock exchange in Australia or elsewhere or were offered to the public. A unit trust will also be a public unit trust if, at all times during the income year, the units in the unit trust were held by 50 or more persons.

The transferor trust measures will apply to you if you make a transfer of property or services to a non-resident public unit trust on or after 12 April 1989 for less than arm's length consideration.

Deceased estates

The transferor trust measures generally do not apply to a trustee of a deceased estate who transfers property or services to a non-resident trust estate according to directions contained in the deceased person's will or codicil, or according to a court order which varies the will or codicil. The measures will apply, however, if:

  • the transfer is made through the exercise of the power of appointment or of a discretion by the trustee or any other person - for example, where the trustee of a deceased estate has a discretion to invest money of the trust estate and decides to transfer the money to a discretionary trust estate or
  • the trustee transfers property or services to a non-resident trust estate but the transfer was caused by another entity - other than a deceased person - in which case, the entity that caused the transfer is treated as a transferor.

Non-resident family trusts

The transferor trust measures do not apply to a natural person who has transferred property or services to a non-resident family trust. However, the trust must be a non-resident family trust at all times when it is in existence after the beginning of the transferor's 1990-91 income year until the end of the current income year - that is, the income year for which the transferor is working out assessable income.

An exemption from the transferor trust measures is also available to a natural person who:

  • first becomes an Australian resident after 12 April 1989
  • makes a transfer to a non-resident family trust before taking up residency in Australia.

To qualify, the trust estate must be a non-resident family trust at all times after the transferor becomes a resident of Australia.

The exception does not apply to a natural person who, as trustee, transferred any property or services to the non-resident family trust from any other trust estate.

Two types of non-resident family trusts are covered by this exception - post-marital family trusts and family relief trusts.

Post-marital family trusts

Post-marital family trusts come into existence after a decree or order of dissolution or annulment of a marriage or a decree or order of judicial separation or similar instrument. Trusts resulting from the breakdown of a de facto marriage also qualify. The beneficiaries of the trust estate must be non-resident natural persons and:

  • the spouse or former spouse of the natural person or
  • a child of the natural person or of the spouse of the natural person or
  • a person who was a child of the former spouse of the natural person during the marriage.

Family relief trusts

Family relief trusts are established and operated to help non-resident family members. Trusts with Australian or non-family beneficiaries do not qualify as family trusts. The only beneficiaries permitted are non-residents who are related to the transferor. The following persons are treated as related to the transferor for this purpose.

  • a spouse or former spouse
  • a parent of the transferor or of the transferor's spouse or former spouse
  • a child of the transferor or of the transferor's spouse or former spouse
  • a grandparent of the transferor
  • a grandchild of the transferor
  • a brother or sister of the transferor or of the transferor's spouse or former spouse
  • a child of the transferor's brother or sister
  • a child of a brother or sister of the transferor's spouse or former spouse.

A trust estate will generally not qualify as a family trust if the assets of the trust are excessive given the requirements of the beneficiaries. There is an exception to this rule, however, if there have been no transfers of property or services to the trust after 12 April 1989. In this case the trust can have excessive assets and still qualify as a family trust.

Contingent beneficiaries

A trust estate can still be a family trust estate if, in the event of the death of a family member, one or more natural persons benefit or are capable of benefiting under the trust. These persons must, however, be:

  • non residents
  • children of the deceased family member.

If all beneficiaries die, the trust estate can still be a family trust estate if there are one or more funds, authorities or institutions covered by section 78 - the gift provisions - of the Act that would benefit or be capable of benefiting under the trust.

Migrant transferors

A natural person who first became an Australian resident after 12 April 1989 will not be subject to the transferor trust measures if they transferred property or services to a non-resident trust estate before becoming a resident.

Discretionary trust estates

The transferor trust measures do not apply to a transferor who has transferred property or services to a discretionary trust estate if both of the following conditions are satisfied:

  • the transfer was made in the course of carrying on a business
  • the transfer was made in terms identical or similar to those that relate to transactions undertaken by the transferor, at or about the time of the transfer, in the ordinary course of business with ordinary clients or customers - that is, on an arm's length basis and subject to similar terms and conditions.

If the transfer was not made on an arm's length basis in the course of carrying on a business, the transferor trust measures will normally apply if at any time after the transfer the transferor or the transferor's associates were in a position to control the trust estate. However, if the transfer was made before 12 April 1989, the transferor trust measures will only apply if the transferor or the transferor's associates were in a position to control the trust after 12 April 1989.

If a transferor subsequently gains control of the discretionary trust estate, all years before the commencement of the transferor trust measures become subject to the measures.

A transferor is taken to be in a position to control a non-resident trust estate if the transferor or any associates:

  • have power, by whatever means, to obtain the beneficial enjoyment of the corpus or income of the trust estate
  • were able to control, directly or indirectly, the application of the income or corpus of the trust estate
  • were capable, under a scheme, of gaining the enjoyment or control referred to in the above two points
  • could expect the trustee to follow their directions, instructions or wishes or
  • have the ability to remove or appoint any trustees of the trust estate.

All factors must be taken into account in determining whether the trustee of a trust estate was accustomed, or might reasonably be expected, to follow directions, instructions or wishes of a transferor or an associate of the transferor.

For example, a requirement in a trust deed for the trustee to ignore directions, instructions or wishes would not pre-empt the examination of the actual circumstances to determine whether the transferor or an associate controls the trustee. The way in which the trustee has acted in the past, the relationship between the transferor or transferor's associate and the trustee and the amount of property or services transferred to the trust estate, are some of the other matters that need to be considered.

Non-discretionary trust estates

The transferor trust measures will not apply to a transferor who transferred property or services to a non-discretionary trust estate before 12 April 1989. Moreover, the measures will not apply to a transfer of property or services after 12 April 1989 if:

  • the trust estate was a non-discretionary trust estate at all times during the transferor's current year of income
  • the transfer was made for arm's length consideration.

Where:

  • one transferor - the original transferor - makes transfers of property or services to a non-resident non-discretionary trust estate which were all made for consideration at an arm's length amount and
  • another transferor - the second transferor - makes a transfer of property or services to the same non-resident trust estate on or after 12 April 1989 which is made for no consideration or consideration at less than an arm's length amount,

the second transferor - but not the original transferor - would become an attributable taxpayer in relation to the trust estate. Therefore, all the attributable income of the trust estate would be attributed to the second transferor.

Section 3 - What amount do you have to include in your assessable income?

This section is relevant only if you are an attributable taxpayer in relation to a non-resident trust estate.

You must follow the steps in subsection 1 to work out your attributable income if you can obtain the necessary information.

If you cannot reasonably be expected to have access to the necessary information, work out the amount to be included in your assessable income following the steps in subsection 2 .

Once you have worked out the amount to include in your assessable income, you may be able to apply for a reduction of this amount. Subsection 3 explains how to do this.

Subsection 1 - Working out your assessable income where information is available

Working out the attributable income of a non-resident trust estate

To determine the attributable income of a non-resident trust estate you must first work out its net income. The net income of a trust estate is worked out as though the trust estate were an Australian resident and taxpayer. The foreign loss quarantining rules will, for instance, apply when working out the net income of the trust estate.

In working out the net income of a non-resident trust estate, you need to identify whether it is a broad-exemption listed country trust estate.

If it is a broad-exemption listed country trust estate, only the trust's eligible designated concession income is taken into account when working out the net income. The balance of the income of the trust estate is treated as exempt income.

If it is not a non-broad-exemption listed country trust estate, all its income or gains are included in working out its net income.

A non-resident trust estate is treated as a broad-exemption listed country trust estate if all the income of the trust estate - other than eligible designated concession income - is either subject to tax in a broad-exemption listed country or is assessable in Australia in the hands of the trustee or a beneficiary.

For income years commencing before 1 July 1997, the calculation of attributable income for listed country trust estates was the same as that described above for broad-exemption listed country trust estates. The list of countries used prior to 1 July 1997 is in attachment A of appendix 1 .

Amounts that may be excluded from attributable income

In determining the attributable amount, the net income of a non-resident trust estate is reduced by the following amounts to the extent they relate to amounts included in the net income of the trust estate:

  • amounts that have been included in the assessable income of a beneficiary under section 97 of the Act - that is, amounts to which a beneficiary is presently entitled
  • amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 98 of the Act - for example, on behalf of a resident beneficiary under a legal disability
  • amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 99 or 99A - for example, where the trust has undistributed Australian source income
  • amounts paid to beneficiaries who are residents of a broad-exemption listed country if those amounts are paid during the year of income of the non-resident trust estate or within one month after the end of the year of income. These amounts must be subject to tax in a broad-exemption listed country in a tax accounting period ending before the year of income or commencing during the year of income
  • franked dividends - that is, dividends paid by Australian companies or similar amounts paid by corporate unit trusts and public trading trusts, out of profits that have been subject to Australian tax
  • amounts included in the assessable income of the trustee of a trust estate where a dividend is grossed up for dividend imputation purposes
  • amounts received by a trustee from another trust estate to the extent that the amount has already been attributed to a transferor
  • dividends received from a CFC that have been included in the assessable income of a taxpayer under section 458 of the Act - see chapter 1 of the guide
  • amounts received by the trustee that are referable to the income or profits of a CFC that have been included in the assessable income of any resident taxpayer under the CFC measures
  • income or profits of the trust estate - other than eligible designated concession income - that are subject to tax in any broad-exemption listed country in a tax accounting period ending before the end of, or commencing during, the year of income of the non-resident trust estate
  • FIF income attributed to the trust estate for a notional accounting period of a company FIF if a share of the attributable income of the company FIF is included in your assessable income under the CFC measures for:
    • a statutory accounting period coinciding with the notional account period of the company FIF or
    • statutory accounting periods ending and commencing during the notional accounting period of the company FIF
  • amounts of foreign tax or Australian tax paid by the trustee or a beneficiary on amounts included in the attributable income of the trust estate.

For a broad-exemption listed country trust estate, exclude only the amounts that relate to the part of the net income that consists of eligible designated concession income.

Modifications made to Australian tax law

Rules that do not apply in working out the attributable income of a trust estate

The following rules do not apply in working out the attributable income of a trust estate:

  • the general currency conversion rules in section 20
  • the exemption for distributions from profits that have been taxed under the CFC measures
  • the rules in sections 38 to 43 dealing with the taxation of a business only partly carried on in Australia
  • the exemption for amounts that have been subject to withholding tax in Australia
  • the CFC measures.

Conversion of income and expenses to Australian dollars

All amounts are to be expressed in Australian dollars. The following rules apply for the conversion of amounts of income or expenses of a revenue nature. The rules do not apply for the conversion of amounts of a capital nature or for the conversion of foreign taxes.

A non-resident trust estate may keep its records in one foreign currency or predominantly in one foreign currency. These amounts can be converted to Australian dollars using the average exchange rate that prevailed during the income year of the trust estate. Alternatively, the trustee may elect to use the rate that prevailed on the last day of the trust estate's income year. This election must be made within 30 days of the end of the income year concerned and the election will apply for all subsequent income years. The ATO may allow an extension for the lodgment of the election.

If there is a predominant currency but there are one or more other currencies, the other currencies are to be converted into the predominant currency on any reasonable basis and then converted into Australian dollars using one of the two methods outlined above.

Where there is no single or predominant currency, any reasonable basis can be used to convert the amounts.

Conversion of amounts of foreign tax to Australian dollars

If foreign tax is paid by deduction from another amount, the foreign tax is converted to Australian currency using the method adopted for converting the other amount. Withholding tax paid on interest received by a trust would, for instance, be converted to Australian currency using the method for converting the interest to Australian currency.

In any other case, an amount of foreign tax is to be converted to Australian currency using the rate of exchange that applied at the time the foreign tax was paid.

Conversion of capital amounts to Australian dollars

There are no special rules for converting capital amounts. The conversion is made using the rules that apply for converting capital amounts under the usual operation of the Act. Amounts that are taken into account in determining the cost base of an asset are converted at the time the costs were incurred. Amounts arising from the disposal of an asset are converted at the time of disposal.

Modified application of trading stock provisions

All items of trading stock are to be valued at cost when brought to account by a non-resident trust estate.

Modified application of depreciation provisions

A non-resident trust estate is allowed depreciation on the same basis as a resident taxpayer. However, assets are treated as having been held for the production of assessable income in income years where there was no calculation of attributable income.

Where the trustee has used a property during an income year partly for producing exempt income and partly for producing assessable income, the ATO can determine the amount that is an allowable deduction.

Modified application of the transfer pricing rules

The ATO can make adjustments reflecting arm's length values to amounts used in working out the attributable income of a trust estate. To avoid double taxation, the ATO can make a corresponding adjustment to an amount in determining the taxable income of another taxpayer.

Modifications relating to capital gains tax

The capital gains tax provisions of the Act - that is, Part IIIA - apply as if the non-resident trust estate were a resident trust estate. This ensures that a gain on the disposal of a non-taxable Australian asset is taken into account under the transferor trust measures. It also ensures that the pre-20 September 1985 status of assets is retained.

Special rules apply to prevent double taxation of capital gains where a trust estate was formerly a resident of Australia. In this case, the cost base of assets that were taxed under the capital gains tax provisions at the residence change time is taken to be the market value of the assets at that time.

Modification of loss provisions

Losses are not available for income years commencing before 1 July 1990.

De minimis exemption

The de minimis exemption ensures that the transferor trust measures do not apply to small amounts derived by a trust estate in a broad-exemption listed country.

The de minimis exemption is worked out having regard to the total of the attributable incomes of all trust estates for which a taxpayer is an attributable taxpayer. The de minimis exemption will be satisfied if the total of the attributable incomes of all the trust estates is equal to or less than the lesser of:

  • $20 000 or
  • 10 per cent of the total of the net incomes of those trust estates.

If these tests are satisfied, the attributable income of broad-exemption listed country trust estates will not be included in the assessable income of the attributable taxpayer. The attributable income from the non-broad-exemption listed country trust estates would still be included.

Working out the amount of attributable income to include in your assessable income

If you are an attributable taxpayer in relation to a non-resident trust estate, all the attributable income of the non-resident trust estate for an income year coinciding with your income year is included in your assessable income.

If there is more than one attributable taxpayer, the ATO may allow a reduction of the amount of attributable income to be included in the assessable income of each attributable taxpayer. To obtain the reduction, the taxpayer must apply to the ATO - refer to subsection 3 for more information.

Resident for part of a year

If you are a resident for only part of the income year, the attributable income included in your assessable income is reduced. The amount included is worked out as follows:

Notional attributable income

X

the number of days during

the period that you were a resident


total number of days in the period

Example 3

Part-year residency

  • George is a resident of Australia for 200 days out of the 365 days in the income year 1 July 1996 to 30 June 1997. He is an attributable taxpayer in relation to YZ trust that was a non-resident trust with the same income year. The attributable income of the trust estate was $40,000.

    The amount George is required to include in assessable income for 1996-97 is:

    $40,000 x (200/365) = $21,917

Overlapping years of income

If you are an attributable taxpayer and your income year is different from that of a non-resident trust estate, the trust estate's attributable income for the two income years which overlap your income year is apportioned using the number of days that fall within your current income year.

Example 4

Overlapping years of residency

  • Helen's current income year is 1 July 1996 to 30 June 1997. She is an attributable taxpayer in relation to XY trust estate. The trust estate's income years are 1 January 1996 to 31 December 1996 and 1 January 1997 to 31 December 1997. The attributable income of the trust estate is $30,000 for the 1996 income year and $40,000 for the 1997 income year.

    The amount worked out for the trust estate's 1996 income year is:

    $30 000 x (184/365) = $15,123

    For the trust estate's 1997 income year, the amount is:

    $40 000 x (181/365) = $19,835

    Helen adds the amounts to give a total attributable income of $34,958 for her 1996-97 income year.

Partnerships and trusts

The attributable income from a trust estate is included in working out the net income of a partnership or a trust estate and is treated as having a foreign source.

Where a partner of a partnership or a beneficiary of a trust estate is an Australian resident for the whole income year, they are to include in their assessable income their share of the net income - including attributable income - of the partnership or trust estate.

Where a partner or beneficiary is a non-resident of Australia at all times during an income year, they would not include any attributable income of the partnership or trust estate in their assessable income.

Subsection 2 - Working out your assessable income where you do not have sufficient information to work out attributable income

If you are unable to obtain the information necessary to work out the attributable income of a trust estate, you must include an amount worked out using the following formula in your assessable income.

The formula is to be used for each transfer of property or services you made to the trust estate that is subject to the transferor trust measures.

The amount to include in your assessable income is worked out by applying a deemed rate of return to the market value of the property or services you transferred to the trust estate. The market value is adjusted for this calculation to reflect deemed returns for previous periods. The deemed rate of return for a particular period is 5 per cent above the rate of interest that applies for that period under section 214A of the Act less 4 percentage points. If there are two or more rates of interest for the income year, you use the weighted average of these rates for the income year. The weighted average of the section 214A rate less 4 percentage points is referred to as the weighted statutory interest rate.

Use the following formulas to determine the amount to include in your assessable income for transfers of property or services after 12 April 1989.

Transfers made after 12 April 1989

Amount to be included in assessable income

=

Adjusted value of the transfer

x

Weighted statutory interest rate plus 5 per cent

The adjusted value for transfers made during the current income year is worked out as follows.

Adjusted value of the transfer

=

Market value, immediately before the transfer of property or services

x

Days after the transfer to the end of the income year, divided by days in income year

Example 5

Transfer during current income year

  • An attributable taxpayer transferred property worth $30 000 to a non-resident trust estate on 31 May 1998. There are 30 days between the transfer on 31 May and the end of the year - 30 June 1998.

    The adjusted value is worked out as follows:

    $30,000 x (30/365) = $2465

If the transfer occurred before the taxpayer's current income year, the adjusted value of the transfer is the total of:

  • the market value, immediately before the transfer, of the property or services transferred and
  • the total of the amounts that would have been included in the transferor's assessable income for that transfer in the income years preceding the taxpayer's current income year, if this method had been used in those years.

Where more than one transfer was made after 12 April 1989, the formula is applied separately to each transfer and then the relevant amounts are added together.

Transfers made before 12 April 1989

Use the following formula to determine the amount to include in your assessable income for transfers of property or services before 12 April 1989.

Amount to be included in assessable income

=

Adjusted net worth of the trust estate

x

Weighted statutory interest rate plus 5 per cent

The adjusted net worth of a trust estate is its net worth adjusted for the deemed return on the property or services transferred before 12 April 1989.

The net worth of the trust estate is determined on 1 July 1990. The 1 July 1990 net worth of a trust estate is the market value at 1 July 1990 of the assets of the trust estate, reduced by its liabilities on 1 July 1990.

To determine the adjusted net worth, the net worth is increased by the total of amounts that would be worked out in each previous income year commencing on or after 1 July 1990 using the above formula.

When using the formula method to work out the amount to include in your assessable income, if two or more taxpayers have transferred property or services to the trust estate, the ATO is empowered to provide relief along lines similar to those referred to below in subsection 3 .

Subsection 3 - What happens if there is more than one transferor?

The assessable income of a transferor in relation to a non-resident trust estate will include the part of the attributable income of the trust estate relating to the period that the transferor was a resident of Australia. This can have the effect of subjecting more than one person to tax for the same income.

The ATO can reduce the amount included your assessable income if there is more than one transferor. When determining the amount of the reduction, the ATO takes into account the amount of attributable income of the trust estate that relates to the property or services transferred to the trust estate and to any other matters that are considered relevant. You will need to apply to the ATO for the reduction.

Part 2 - Interest charge for beneficiaries of non-resident trust estates

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.

Summary of part 2

Section 1

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

Section 2

Do you have to pay any interest charges?

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

This section explains the tax treatment under section 99B of distributions made by a non-resident trust estate - whether or not the distribution was made out of income or gains which have previously been attributed to an attributable taxpayer.

Is the distribution assessable?

Under section 99B, distributions made by a non-resident trust estate to Australian resident beneficiaries are assessable in the hands of the beneficiaries, except in the following five cases:

  • the distribution is capital of the trust estate - an amount derived by the trust estate which would have been subject to tax if it had been derived by a resident taxpayer will not be taken to represent capital
  • 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
  • the distribution paid to or applied for the benefit of a resident taxpayer - other than a company - represents an amount of attributable income of a non-resident trust estate that has previously been included in the assessable income of any taxpayer
  • 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
  • the distribution is from any amount that would not have been assessable income in the hands of a resident taxpayer - for example, exempt income. This would include an amount that, if it had been derived by a resident taxpayer, would have been exempt from tax under section 23AH and former paragraph 23(q) .

Section 2 - Do you have to pay any interest charges?

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 x Applicable rate of tax) -Foreign tax

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 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 7

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 $5000.

    Interest is payable on the distributed amount of $10,000 grossed up by the amount of foreign tax relating to the distributed amount - $3333 - multiplied by the applicable rate of tax - 47 per cent - less the amount of foreign tax credit.

    ($13,333 x 47% ) - $3333 = $2934

    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 - $5000
  • $15,000
  • Amount of the distribution
  • $10,000
  • Foreign tax attributable to the distribution=
 
 
  • $10,000 x $5000

    15,000
  • $3,333

Period over which the interest charge accrues

The interest charge commences to accrue as follows:

  • where the trust distribution is paid out of trust income or profits accumulated before 1990-91, the charge will accrue from the commencement 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.

ATO references:
NO NAT 1840

Foreign income return form guide
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