Edited version of private advice

Authorisation Number: 1052417760708

Date of advice: 03 July 2025

Ruling

Subject: Foreign income tax offset

Issue 1 - section 99B

Question 1

Will the proposed in-specie distribution of Company A Shares result in an amount being included in the assessable income of the Australian resident beneficiaries under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

No. The proposed in-specie distribution will be a payment or application of trust property for the benefit of the Australian beneficiary for the purposes of subsection 99B(1), however the subsection 99B(1) liability will be reduced in full under paragraph 99B(2)(a) as the distribution represents corpus of the trust estate which is not attributable to amounts which would be taxable to a hypothetical resident.

Question 2

Is the date the Company A Shares were acquired relevant for the purposes of section 99B of the ITAA 1936?

Answer 2

No. The proposed in-specie distribution of the Company A shares represents corpus. That corpus is not attributable to amounts which would be taxable to a hypothetical resident and therefore the whole of the subsection 99B(1) liability will be reduced under paragraph 99B(2)(a) regardless of when the Company A Shares were acquired.

Question 3

Will the proposed in-specie distribution of the Portfolio Investments result in an amount being included in the assessable income of the Australian resident beneficiaries under section 99B(1) of the ITAA 1936?

Answer 3

Yes. The proposed in-specie distribution will be a payment or application of trust property for the benefit of the Australian beneficiary for the purposes of subsection 99B(1) of the ITAA 1936 and will be included in the Australian beneficiary's assessable income. The Portfolio Investments represent corpus however, to the extent that the Portfolio Investments were acquired from amounts that would have been assessable to a hypothetical resident taxpayer, the liability under subsection 99B(1) would not be reduced by that amount.

Question 4

Will an interest charge be imposed under section 102AAM of the ITAA 1936??

Answer 4

Yes. An interest charge will be imposed under section 102AAM.

Issue 2 - capital gains

Question 5

Will any capital gain arising from the ending of the resident beneficiaries' interest in the Foreign Trust as a result of the in-specie capital distribution, be disregarded?

Answer 5

Yes. Despite CGT event E7 arising as a result of the in-specie capital distribution; any capital gains of the trustee will be disregarded as per section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997), and any capital gains of the beneficiaries' will be disregarded as per paragraphs 104-85(6) (a) and (b) of the ITAA 1997.

Issue 3 - foreign income tax offset

Question 6

Is a foreign income tax offset available under Division 770 of the ITAA 1997 to the resident beneficiary where an amount is included in their assessable income under section 99B and foreign income tax was paid?

Answer 6

Yes. A foreign income tax offset may be available to a resident beneficiary for foreign income tax paid on an amount included in their assessable income under section 99B.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

30 June 19XX

Relevant facts and circumstances

The Foreign Trust was established overseas in 19XX.

The Foreign Trust was initially settled with $XX as per the trust instrument.

The Foreign Trust was established by Person A, a foreign tax resident of Australia, for the benefit of Person B's children, grandchildren and great grandchildren.

The current trustees are all foreign tax resident individuals.

All trustee decisions and the day-to-day administration of the Foreign Trust have always occurred outside Australia.

The Foreign Trust is a passive investor and does not carry on a business.

There has never been a transfer of property or services to the Foreign Trust by an Australian resident taxpayer.

The Trust Deed for the Foreign Trust provides that the class of income beneficiaries entitled to a per capita payment of the net annual income of the trust are all living children, grandchildren and great grandchildren of Person B.

The Trust Deed also provides that the class of capital beneficiaries with a per capita entitlement to the trust capital are the grandchildren and great grandchildren of Person B, living at the date of distribution.

The Trust Deed further provides that the trustee may apply the whole or any part of the capital or income of the Foreign Trust of any beneficiary under the deed.

The Foreign Trust holds two 'buckets' of assets:

a)             Shares in Company A, acquired by the trustee prior to 20 September 1985

b)             Other securities via a collective investment portfolio and bank accounts denominated in XX currency which were acquired after 20 September 1985.

Shares

The shares in Company A were acquired by the trust prior to 20 September 1985 via gifts, bonus issue and a sale with loan back from Person B (which were subsequently partly repaid and partly forgiven).

The shares in Company A were not acquired through a reinvestment of dividend income.

Portfolio investments

The Portfolio Investments were predominately acquired using reinvested trust income.

No external debt was used to fund the acquisition of the Portfolio Investments.

No Foreign Trust assets are Taxable Australian Property or trading stock.

Some Foreign Trust beneficiaries have migrated to, or been born in Australia, and are now Australian tax residents.

There are currently XX adult Australian resident beneficiaries with income and capital rights.

There is currently XX adult Australian resident beneficiary with rights to income only.

Beneficiaries did not pay any expenditure to acquire their interests in the Foreign Trust, nor was it acquired by assignment.

It is proposed that on or before the vesting date, there will be an entitlement to a capital distribution to the capital beneficiaries of the Foreign Trust proportionately, either by exercise of trustee power or upon vesting under the trust instrument.

Once all beneficiaries are identified, the capital distribution will be in the form of an 'in-specie' transfer of assets.

The entitlement will be satisfied by the subsequent registration (circa several months later) of the assets in the name of the beneficiaries, or otherwise transferred to them.

Should the distribution happen on or after the vesting date, it will be in satisfaction of the capital interests of the capital beneficiaries under the trust deed.

Otherwise, to the extent the Foreign Trust ceases to hold assets, then the income and capital interests will simply end.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 section 102AAM

Income Tax Assessment Act 1997 Subdivision 104-A

Income Tax Assessment Act 1997 section 104-85

Income Tax Assessment Act 1997 Subdivision 115-C

Income Tax Assessment Act 1997 Division 855

Income Tax Assessment Act 1997 Division 770

Reasons for decision

Issue 1 - section 99B

Question 1

Will the proposed in-specie distribution of Company A Shares result in an amount being included in the assessable income of the Australian resident beneficiaries under subsection 99B(1) of the ITAA 1936?

Summary

No. The proposed in-specie distribution will be a payment or application of trust property for the benefit of the Australian beneficiary for the purposes of subsection 99B(1), however the subsection 99B(1) liability will be reduced in full under paragraph 99B(2)(a) as the distribution represents corpus of the trust estate which is not attributable to amounts which would be taxable to a hypothetical resident.

Question 2

Is the date the Company A Shares were acquired relevant for the purposes of section 99B of the ITAA 1936?

Summary

No. The proposed in-specie distribution of the Company A shares represents corpus. The corpus is not attributable to trust income and therefore the whole of the subsection 99B(1) liability will be reduced under paragraph 99B(2)(a) regardless of when the Company A Shares were acquired.

Detailed reasoning

Broadly, section 99B of the ITAA 1936 deals with the receipt by a taxpayer of trust amounts that have not previously been subject to tax in Australia. It applies where foreign trust property is paid or applied for the benefit of an Australian resident beneficiary.

Subsection 99B(1) provides that where a beneficiary who was an Australian resident at any time during an income year, is paid an amount from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary in the income year it is paid.

'Paid' includes any amount a beneficiary has received from a trust estate. 'Applied for their benefit' includes any property from a trust estate which holds value and has been made available for the benefit of a beneficiary.

The breadth of subsection 99B(1) is confirmed by subsection 99C(1) which states that regard is to be had to all benefits or amounts that have been accrued at any time to the beneficiary (whether or not the beneficiary had rights at law or in equity in or to those benefits) as a result of the derivation of, or in relation to, that amount, irrespective of the nature or form of the benefits.

Paragraph 99B(2)(a) may apply to reduce the amount included in the beneficiary's assessable income under subsection 99B(1) by so much of that amount as represents corpus (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income).

The reduction in paragraph 99B(2)(a) depends on the 'hypothetical resident taxpayer test' which removes certain amounts of corpus from the reduction otherwise available. The hypothetical resident taxpayer test posits a taxpayer that does not have any characteristics other than being a resident taxpayer (Taxation Determination TD 2024/9 Income tax: factors taken into account in applying paragraphs 99B(2)(a) and (b) of the Income Tax Assessment Act 1936 at paragraph 28) and takes into account the circumstances giving rise to the relevant amount and what the relevant amount received by the beneficiary is attributable to or represents.

The in-specie distribution of the Company A Shares represents a distribution of corpus for the purpose of paragraph 99B(2)(a). In applying the hypothetical resident taxpayer test in paragraph 99B(2)(a) it is necessary to consider what the Company A Shares are attributable to. If the Company A Shares are attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would be included in the assessable income of that hypothetical resident taxpayer, the subsection 99B(1) liability may not be reduced to that extent.

To the extent that the Company A Shares were gifted property or were not otherwise acquired from trust income or dividend reinvestment income, the distribution of Company A Shares is not attributable to amounts which would be taxed if derived by a hypothetical resident taxpayer. Therefore the subsection 99B(1) liability will be reduced in full and no amount will be included in the assessable income of the Australian beneficiary. This is the case regardless of whether the shares were acquired before 20 September 1985 or after. The acquisition date of the shares would be relevant where the distribution of corpus was instead attributable to capital proceeds from disposal of the shares as the acquisition would be circumstances giving rise to the amount for the purposes of the hypothetical resident taxpayer test and the tax attributes of the asset at the time of its acquisition would be relevant.

Question 3

Will the proposed in-specie distribution of the Portfolio Investments result in an amount being included in the assessable income of the Australian resident beneficiaries under section 99B(1) of the ITAA 1936?

Summary

Yes. The proposed in-specie distribution will be a payment or application of trust property for the benefit of the Australian beneficiary for the purposes of subsection 99B(1) and will be included in the Australian beneficiary's assessable income. The Portfolio Investments represent corpus however, to the extent that the Portfolio Investments were acquired from amounts that would have been assessable to a hypothetical resident taxpayer, the liability under subsection 99B(1) will not be reduced by that amount.

Detailed reasoning

The proposed in-specie distribution of the Portfolio Investments is a payment or application of trust property for the purposes of subsection 99B(1).

The Portfolio Investments represent corpus for the purposes of paragraph 99B(2)(a) and therefore the subsection 99B(1) liability will be reduced by so much of the distribution that is not attributable to amounts derived by the trust estate that would be included in the assessable income of a hypothetical resident taxpayer.

To the extent that the Portfolio Investments were acquired by the Trust Estate using trust income, the in-specie distribution will be attributable to trust income, such income being amounts that would be included in the income of a hypothetical resident taxpayer. The subsection 99B(1) liability of the Australian beneficiary will therefore not be reduced by those amounts.

Question 4

Will an interest charge be imposed under section 102AAM of the ITAA 1936?

Summary

Yes. An interest charge will be imposed under section 102AAM.

Detailed reasoning

Section 102AAM imposes an additional interest charge on certain distributions from non-resident trusts, including distributions taxed under subsection 99B(1). This is a compensatory charge for the tax deferred while profits were accumulated offshore in the trust. The Commissioner has no discretion to remit or reduce the additional charge imposed by section 102AAM.

The interest charge is calculated under subsection 102AAM(5). The amount interest is charged on is determined in accordance with the formula in subsection 102AAM(2):

{Distributed amount x applicable rate of tax} - Foreign income tax offset

The distribution of the Portfolio Investments which will result in an amount included in the relevant beneficiary's assessable income under subsection 99B(1) is from a foreign resident trust. The foreign country is a listed country under regulation 19 of the Income Tax Assessment (1936) Act Regulations 2015. On that basis, paragraph 102AAM(1)(a) provides that the 'distributed amount' will be the section 99B amount where the distribution relates to a listed country trust estate and all or part of the amount is attributable to income or profits of the trust in the form of eligible designated concession income.

Subsection 102AAM(1A) further provides that the 'distributed amount' is taken to be wholly attributable to eligible designated concession income unless the contrary is established.

The amount interest will be charged on therefore equals the amount of the distribution that is included in the beneficiary's assessable income under subsection 99B(1) grossed up for any foreign tax claimed on that share. 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.

Interest is charged at the base rate and assuming the trust received the reinvested income post 1 July 1990, interest will be calculated and imposed from the income year in which the reinvested income was earned.

Issue 2 - capital gains

Question 5

Will any capital gain arising from the ending of the resident beneficiaries' interest in the foreign trust as a result of the in-specie capital distribution, be disregarded?

Summary

Yes. Despite CGT event E7 arising as a result of the in-specie capital distribution; any capital gains of the trustee will be disregarded as per section 855-10, and any capital gains of the beneficiaries' will be disregarded as per paragraphs 104-85(6) (a) and (b) of the ITAA 1997.

Detailed reasoning

Subsection 104-85(1) provides that CGT event E7 will occur if a trustee disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's interest in the trust capital.

As per subsection 104-85(3), the trustee of the trust makes a capital gain from CGT event E7 if the market value of the asset at the time of the event is more than its cost base, unless, as per 104-85(4) that asset was acquired before 20 September 1985.

However, as per section 855-10 of the ITAA 1997 a capital gain from a CGT event is disregarded if you are a foreign resident just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not taxable Australian property.

As per subsection 104-85(5) of the ITAA 1997, the beneficiary makes a capital gain from CGT event E7 if the market value of the asset at the time of the event is more that the cost base of their interest, or part of it, that is being satisfied.

However, as per paragraphs 104-85(6) (a) and (b) any capital gain of the beneficiary is disregarded where they obtained the asset for no expenditure, and/or they acquired their interest before 20 September 1985.

In this case, despite CGT event E7 arising as a result of the in-specie capital distribution, any capital gains of the trustee and beneficiaries' will be disregarded.

Issue 3 - foreign income tax offset

Question 6

Is a foreign income tax offset available under Division 770 of the ITAA 1997 to the resident beneficiary where an amount is included in their assessable income under section 99B and foreign income tax was paid?

Summary

Yes. A foreign income tax offset may be available to a resident beneficiary for foreign income tax paid on an amount included in their assessable income under section 99B.

Detailed reasoning

Division 770 of the ITAA 1997 provides for a non-refundable tax offset in certain circumstances where foreign income tax has been paid on an amount included in the assessable income of an Australian resident.

The offset may be available even if the foreign income tax was paid in another year or by another entity.

As per subsection 770-130(2) of the ITAA 1997 a beneficiary of a trust is treated as having paid foreign income tax in respect of a taxed amount if under the law relating to the foreign tax, the foreign income tax is paid by the trust.