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Ruling

Subject: Trust distribution - non-resident company

Question 1

Is the trustee assessable on income distributed to a non-resident beneficiary company?

Answer

No.

This ruling applies for the following periods:

Financial year ended 30 June 2006

Financial year ended 30 June 2007

Financial year ended 30 June 2008

Financial year ended 30 June 2009

Financial year ended 30 June 2010

Relevant facts and circumstances

The trust was established under a will.

Under the terms of the will, income from the trust is to be paid to the governing body of an institution (beneficiary X) in a foreign country to establish an annual prize/s to reward outstanding contributions to a particular field.

The prize/s will be determined and awarded by beneficiary X after considering the amount of annual income available for distribution from the trust.

Beneficiary X is a body corporate and politic of Y in which it is incorporated under its own statute. As an instrumentality of Y, it is exempt from federal income tax. Beneficiary X is exempt from a number of Y state and local taxes.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1).

Income Tax Assessment Act 1936 section 23.

Income Tax Assessment Act 1936 section 96.

Income Tax Assessment Act 1936 paragraph 97(3)(c).

Income Tax Assessment Act 1936 subsection 97A(1A).

Income Tax Assessment Act 1936 subsection 98(3).

Income Tax Assessment Act 1997 section 30-15.

Income Tax Assessment Act 1997 section 50-5.

Income Tax Assessment Act 1997 section 50-55.

Income Tax Assessment Act 1997 section 51-5.

Income Tax Assessment Act 1997 section 51-10.

Income Tax Assessment Act 1997 section 51-30.

Income Tax Assessment Act 1997 section 995-1.

Income Tax Assessment Regulations 1997 Regulation 50-55.01.

Reasons for decision

Division 6 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the criteria for the assessment of income derived by a trust estate and determines whether the trustee or the beneficiary is liable to tax and upon what amount. Section 96 of the ITAA 1936 provides that a trustee is not liable as a trustee to pay income tax on the income of a trust estate except as provided.

Subsection 98(3) of the ITAA 1936 sets out the conditions necessary for a trustee to be liable to tax on the share of the trust income of a non-resident company beneficiary. The conditions are:

1. The beneficiary is presently entitled to a share of the net income of a trust estate.

2. The beneficiary is a company.

3. The beneficiary does not receive the income in the capacity of a trustee of another trust estate.

4. The beneficiary is a non-resident at the end of the year of income.

5. The beneficiary is not a beneficiary to whom subsection 97A(1A) applies in relation to the year of income.

6. The beneficiary is not a body, association, fund or organization referred to in subparagraph 97(3)(c)(i).

7. The beneficiary is not a body, association, fund or organization referred to in subparagraph 97(3)(c)(ii).

Presently entitled

It has been assumed that for the purposes of the Ruling that beneficiary X is presently entitled to the income of the trust estate.

Company

Company is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean

(a) a body corporate, or

(b) any other unincorporated association or body of persons

but does not include a partnership or a non-entity joint venture.

In correspondence from beneficiary X, it is stated that beneficiary X is a body corporate created by statute. It is accepted that this condition is satisfied.

Not received in capacity as a trustee

The question of whether the beneficiary receives the income in the capacity of a trustee of another trust estate is not easily answered. It depends on an interpretation of the express wording contained in the will of the deceased which authorises payment to beneficiary X and whether it operates to make beneficiary X the trustee of the funds it receives from the deceased estate.

For a trust to exist, a number of essential elements are required to be present. There has to be a trustee, trust property, a beneficiary and a personal obligation imposed on the trustee attached to the trust property.

It can be argued that when beneficiary X receives the income from the deceased estate, it does not acquire an unfettered right to deal with that income as it wishes.

As a result of the terms of the will of the deceased, beneficiary X must in accordance with those conditions award that income in the form of a prize or prizes. To that extent beneficiary X may be regarded as a trustee.

Although beneficiary X has no right to the corpus of the deceased estate, it is entitled to the income. It can be argued that each time that the income is paid over to beneficiary X, a trust is created in respect of that income with the distribution from the deceased estate forming the trust property.

There is an identifiable class of beneficiaries entitled to benefit from that property, this being those who have made an outstanding contribution in the particular field. Although all members of the class of beneficiaries may not be identifiable, it is possible for beneficiary X to determine whether a specific recipient of the award satisfied the criteria.

It is clear from the wording of the will that gives rise to the distribution that beneficiary X is under an obligation, subject to the amount of income, to award a prize(s) to a person(s) who satisfies the criteria. This obligation is one that would be enforced in equity if beneficiary X refused to carry out its duty.

From the above, it is considered that beneficiary X receives the distribution from the deceased estate as the trustee of another trust estate.

Non-resident

Under section 6(1) of the ITAA 1936, for a company to be resident of Australia, it must be incorporated in Australia or carry on business in Australia and have either its central management and control in Australia or have its voting power controlled by shareholders who are residents of Australia. In view of the nature of beneficiary X, it is considered that neither its central management and control would be in Australia nor would its voting power be controlled by shareholders who are residents of Australia. Beneficiary X would not satisfy the definition of resident and would be a non-resident. This condition would be satisfied.

Section 97A(1A) does not apply

This section applies to certain primary producers who are owners of a current IED scheme deposit or the owner of a farm management deposit made during the year of income. It has been assumed for the purposes of this ruling that beneficiary X is not the holder of one of the deposits required by the section. This condition is satisfied as section 97A(1A) of the ITAA 1936 does not apply to the beneficiary.

Not a section 97(3)(c)(i) body

For a body to satisfy section 97(3)(c)(i) of the ITAA 1936, it must be a body, association, fund or organization the income of which is exempt from tax from the operation of Subdivision 50-A or section 51-5, 51-10 or 51-30 of the ITAA 1997. Each of these exemption provisions will be considered in turn.

Subdivision 50-A

Under Subdivision 50-A of the ITAA 1997, the ordinary income and the statutory income of certain types of entities is exempt from tax subject to any conditions specified in the Subdivision. Under section 50-5 of the ITAA 1997, the income of a particular type of institution is exempt from tax subject to conditions provided in section 50-55. It is accepted that beneficiary X is an institution within the meaning of the section. The special conditions laid down in section 50-55 require the entity to satisfy one of three alternate tests.

Firstly, the institution has a presence in Australia and to that extent, incurs its expenditure and pursues its objectives principally in Australia. From the information supplied, beneficiary X would not meet this condition.

Secondly, the entity is an institution that meets the description and requirements in item 1 of the table in section 30-15 of the ITAA 1997. Although beneficiary X would meet the description of a fund, authority or institution covered by an item in a table in Subdivision 30-B, it would not be able to meet an essential requirement that it must be in Australia.

Lastly, the entity must be a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident. Regulation 50-55.01 of the Income Tax Assessment Regulations 1997 sets out the prescribed institutions. The beneficiary is not one of the listed institutions.

As beneficiary X has not satisfied any of the conditions necessary, its income would not be exempt under Subdivision 50-A of the ITAA 1997.

Sections 51-5, 51-10 and 51-30

Division 51 of the ITAA 1997 deals with the exemption from income tax of certain payments made to specified entities. None of the above sections would apply to make the income of beneficiary X exempt from tax.

As beneficiary X does not satisfy any of the tests for exemption from tax, it is not a body, association, fund or organization referred to in subparagraph 97(3)(c)(i) of the ITAA 1936.

Not a section 97(3)(c)(ii) body

For a body to satisfy section 97(3)(c)(ii) of the ITAA 1936, it must be an organization, the income of which is exempt from tax by virtue of a regulation in force under the International Organizations (Privileges and Immunities) Act 1963. Beneficiary X is not listed in any of those regulations so it is not a body, association, fund or organization referred to in subparagraph 97(3)(c)(ii).

Summary

As beneficiary X receives the distribution from the deceased estate as the trustee of another trust estate, the conditions necessary to impose a liability for taxation on the trustee of the deceased estate are not satisfied. The distribution to beneficiary X would be exempt from tax in the hands of the trustee.

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