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Ruling

Subject: Foreign income

Question and answer:

1. Is the transfer of an amount from overseas to Australia, fully exempt from taxation in Australia?

No.

This ruling applies for the following period:

Year ended 30 June 2011.

Year ended 30 June 2012.

Year ended 30 June 2013.

The scheme commenced on: 1 July 2010.

Relevant facts:

You consider yourself an Australian resident for taxation purposes from the date you became a citizen in mid 200X.

Your family member, the deceased, created a family trust.

The deceased passed away post September 1985 located overseas.

You have supplied a copy of the Will (dated pre 1985) which refers to a family trust created.

The deceased left the majority of their estate to the family trust.

You have received trust distributions from the family trust.

Of the total distributions you have received, you have already paid taxation on a portion of this overseas but are unsure of the tax effect of bringing the funds to Australia from overseas.

The family trust was wound up in the relevant year, and all cash distributed to the beneficiaries at that date.

You have supplied a copy of the trust deed.

The advice of the distribution from the trust you provided does not detail the capital or income nature of any of the distributions.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Division 6.

Income Tax Assessment Act 1997 Section 95(3).

Income Tax Assessment Act 1936 Section 97.

Income Tax Assessment Act 1936 Subsection 6B(3).

Income Tax Assessment Act 1936 Section 99B.

Income Tax Assessment Act 1936 Subsection 99B(2).

Income Tax Assessment Act 1936 Section 98.

Income Tax Assessment Act 1936 Section 99.

Income Tax Assessment Act 1936 Section 99A.

Income Tax Assessment Act 1936 Subsection 98(4).

Reasons for decision

As per the deceased's Will, the remainder of the estate merged with the corpus of the existing family trust, and as such will be treated the same way as any inter vivos trust (i.e. a trust created during ones lifetime).

You did not inherit directly from a deceased estate, but instead had entitlement to distributions from your family trust once presently entitled.

Trust arrangement

In a trust arrangement there is a:

· Settlor - transfers property to the trustee (settler can be the same individual as the trustee),

· Trustee - Holds the trust property for benefit of beneficiaries with legal title to the trust property,

· Beneficiary(s) -The beneficial owners of the trust property with equitable title to the trust property,

· and the Trust property.

In Australia trusts are not considered a separate legal entity and as such either the trustee or beneficiary pays taxation on the relevant amounts at differing rates depending on the circumstances.

Where there is a presently entitled resident of Australia to an Australian trust (with no legal disability e.g. not a minor or bankrupt) they will be taxed under Section 97(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and subject to marginal rates of taxation.

Subsection 6B(3) of the ITAA 1936, states that where a beneficiary is presently entitled to income of the trust estate, that income shall be deemed to be an amount of income derived by the person.

Presently entitled

Present entitlement is an important concept in the trust provisions, because the method of taxing trust income in Australia depends on whether it is income to which a beneficiary is entitled or income to which no beneficiary is entitled.

A beneficiary has present entitlement to the income of a trust if they can demand immediate payment of that income from the trustee.

The High Court of Australia has held that for a beneficiary to be presently entitled to trust income, certain conditions must be satisfied, that is:

· The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. The interest must be such that the beneficiary may demand immediate payment of that income.  Or, if the beneficiary is under a legal disability such as infancy (that is, aged under 18 years) or insanity, the interest must be such that the beneficiary would have been able to demand immediate payment of the income had there been no disability or incapacity

· A beneficiary can only be presently entitled to income which is legally available for distribution to the beneficiary even though it may not at the relevant time be in the trustee's hands for distribution

Presently entitled and Discretionary trusts

Where a trustee has discretion to pay or apply trust income to or for the benefit of specified beneficiaries, a beneficiary in whose favour the trustee exercises their discretion is deemed to be presently entitled to the amount of trust income so paid or applied.

In a discretionary trust, the beneficiary's entitlement arises when the trustee makes the appropriate resolution.

There must be an effective exercise by the trustee of the discretion before the end of the financial year in which the income is derived by the trustee.

A discretionary beneficiary may be deemed to be presently entitled notwithstanding that the beneficiary was unaware of this entitlement to trust income or even of the existence of the trust.

Discretionary trusts

Under a discretionary trust, some or all of the entitlements of the beneficiaries in any particular income year are determined by the exercise of the trustee's discretionary powers. The trust instrument (trust deed) may place limits on the extent of the trustee's discretion.

In Australia there are special rules affecting trusts including Capital Gains Tax (CGT) rules for example CGT rules also apply in the following situations;

· the disposal of an interest in a trust;

· the distribution of a non-assessable amount to a beneficiary;

· the creation of a trust over a CGT asset;

· transfer of an asset to a trust;

· a beneficiary becoming entitled to a trust asset;

· the disposal of a CGT asset of a trust to a beneficiary to end an income right;

· the disposal of a CGT asset of a trust to a beneficiary to end a capital right; and

· a beneficiary's disposal of a capital interest in a trust.

The fundamental principals underlying Division 6 of the ITAA 1997 are:

· The net income of a trust estate for an income year is assessable in the hands of the beneficiary or beneficiaries who are "presently entitled" to the income of the trust estate in that year.

· If the beneficiaries are not entitled to all of the income of the trust estate, the trustee will be liable to pay tax on part or all of the net income of the trust estate.

Non-resident trust estates

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) distinguishes between a "resident trust estate" and a "non-resident trust estate".

A "non-resident trust estate" is a trust estate that is not a resident trust estate: section 95(3) ITAA 1997.

· If the amount derived by a trust estate would have been assessable in the year of derivation if it had been derived by an Australian resident individual, but it was not assessed in Australia in the year of derivation (e.g. because no beneficiary was presently entitled to the income and the trust was not a resident trust estate), that income is taxable when it is distributed to a beneficiary or "applied for the benefit of" a beneficiary.

These general principals are modified for example where, the trust income had a foreign source and the beneficiary who is presently entitled to the income is a resident at the end of the income year but was not a resident when the income was derived.

Receipt Of Trust Income Not Previously Subject To Tax - Section 99B of the ITAA 1936

Section 99B of the ITAA 1936 states that where, a beneficiary who was a resident at any time during the income year and who receives any amounts from a trust estate, either by way of payment or application for her or his benefit, is subject to tax on that amount except if certain exclusions contained in subsection 99B(2) of the ITAA 1936 apply.

Section 99B(2) of the ITAA 1936 excludes from the assessable income of a beneficiary receiving an amount from a trust estate:

· distributions in the form of corpus except if that corpus has resulted from the receipt of amounts by the trustee that if received directly by a resident taxpayer would have been assessable income;

· amounts that would not have been included in the assessable income of a resident taxpayer if they had been received by her or him at the time of the derivation by the trustee;

· amounts that have been non-assessable non-exempt income of beneficiaries because of section 802-17 of the ITAA 1936 (relating to conduit foreign income);

· amounts that have been previously assessed to the beneficiary under section 97(see ATO ID 2008/155 ) or to the trustee under section 98, section 99 or section 99A of the ITAA 1936 ; and

· amounts that are reasonably attributable to a part of the net income of another trust in respect of which the trustee of the other trust is assessed and liable to pay tax under section 98(4) of the ITAA 1936 .

The purpose of this provision is to overcome situations where income was accumulated for the benefit of beneficiaries overseas, was not subject to tax in Australia and effectively was converted into a capital receipt insofar as the beneficiary was concerned by a process of capitalisation of income by the trustee.

In Howard v FCT (No 2) [2011] FCA 1421, the taxpayer asserted that an amount distributed to him by a non-resident trust estate was a distribution of the corpus of the trust estate and was therefore a capital receipt. The Commissioner did not take issue with this assertion, but said the amount was nevertheless assessable under section 99B of the ITAA 1936 to the extent that it was not assessable under section 97 of the ITAA 1936. The Court agreed, finding that when the amount that was later distributed to the taxpayer was derived by the trust, it would have been assessable if it had been derived by an Australian resident. This decision is on appeal.

In your case, you will need to obtain from the trustee of the trust the nature of the distributions you received in the relevant year to determine what part of the distribution is not assessable in Australia in the year ended 30 June 20XX. The fact that the distribution was not repatriated to Australia or converted to Australian currency at the time means there may also be foreign exchange gains or losses that upon transfer to Australia.

Based on the facts provided, and subject to the application of the Double Taxation Agreement between Australia and overseas, none of the exclusions of 99B(2) apply. You will be assessable on any amounts of capital/income you received in the relevant years or were entitled to receive (with the relevant tax law of Australia applicable in each of those years).

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