Edited version of private advice

Authorisation Number: 1012616654481

Ruling

Subject: Distribution from a foreign trust

Question and answer

Is any part of the distribution you received from a foreign foundation assessable for income tax purposes?

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commences on

1 July 2012

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You received a one off 'donation' from a foreign 'Foundation' (the Foundation).

The donation comprised of two capital gains tax (CGT) assets.

You had no control over how the CGT assets were to be transferred.

You did not acquire your interest in the Foundation for any expenditure.

The Foundation was established in a foreign country.

An article of the Deed of Foundation states that the Foundation is a family foundation which has the purpose of providing financial support to the members of the family. The financial support provided is to be in the form of a single donation to the members of the designated group of people.

An article of the Deed of Foundation states that the financial support provided to family members is to be in the form of a single payment. The Foundation Board of Trustees decides at its discretion if a donation is to be granted, the amount to be granted and the date the donation is to be made to the recipient. No one has a legal claim to the granting of a donation from the Foundation's funds.

An article of the Deed of Foundation states that the governing bodies of the Foundation are the Foundation's board of trustees and the auditor.

You received the donation in the first year of operation of the Foundation.

You have provided a copy of the Financial Statements for the first year of operation of the Foundation.

According to the financial statements, the total expenses of the Foundation exceeded the income of the Foundation.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 95

Income Tax Assessment Act 1936 section 97

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 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 section 102AAZD

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 section 104-70

Income Tax Assessment Act 1997 subsection 104-85(5)

Income Tax Assessment Act 1997 subsection 104-85(6)

Reasons for decision

Foreign trust

A trust is an obligation imposed on a person or other entity to hold property for the benefit of beneficiaries.

Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) specifies that a trust is a non-resident or foreign trust if a trustee of the trust estate is not an Australian resident and the central management and control of the trust estate is outside Australia for the whole of the relevant year of income.

A discretionary trust is a trust where the trustee has the discretion as to when any payment from the trust fund will be made, how it will be distributed between named beneficiaries (or class of beneficiaries), and how much the payment will be.

In your case, the trustee of an entity established and operated in a foreign country held monies on trust for the benefit of the members of a particular family group and you were one of these people. Neither you nor any other of the family members had a legal claim to the granting of a donation from the Foundation's funds.

Based on the above, the Foundation is a foreign discretionary trust for Australian taxation purposes.

Assessability of donation under trust provisions

Subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution 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.

However, subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:

a)   corpus of the trust (however, an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer); or

b)   amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or

c)   amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

d)   amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amount included under the transferral trust measures for taxpayer having transferred property or services).

In your case, you received a distribution from a foreign trust.

The financial statements for the first year of operation of the Foundation show that the operating expenses were higher than the gross income of the Foundation for that period. Therefore, it is evident that the Foundation made a loss for the year and had no net income to distribute to the beneficiaries. Further, it is also evident that the Foundation had no capitalised income to distribute to the beneficiaries as it was in its first year of operation.

Although it could be said that it was possible for some of the income of the Foundation to have been distributed to one or more of the beneficiaries before certain expenses were incurred, this would appear to be less likely in your case as your payment was made towards the end of the year when the bulk of the expenses would most likely have already been incurred.

In view of the above, we are prepared to accept that no part of the distribution you received comprised of income of the Foundation and therefore the entire amount you received represented the corpus or capital of the Foundation.

Consequently, the distribution you received will not be included in your assessable income under subsection 99B(2)(a) of the ITAA 1936.

Assessability of donation under capital gains tax provisions

Section 104-85 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that capital gains tax (CGT) event E7 happens when a trustee of a trust (except a unit trust or a trust that is created from a deceased estate) disposes of a CGT asset of a trust to a beneficiary in satisfaction of the beneficiary's interest, or part of it, in the trust capital. The time of the event is when the disposal occurs.

The beneficiary makes a capital gain if the market value of the asset at the time of disposal is more than the cost base of the interest being satisfied (subsection 104-85(5) of the ITAA 1997). However, the capital gain is disregarded if the beneficiary acquired the CGT asset that is the interest for no expenditure (subsection 104-85(6) of the ITAA 1997).

In your case, you received two CGT assets from a foreign trust which satisfied your interest in the trust capital. Therefore, CGT event E7 happened; however, any capital gain you made is disregarded as you did not incur any expenditure in acquiring your interest in the trust.

Section 104-70 of the ITAA 1997 provides that CGT event E4 happens if the trustee of a trust makes a payment to you in respect of your interest in a trust and some or all of the payment is not included in your assessable income. However, CGT event E4 does not apply where CGT event E7 happens in relation to your interest.

As mentioned above, CGT event E7 happened when you received the CGT assets; therefore, CGT event E4 does not apply to you.

Consequently, the CGT assets you received are not assessable under the capital gains tax provisions.

Assessability of donation as ordinary income

Section 6-5 of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• are earned

• are expected

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

In your case, you received a one off donation. As such, the amount you received did not have the required element of periodicity, recurrence or regularity to be considered ordinary income.

Therefore, the donation you received is not assessable as ordinary income under section 6-5 of the ITAA 1997.

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