Edited version of your written advice

Authorisation Number: 1013110754545

Date of advice: 1 November 2016

Ruling

Subject: Interest and dividend income of non-resident

Question 1:

Is the Estate considered to be a resident trust estate for taxation purposes?

Answer:

No

Question 2:

Are the interest receipts of the Estate subject to a 10% withholding tax as a final tax?

Answer:

Yes

Question 3:

Are the dividend receipts of the Estate, to the extent that they are franked, subject to a withholding tax or income tax in Australia?

Answer:

No

Question 4:

Are the dividend receipts of the Estate, to the extent they are not franked, subject to a 15% withholding tax as a final tax?

Answer:

Yes

Question 5:

Do the answers to Questions 2 to 4 apply to both the period that the Estate's sole beneficiary has no present entitlement to the income of the Estate and the period that they do have a present entitlement?

Answer:

Yes

Question 6:

Is the dividend and interest income of the Estate income to which the trustee will be assessed under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer:

No

Question 7:

As the payers of the interest and dividends have not withheld, can the interest and dividends to the extent they are not franked, be declared in income tax returns so that withholding tax assessments can be raised to enable the withholding tax to be paid?

Answer:

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts

The deceased was a resident for tax purposes in Australia.

The deceased left a Will.

The Executor (the Trustee) and the sole beneficiary of the Will is a family member of the deceased.

The family member is a citizen and resident of Country X and has never lived in Australia.

The Estate's affairs are controlled and managed by the Trustee by issuing instructions, from Country X, to a lawyer and an accountant in Australia.

The Estate's income consists of interest on bank account deposits and dividends from shares listed on the Australian Stock Exchange.

Withholding tax was not withheld by the payers of the interest and dividends.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Subsection 95(2)

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1936 Section 128A

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Section 128D

Reasons for decision

Summary

From the information provided we accept the Estate is a non-resident trust from the date of death of the deceased. As the Estate and the sole beneficiary are non-residents, non-resident withholding tax is payable and consequently section 128D of the ITAA 1936 applies to exclude the interest and dividends from being included in the assessable income of the Estate (for the period no beneficiary is presently entitled) and the sole beneficiary (for the period they are presently entitled).

As both the Estate and the sole beneficiary are residents of Country X, the same rates of withholding tax apply to the period when no beneficiary is presently entitled and the period when the beneficiary is presently entitled. As per the double tax agreement with Country X the rates are 10% for interest and 15% for dividends to the extent that they are unfranked.

As the payers of the interest and dividends did not withhold, to enable the non-resident withholding tax to be paid, income tax returns for the relevant income years can be lodged including the interest and the dividends to the extent that they were unfranked at the relevant labels. As the taxpayer is a non-resident the Commissioner will then raise non-resident withholding assessments for these amounts.

Detailed Reasoning

Deceased estate

On the death of an individual, the property of the deceased passes to his or her estate, legal control over which is exercised by an executor or administrator.

A fiduciary obligation is assumed by the executor or administrator, on the death of the individual, in favour of the beneficiaries of the estate. At that time, beneficiaries of the estate have no interest in the assets of the estate, although they do have a beneficial right to see that the estate is properly administered.

Following ascertainment of the 'net income' of the estate, the net income is assessed to the beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the estate or is under a legal disability.

The issue of present entitlement in relation to deceased estates is discussed in Taxation Ruling IT 2622 Income Tax: Present Entitlement During The Stages Of Administration Of Deceased Estates (IT 2622).

IT 2622 notes that case law has established that a beneficiary of a deceased estate cannot be presently entitled to the income of the estate until the estate has been fully administered (Federal Commissioner of Taxation v Whiting (1943) 68 CLR 199; 7 ATD 179).

Further, paragraph 9 of IT 2622 explains that:

Beneficiaries cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries.

Residency

Subsection 95(2) of the ITAA 1936 states that a trust estate shall be taken to be a resident trust estate in relation to a year of income if:

(a) a trustee of the trust estate was a resident at any time during the year of income; or

(b) the central management and control of the trust estate was in Australia at any time during the year of income.

Non-resident withholding tax

Interest, unfranked dividends and royalties paid to non-residents are liable to non-resident withholding tax under section 128B of the ITAA 1936. If a dividend is fully franked, no amount needs to be withheld. If a dividend is partially or completely unfranked, an amount must be withheld from the unfranked amount.

For a non-resident trust and non-resident beneficiary of that trust, the withholding tax liability will rest with the trustee for the period when no beneficiary is presently entitled and it will rest with the beneficiary for the period the beneficiary is presently entitled (paragraph 128B(3)(ga) of the ITAA 1936).

Section 128D of the ITAA 1936 excludes from the assessable income of a non-resident, certain income on which withholding tax is payable (including interest and dividends to the extent they are unfranked) and certain income that would be subject to withholding tax except that an exclusion applies (for example, dividends to the extent they are franked).

Rates of withholding

Where non-resident withholding applies, the applicable withholding rates are:

● 10% for interest (except in very limited circumstances); and,

● generally 30% for dividends, unless an international agreement applies - also the tax treatment of a dividend will depend on a number of circumstances and whether it has been franked.

Note: The current rate of withholding for payments of interest from Australia to a resident of Country X is 10% and for unfranked dividends is 15% (refer to the double tax agreement between Australia and Country X).

Application to your circumstances

In this case, from the information provided we accept the Estate is a non-resident trust from the date of death of the deceased. The sole beneficiary is also a non-resident.

If the Estate and the sole beneficiary were residents, the interest and dividends would be assessable income of the Estate during the period no beneficiary was presently entitled and assessable income of the beneficiary during the period they were presently entitled.

However, as the Estate and the sole beneficiary are non-residents, non-resident withholding tax is payable and consequently section 128D of the ITAA 1936 applies to exclude the interest and dividends from being included in the assessable income of the Estate (for the period no beneficiary is presently entitled) and the sole beneficiary (for the period they are presently entitled). With respect to the Estate, the trustee would not be assessed under sections 99 or 99A of the ITAA 1936 as the interest and dividends are not included in the Estate's assessable income and the Estate has no other income.

As both the Estate and the sole beneficiary are residents of Country X, the same rates of withholding tax apply to the period when no beneficiary is presently entitled and the period when the beneficiary is presently entitled. The rates are 10% for interest and 15% for dividends to the extent that they are unfranked.

As the payers of the interest and dividends did not withhold, to enable the non-resident withholding tax to be paid, income tax returns for the relevant income years can be lodged including the interest and the dividends to the extent that they were unfranked at the relevant labels. As the taxpayer is a non-resident the Commissioner will then raise non-resident withholding assessments for these amounts.

In order for the Commissioner to raise withholding assessments for the Estate, the Trustee needs to include the details of the non-resident beneficiary and ensure that a zero is placed at Label J at item Non-resident beneficiary additional information S98(3) assessable amount.

Additional information should also be provided with the tax returns stating the amounts of interest and unfranked dividends that are included in the tax returns have not had withholding tax deducted.

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