Edited version of your written advice

Authorisation Number: 1051409870685

Date of advice: 6 August 2018

Ruling

Subject: Temporary residency status and foreign trust distribution

Questions and Answers

1. Are you a ‘temporary resident’ under the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Does section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) apply to you if you receive capital distributions from the Trust?

No.

This ruling applies for the following period(s)

Income year ended 30 June 2018

Income year ending 30 June 2019

Income year ending 30 June 2020

Income year ending 30 June 2021

Relevant facts and circumstances

Personal circumstances

You and your spouse were both born in a foreign country. You were born in 19XX and your spouse was born in 19XX.

You and your spouse are both citizens of a foreign country.

You and your spouse both entered Australia in 20XX with your a foreign country passports and also when re-entering Australia after temporary absences.

You and your spouse each hold a Special Category Visa (SCV).

You and your spouse came to Australia with the intention of living here.

You live with your spouse in a house in Australia.

You and your spouse are married to each other.

You and your spouse will not change your visa status. You will not become permanent residents of Australia or become Australian citizens in the future.

Neither you nor your spouse was in Australia on DDMMYY or for periods totalling 12 months during the two years immediately before that date.

You have never been granted social security payments on the basis of being protected SCV holders.

You have stated that both you and your spouse satisfy the definition of ‘temporary resident’ because you:

● hold a temporary visa granted under the Migration Act 1958;

● are not an Australian resident within the meaning of the Social Security Act 1991; and

● do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

The Trust

The Trust) is a discretionary trust that was established on in 19XX in a foreign country.

You are an appointor of the Trust.

You retired as a trustee in 20XX.

The current trustees are:

● your solicitor and a resident of a foreign country; and

● your accountant and a resident of a foreign country.

You and your spouse are the discretionary beneficiaries of the Trust.

The capital of the Trust includes real property in a foreign country.

The Trust has always been centrally managed and controlled from a foreign country.

You and your spouse gifted real property located in a foreign country into the Trust soon after it was established. In 20XX, this property was sold to a foreign country company called the Company, in which the Trust owned 50% of the shares.

The property of the Trust comprises:

● shares in the Company (whose assets consist of property, plant and equipment in a foreign country);

● an advance to the Company; and

● shares in a second a foreign country company (whose assets include shares in a foreign country agricultural co-operative).

The Trust has derived income from the following sources:

● rental income derived from the a foreign country real property between 20XX and 20XX;

● a capital gain on the sale of the a foreign country real property in 20XX;

● capital gains on the sale of some of the Trust’s shares in the Company; and

● interest from a foreign country bank account.

Most of the Trust’s income has been accumulated by the trustees, such that it forms part of the capital of the Trust. Other amounts of income were distributed to the applicants in the years they were derived.

The trustees now expect to:

● receive a dividend from the Company;

● sell the Trust’s remaining shares in the two companies; and then

● wind up the trust.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 768-910

Income Tax Assessment Act 1997 Section 768-915

Income Tax Assessment Act 1936 Section 99B

Reasons for decision

Sections 6-5(2) and 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Relevantly included in this list is section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that where a beneficiary of a trust estate is presently entitled to a share of the net income of the trust estate, the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident.

Temporary resident

Subdivision 768-R of the ITAA 1997 provides an exemption for most foreign income derived by temporary residents of Australia. The exemption for temporary residents is succinctly explained in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006. Paragraph 1.23 explains:

This Bill makes ordinary income derived from a foreign source during the period the taxpayer is a temporary resident non-assessable non-exempt income. This measure also applies to all statutory income that has a source other than Australia, including amounts otherwise attributable from a foreign company or a foreign trust, on which the taxpayer would otherwise be taxed. This extends to amounts derived through partnerships and trusts but not to amounts derived by other taxable entities (e.g., not where a trustee is taxable under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)). There is no exemption for Australian source income.

Specifically, section 768-910 of the ITAA 1997 provides that statutory income derived by a temporary resident from a foreign source (other than a net capital gain which is covered by section 768-915 of the ITAA 1997) is non-assessable non-exempt income and therefore not subject to tax.

To be eligible for the temporary resident exemptions, a person must be a "temporary resident”, i.e. a person who satisfies three tests. The person:

1. must hold a temporary visa granted under the Migration Act 1958

2. must not be an Australian resident within the meaning of the Social Security Act 1991, and

3. must not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

Consideration of the facts of your situation shows that you meet the requirements of a temporary resident.

Payments from a Trust

Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary.

However, subsection 99B(1) of the ITAA 1936 is qualified by subsection 99B(2) of the ITAA 1936 which broadly reduces the amount included in the assessable income of the beneficiary to the extent that it represents:

● corpus of the trust estate - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer

● an amount that would not have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer

● an amount that is or has been included in the assessable income of the beneficiary under section 97 of the ITAA 1936

● an amount that has been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, or

● an amount that has been included in the assessable income of a taxpayer under Division 6AAA of Part III of the ITAA 1936.

As the amounts paid from the trust are specifically exempt by the temporary resident provisions, subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income; therefore, section 99B of the ITAA 1936 will not apply. The capital distributions from the Trust are not included in your assessable income.

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