Edited version of private advice

Authorisation Number: 1051830400148

Date of advice: 23 April 2021

Ruling

Subject: Distribution from a foreign trust

Question 1

Will an interest free loan made by the foreign Trust to you from amounts not excluded by paragraph 99B(2)(a) of the Income Tax Assessment Act 1936 (ITAA 1936), be included in your assessable income under subsection 99B(1) of the ITAA 1936?

Answer

Yes.

Question 2

Will an interest free loan made by the foreign Trust to you from the corpus of the Trust, being an amount excluded by paragraph 99B(2)(a) of the ITAA 1936, be included in your assessable income under subsection 99B(1) of the ITAA 1936?

Answer

No.

Question 3

Will the amount assessable under subsection 99B(1) of the ITAA 1936, as outlined in question 1, be a lesser amount, or no amount, where the loan made by the foreign Trust was repayable with an arm's length rate of interest applied?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2021

Year ending 30 June 2022

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You are an Australian citizen and a tax resident of Australia.

You are a beneficiary of a non-resident discretionary trust (the Trust).

The trustees of the Trust are non-residents of Australia for tax purposes and the management and control of the Trust is exercised outside of Australia.

The corpus of the Trust is comprised of assets held in an investment portfolio.

No assets have been added to the Trust corpus since the initial contribution.

You are considering purchasing a property in Australia.

The trustees of the Trust are considering lending funds from the Trust to you to facilitate the property purchase.

The monies lent with either be:

•         a loan of original Trust corpus; or

•         a loan of accumulated income, arising from passive income sources, such as, interest, rent, dividends, capital gains.

The Trust deed allows the trustees to lend funds.

The Trust is not a transferor trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Income Tax Assessment Act 1936 section 99C

Income Tax Assessment Act 1936 subsection 99C(2)

Income Tax Assessment Act 1936 paragraph 99C(2)(c)

Income Tax Assessment Act 1936 section 102AAM

Reasons for decision

Questions 1 and 2

Subsection 99B(1) of the ITAA 1936 states that where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary shall, subject to subsection 99B(2), include that amount.

Subsection 99B(2) of the ITAA 1936 excludes certain amounts from the scope of subsection 99B(1). Relevantly, in this case, paragraph 99B(2)(a) excludes an amount representing corpus of the trust estate, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer for a year of income.

Section 99C of the ITAA 1936 provides further detail in determining whether an amount has been applied for the benefit of a beneficiary for the purposes of section 99B.

Subsection 99C(2) of the ITAA 1936 states, in part, that an amount shall be taken, for the purposes of section 99B, to have been applied for the benefit of a beneficiary if:

c)    the beneficiary has received or become entitled to receive any benefit (including a loan or a repayment, in whole or in part, of a loan, or any other payment of any kind) provided directly or indirectly out of that amount or out of property or money that was available for the purpose by reason of the derivation of the amount.

In your case, you may receive a loan from the Trust which will comprise of either the original Trust corpus and/or a loan of accumulated income, arising from passive income sources, such as, interest, rent, dividends, capital gains.

In applying the legislation to your circumstances:

•         A loan made to you by the Trust will be subject to taxation under section 99B of the ITAA 1936

•         The amount of a loan that comprises of original trust corpus will be excluded from your assessable income under paragraph 99B(2)(a)

•         The amount of a loan that comprises of amounts that would have been assessable income in the hands of a resident taxpayer, such as, interest, rent, dividends and capital gains will not be excluded from your assessable income under paragraph 99B(2)(a).

Additional information

Section 102AAM of the ITAA 1936 operates so that where the trustee of a non-resident trust pays an amount to an Australian resident beneficiary that is assessable under section 99B of the ITAA 1936, the beneficiary is liable to pay interest on an amount treated as income tax paid late on all, or part of, the distribution. The interest is intended to make up for the deferral of Australian tax on any accumulated income not taxed in a previous year of income of the non-resident trust.

Question 3

As stated above, an amount may be assessable under subsection 99B(1) of the ITAA 1936 if the 'amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate............'.

From the wording of subsection 99B(1), it is evident that the subsection is concerned with 'amounts of trust property' that are paid or applied from the trust to the beneficiary (subject to any amount excluded by subsection 99B(2)).

Consequently, in the case of a loan made from a trust to a beneficiary of the trust, the relevant consideration is whether the loan is an amount of trust property, not what the repayment arrangements are, eg, whether interest is charged, term of loan, interest only or principal and interest repayments etc. There is nothing in either subsection 99B(2) or section 99C of the ITAA 1936 that provide for a lesser assessable amount where interest is payable on a loan made by a trust to a beneficiary.

Therefore, the amount assessable under subsection 99B(1) of the ITAA 1936 would not be a lesser amount, or no amount, if a loan made by the foreign Trust to you is repayable with an arm's length rate of interest applied.

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