Edited version of private advice

Authorisation Number: 1052347892200

Date of advice: 24 February 2025

Ruling

Subject: Foreign trust distribution

Question 1

Is the distribution you received from the foreign trust subject to tax in Australia under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Is the amount of the trust distribution that is included in your assessable income reduced by the part of the distribution that represents corpus of the trust (except to the extent to relates 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 of a year of income) under paragraph 99B(2)(a) of the ITAA 1936?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You received a distribution from a foreign resident trust as a beneficiary of the trust.

At the time of the Trust distribution, you were not a trustee of the Trust and were an Australian resident for tax purposes.

The distribution arose from the sale of real property held by the Trust in the foreign country.

The property was originally acquired by your parents prior to 1985 and was used as their primary place of residence.

The property was gifted to the Trust after 1985 with the purpose of passing it on to you and your siblings after your parents' deaths.

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)

Reasons for decision

Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives an amount from a foreign trust.

Taxation Determination TD 2017/24 Income tax: where an amount included in a beneficiary's assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) had its origins in a capital gain from non-taxable Australian property of a foreign trust, can the beneficiary offset capital losses or a carry-forward net capital loss ('capital loss offset') or access the CGT discount in relation to the amount? explains that the trustee of a foreign trust for CGT purposes does not include in the net income of the trust a capital gain from a CGT event happening to a CGT asset which is not taxable Australian property. Further, the amount is not treated as a capital gain of the trust's beneficiaries and does not have the character of a capital gain for Australian tax purposes.

An amount attributable to the capital gain may nonetheless be assessable to the beneficiary under subsection 99B(1) of the ITAA 1936.

Subject to subsection 99B(2) of the ITAA 1936, subsection 99B(1) requires a beneficiary to include in their assessable income an amount of trust property that is paid to, or applied for their benefit, provided the beneficiary was resident at any time during the income year in which the payment or application was made.

Subsection 99B(2) of the ITAA 1936 reduces the amount included in assessable income under subsection 99B(1) by:

•                     for paragraph 99B(2)(a) - so much of the amount as represents 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, and

•                     for paragraph 99B(2)(b) - so much of the amount as represents an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income.

Taxation Determination TD 2024/9 Income tax: factors taken into account in applying paragraphs 99B(2)(a) and (b) of the Income Tax Assessment Act 1936explains that corpus, in the context in which it is used in section 99B of the ITAA 1936 more broadly refers to trust capital which is represented by the assets of the trust, excluding income which has not been accumulated. In determining whether an amount distributed represents corpus, for the purposes of paragraph 99B(2)(a) of the ITAA 1936, regard is had to the trust property distributed. The accounting records of the trust may assist in evidencing this but are not determinative of what the amount represents.

Paragraphs 99B(2)(a) and (b) of the ITAA 1936 require a hypothesis to be posited in order to determine if an amount distributed to an Australian beneficiary is assessable under subsection 99B(1). The hypothesis, posited for paragraph 99B(2)(a), is that the amounts derived by the trustee were, instead, derived by a hypothetical resident taxpayer. The question premised on this hypothesis is whether the amounts would be included in the assessable income of that hypothetical resident taxpayer.

In your case, you received a distribution from a foreign resident trust which was attributable to the sale of real property situated in the foreign country. As such, that part of the distribution that represents a capital gain calculated under the Australian CGT rules is required to be included in your assessable income under section 99B of the ITAA 1936.

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