Edited version of private advice

Authorisation Number: 1012653488889

Ruling

Subject: Foreign Trust Distributions

Questions and answers

1) Is the distribution component relating to the main residence and the cash from the deceased estate assessable?

No.

2) Is the distribution component relating to interest received from the deceased estate assessable?

Yes

3) Is the distribution component relating to the repayments of the loans to the Family trust assessable?

No.

4) Is the distribution component relating to the proceeds from the sale of the shares, farm business and equipment owned by the Family trust assessable under the Capital Gains provisions?

Yes.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts and circumstances

You have been a resident of Australia for taxation purposes for over 10 years.

Your parents created a non-resident trust by deed.in Country X after you became a resident of Australia

You and your siblings are beneficiaries of the Family trust each receiving an equal share of the current year distributions from the Trust.

Distributions have been received by you from the Family trust in the 2014 financial year.

Your non-resident parents were the primary beneficiaries of the Family trust.

Over 10 years ago a private company (the company) was formed and your parents owned all the shares in the company which in owned a farm property (the farm).

A partnership was formed in after that to carry on a business on the farm which was leased from the company.

Later one of your siblings and their spouse entered the partnership and an associated trust acquired a parcel of shares in the company from your parents.

Your parents sold another parcel shares in the company to the Family trust gifting the consideration from the sale of the shares back to the Family trust over a number of years.

Your parents then held a small number shares each in the company.

Parent A died leaving their shares in the company and the remainder of their estate to the Family trust.

The surviving parent (Parent B) became the sole primary beneficiary of the Family Trust.

Parent B died a few years later leaving their shares and the remainder of their estate to the Family trust.

After the death of Parent B, the Family trust held X% interest in the partnership having acquired a further interest after the death of Parent B.

Part of the distributions were made up of the proceeds from the sale of your parent B's main residence, and other cash received from the death of Parent B after the deceased estate realised their assets, along with a small amount of interest.

Another part of the distributions consisted of repayments of loans from the company to the Family trust of funds originally loaned by Parent B and the Family Trust,

The final component was from the profits from the sale of the shares, and the Family trusts interest in the farming business and assets less tax payable in Country X and other expenses.

Probate was granted in the 2013 financial year.

The business was sold on 2014 financial year.

The main residence was sold by Parent B's estate and the proceeds went to the Family Trust.

Relevant legislative provisions

Subsection 6-5(2) of the Income Tax Assessment Act 1997

Section 6-10 of the Income Tax Assessment Act 1997

Section 10-5 of the Income Tax Assessment Act 1997

Subdivision 115-C of the Income Tax Assessment Act 1997

Section 115-210 of the Income Tax Assessment Act 1997

Section 115-222 of the Income Tax Assessment Act 1997

Division 6 of the Income Tax Assessment Act 1936

Section 97 of the Income Tax Assessment Act 1936

Paragraph 97(1) (a) of the Income Tax Assessment Act 1936

Section 95 of the Income Tax Assessment Act 1936

Section 99 of the Income Tax Assessment Act 1936

Section 99A of the Income Tax Assessment Act 1936

Section 99B of the Income Tax Assessment Act 1936

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income you derive directly or indirectly from all sources whether in or out of Australia, during an income year.

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income may be included in assessable income by under another provision as statutory income.

Section 10-5 of the ITAA 1997 lists provisions that include in your assessable income amounts that are not ordinary income. Included in this/her list are provisions that may apply to the amounts you may receive from the Trust:

Assessability of trust income

Division 6 of the Income Tax Assessment Act 1936 (ITAA 1936), which comprises sections 95AAA to 102, provides for the assessment of income tax on the income of a trust estate and on amounts of income distributed by the trust estate.

Section 97 of the ITAA 1936 advises that an Australian resident beneficiary who is presently entitled to a share of the income of a trust estate is assessed on their share of the trust estate's net income.

Paragraph 97(1) (a) of the ITAA 1936 includes the beneficiary's share of the net income of the trust estate based on the principles of residency and source applied to their assessable income.

The assessable income of a beneficiary will include:

n 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, and

n so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia.

You were a resident of Australia for taxation purposes in the 2014 income year and received distributions in the 2014 income year.

You will be assessed on any income received from the Family trust under this provision.

Distribution from the Estate

The distribution received by the Family trust from the Estate consisted of interest earned by the Estate, cash from the realisation of the estate and the sale of the deceased main residence.

Of these the interest received is income to the Family trust you became presently entitled to during the year and so is included in your assessable income.

No part of the proceeds from the sale of the deceased main residence would be assessable income, while the sale of property can be subject to Capital gains Tax in your case any capital gain or loss is disregarded as the property was sold within two years of the deceased date of death. These funds become part of the corpus of the Family trust.

The other distributions from the Estate are capital payments not subject to CGT and also form part of the corpus of the Family trust.

Repayment of loans by the company

The company repaid loans originally made by both the Family trust and the deceased (which passed to the Family trust) these are capital payments which do not result in a capital gain or loss and also form part of the corpus of the Family trust.

Sale of shares in the company

These shares are CGT assets and any profit will be subject to the Capital Gains provisions as you became presently entitled to this during the year of income.

Sale of the business to the company

Again any profit will be subject to the Capital Gains provisions as you became presently entitled to this during the year of income.

Trusts with net capital gains

The income of a trust estate is the amount that, under trust law principles and the relevant terms of the trust deed, is treated as income of the trust estate. In other words, it is the trustee who ascertains the income of the trust estate according to appropriate accounting principles and the trust deed.

Subdivision 115-C of the ITAA 1997 sets out rules for dealing with the net income of trusts that have net capital gains. The rules treat parts of the net income attributable to the trusts' net capital gain as capital gains made by the beneficiary entitled to those parts.

Section 115-210 of the ITAA 1997 explains that Subdivision 115-C applies if a trust estate has a net capital gain for a financial year that is taken into account in working out the trust estate's net income (as defined in section 95 of the ITAA 1936) for the financial year.

Section 95 of the ITAA 1936 requires the trustee of a trust estate to calculate the net income of the trust as if the trustee were a taxpayer in respect of that income and a resident. As we have discussed above, residents of Australia are required to include capital gains or capital losses from all sources in the calculation of their net capital gain for a year of income.

Section 115-222 of the ITAA 1997 explains that where a trustee makes a capital gain, the trustee is assessed under either section 99 or section 99A of ITAA 1936. Sections 99 and 99A of ITAA 1936 are interrelated and must be read together in order to determine which provision applies in a particular situation.

Section 99A of the ITAA 1936, which imposes a penalty rate of tax, applies automatically unless the capital gain comes within an exclusion in section 99A(2) and the Commissioner considers that it is unreasonable for section 99A to apply. Trusts normally excluded from section 99A include testamentary trusts.

Because section 98 of the ITAA 1936 is not applicable to the Family trust, the rules of section 99A of the ITAA 1936 are applied to that trust.

Application of section 99 and 99A to non-resident trust estates

The rules in sections 99 and 99A of the ITAA 1936 (regarding the assessment of income in the hands of the trustee if there is a portion of the income of the trust estate to which no beneficiary is presently entitled) apply only to the part of the net income of the trust estate arising from Australian sources.

Subsections 99A(4B) and 99A(4C) of the ITAA 1936 ensure that only Australian source income to which no beneficiary is presently entitled is assessed to the trustee of a non-resident trust estate.

Section 99B of the ITAA 1936

Section 99B of the ITAA 1936 assesses Australian resident beneficiaries on income not previously subject to tax.

A beneficiary who was a resident at any time during the income year and who receives any amounts from a trust estate, either by way of payment or application for her or his benefit, is subject to tax on that amount unless excluded by sub-section 99B (2).

Sub-section 99B (2) excludes:

(a) 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 of a year of income);

(b) 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;

(c) an amount:

(i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or

(ii) in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of section 98, 99 or 99A;

There are parts of your distributions that will be assessed pursuant to section 97 (interest and any Capital Gains), the remainder of the distributions are amounts that are excluded under paragraphs (a) or (b).

Other Information

You also asked about valuations used by the trustee and goodwill.

For a discretionary trust the trustee decides what amounts are distributed to different beneficiaries. Tax law is applied to those amounts to determine the tax payable by the trustee and beneficiary as applicable. You have been told what your distribution consists of and the source of those distributions. For the non-assessable capital payments and the interest received the treatment is straight forward.

For the amounts subject to Capital Gains Tax the trustee is required to advise the beneficiary what the taxable gain is and how it has been calculated - including whether any small business or other concessions would apply. This means that the trustee would need to consider whether the parties had been dealing at arm's length etc. this may require the Trustee to use the market value substitution rule.