Edited version of your written advice

Authorisation Number: 1051505767921

Date of advice: 16 April 2019

Ruling

Subject: Foreign trust distributions

Question 1

Are you an attributable taxpayer in respect of the Trust, for the purposes of section 102AAT?

Answer

Yes

Question 2

Do sections 102AAU and 102AAZD operate apply to attribute income to you in respect of the Trust for the relevant income years?

Answer

Yes

Question 3

Will an amount paid to you, or applied for your benefit by the Trust be included in your assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

Year ended 30 June 2021

Year ended 30 June 2022

The scheme commences on:

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Trust was established a number of years ago in Country X.

The Trust is a non-resident trust estate for Australian taxation purposes.

The Trust is a discretionary trust.

There are a number of beneficiaries of the Trust.

You have been an Australian resident for taxation purposes since 19XX. Prior this you were not a resident of Australia for taxation purposes

Between 19XX and 19XY, funds were transferred from funds jointly held by you and your spouse to the Trust. No other monetary contributions have been made to the Trust

Since its establishment, the funds invested in the Trust have returned income in each year

During the relevant income years the income in the Trust consisted of dividends and/or interest income

All investment earnings of the Trust have been either accumulated or reinvested by that Trust

You and the other beneficiaries intend to liquidate the Trust’s investments and to transfer the proceeds into Australia. The Trust would then be wound up

You anticipate the funds to be transferred to you will be less than the initial contributions based on recent valuations and applicable exchange rates

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 95(1)

Income Tax Assessment Act 1936 Subsection 95(2)

Income Tax Assessment Act 1936 Section 97

Income Tax Assessment Act 1936 Section 98

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

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 Paragraph 99B(2)(b)

Income Tax Assessment Act 1936 Division 6AAA

Income Tax Assessment Act 1936 Section 102AAB

Income Tax Assessment Act 1936 Section 102AAE

Income Tax Assessment Act 1936 Subsection 102AAG(1)

Income Tax Assessment Act 1936 Section 102AAM

Income Tax Assessment Act 1936 Section 102AAZD

Income Tax Assessment Act 1936 Section 102AAT

Income Tax Assessment Act 1936 Subparagraph 102AAT(1)(a)(i)

Income Tax Assessment Act 1936 Subparagraph 102AAT(1)(b)

Income Tax Assessment Act 1936 Sub-subparagraph 102AAT(1)(a)(i)(A)

Income Tax Assessment Act 1936 Sub-subparagraph 102AAT(1)(a)(i)(B)

Income Tax Assessment Act 1936 Sub-subparagraph 102AAT(1)(a)(i)(C)

Income Tax Assessment Act 1936 Sub-subparagraph 102AAT(1)(a)(i)(D

Income Tax Assessment Act 1936 Sub-subparagraph 102AAT(1)(a)(i)(E)

Income Tax Assessment Act 1936 Sub-subparagraph 102AAT(1)(a)(i)(F)

Income Tax Assessment Act 1936 102AAT(1)(b)

Income Tax Assessment Act 1936 Subparagraph 102AAT(1)(b)(ii)

Income Tax Assessment Act 1936 Paragraph 102AAT(1)(c)

Income Tax Assessment Act 1936 Subparagraph 102AAT(1)(c)(ii)

Income Tax Assessment Act 1936 Section 102AAU

Income Tax Assessment Act 1936 Paragraph 102AAU(1)(b)

Income Tax Assessment Act 1936 Subsection 102AAU(1)(c)

Income Tax Assessment Act 1936 Section 102AAZD

Income Tax Assessment Act 1936 Subsection 102AAZD(3)

Income Tax Assessment Act 1936 Subsection 102AAZD(4)

Income Tax Assessment Act 1936 Section 102AAZE

Income Tax Assessment Act 1936 Section 317

Income Tax Assessment Act 1936 Section 320

Income Tax Assessment Act 1936 Subsection 324(1)

Income Tax Assessment (1936 Act) Regulation 2015

Taxation Administration Act 1953 Division 359 Schedule 1

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Issue 1: Division 6AAA

Division 6AAA of the Income Tax Assessment Act 1936 (ITAA 1936), commonly referred to as the ‘transferor trust provisions’, imposes accruals taxation by attributing to Australian tax residents income derived by non-resident trust estates to which the Australian resident transferred property or provided services.

The Trust does not meet the requirements of a resident trust estate in section 102AAB of the ITAA 1936. It is a non-resident trust estate for the purposes of Division 6AAA of the ITAA 1936.

Section 102AAT of the ITAA 1936 determines whether an Australian resident taxpayer is an attributable taxpayer for a year of income (current year of income), in relation to a particular trust estate. For you to be an attributable taxpayer in relation to the Trust (the Trust being a discretionary trust estate):

a) The conditions applicable to discretionary trust estates in subparagraph 102AAT(1)(a)(i) must apply;

b) The conditions applicable to natural persons in paragraph 102AAT(1)(b) must be satisfied; and

c) Paragraph 102AAT(c) must not prevent you from being an attributable taxpayer.

Conditions A and B – discretionary trust estate and not a public unit trust- sub-subparagraphs 102AAT(1)(a)(i)(A)-(B)

The Trust is a discretionary trust (section 102AAB of the ITAA 1936) and is not a public unit trust (section 102AAB with section 102AAF of the ITAA 1936). Sub-subparagraphs 102AAT(1)(a)(i)(A)-(B) of the ITAA 1936 are satisfied.

Condition C – transfer of property or services – sub-subparagraph 102AAT(1)(a)(i)(C)

You transferred property, namely cash, to the Trust during the 19XX-19XX income years. Section 102AAB of the ITAA 1936 provides that the definition of property includes money. Sub-subparagraph 102AAT(1)(a)(i)(C) of the ITAA 1936 is satisfied.

Condition D: The transfer was made in the course of carrying on a business, and it was not the case that similar property or services were transferred to ordinary clients or customers under arm’s length transactions - sub-subparagraph 102AAT(1)(a)(i)(D)

The transfers made to the trust estate were not made in the ordinary course of business, nor were they made on terms identical with, or similar to transactions with ordinary clients. Sub-subparagraph 102AAT(1)(a)(i)(D) of the ITAA 1936 is satisfied.

Condition E: If the transfer was made under an arm’s length transaction otherwise than in the course of carrying on a business, the entity was in a position to control the trust estate - sub-subparagraph 102AAT(1)(a)(i)(E)

The transfers were not made under an arm’s length transaction otherwise than in the course of carrying on a business. Sub-subparagraph 102AAT(1)(a)(i)(E) of the ITAA 1936 is satisfied.

Condition F: If the transfer was made before the IP time and the trust estate a discretionary trust, and was in existence, the entity was in a position to control the trust estate at a certain time - sub-subparagraph 102AAT(1)(a)(i)(F)

As you transferred the property after the ‘IP time’ (being the date of effect of legislation in 1989). Sub-subparagraph 102AAT(1)(a)(i)(F) is satisfied.

Summary - subparagraph 102AAT(1)(a)(i)

All the conditions in sub-paragraph 102AAT(1)(a)(i) applicable to discretionary trust estates are satisfied and the sub-paragraph applies to you.

If the entity is a natural person (other than a natural person in the capacity of a trustee).- paragraph 102AAT(1)(b)

Paragraphs 102AAT(1)(b) and (c) provides conditions for natural persons and residency. Subsection 102AAT(1)(b) identifies the criteria to which s102AAT(1)(c) applies. Subsection 102AAT(1)(b) is constructed in such a way to include all natural persons, where the relevant trust estate is not a family trust, satisfying subsection 102AAT(1)(a).

Subsection 102AAT(1)(c) restricts the application of s102AAT(1) to transfers of property made after the time a natural person becomes resident, unless the natural person had control of the trust estate up until the time it became resident.

You became an Australian resident in 19XX, and transfers were made to the Trust after this, the first residence time. A number of the transfers were made after you became an Australian resident. Some of the transfers were made before the first residence time, with effect that subparagraph 102AAT(1)(b)(ii) of the ITAA 1936 applies to the post residency transfers. At all times after the beginning of your year of income commencing on 1 July 19XX and the end of the trust estate's current year of income when it was in existence, the trust estate was not a non-resident family trust and therefore the conditions set out in that sub-subparagraph are satisfied with effect that also paragraph 102AAT(1)(b) is met.

Summary - paragraph 102AAT(1)(b)

You are a natural person who satisfies the requirements in paragraph 102AAT(1)(b) of the ITAA 1936.

Natural persons and residency - paragraph 102AAT(1)(c)

Paragraph 102AAT(1)(c) of the ITAA 1936 only operates to prevent a natural person from being an attributable taxpayer where all the criteria are met. As a number of the transfers were made after you became an Australian resident the condition at subparagraph 102AAT(1)(c)(ii) is not met with effect that the paragraph does not prevent you from being an attributable taxpayer.

Summary - subsection 102AAT(1)

You are an attributable taxpayer in relation to the Trust for the purposes of subsection 102AAT(1).

Assessable income of attributable taxpayer

You have been an Australian tax resident since 19XX and since have not had any periods of non-residency. As set out above, you are an attributable taxpayer in relation to the Trust.

Section 102AAZD operates to include the attributable income of a trust estate, to which a taxpayer has transferred property or services, in the assessable income of the attributable taxpayer. Accordingly, it is relevant to determine the attributable income of the Trust to which you have transferred property and are an attributable taxpayer.

The attributable income of a non-resident trust estate is determined by reference to whether the trust is a listed country trust estate or is not a listed country trust estate (paragraphs 102AAU(1)(a)-(b)). Paragraph 102AAU(1)(a) provides that if the non-resident trust estate is not a listed country trust estate in relation to the year or income – the attributable income is the net income of the non-resident trust estate of the year. Paragraph 102AAU(1)(b) provides that if the non-resident trust estate is a listed country trust estate, the attributable income would have been the net income (if the exempt income of the trust estate included all income and profits of the trust estate) other than eligible designated concession income in relation to any listed country.

The amount calculated under paragraph102AAU (1)(a)-(b) is reduced by amounts prescribed by paragraph 102AAU(1)(c).

Is the Trust a Listed Country Trust Estate?

A ‘listed country’ for the purposes of Division 6AAA has the same meaning as in Part X (section 102AAB). Section 317 in Part X defines “listed country” as having the meaning given by section 320. Australia is not a listed country.

Subsection 320(1)

Listed country means a foreign country, or a part of a foreign country, that is declared by the regulations to be a listed country for the purposes of this Part.

Regulation 19 of the Income Tax Assessment (1936 Act) Regulation 2015 (ITR 2015) lists Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States of America as Listed Countries for the purposes of Part X of that Act. Country X is not a listed country.

Section 102AAE provides the conditions which must be met in order for a trust estate to be taken to be a listed country trust estate.

Section 102AAE(1)

For the purposes of this Division, a trust estate is taken to be a listed country trust estate in relation to a year of income if, and only if, either of the following paragraphs applies to each item of income or profit derived by the trust estate in the year of income:

(a) the income or profit is either:

(i) subject to tax in a listed country in a tax accounting period ending before the end of the year of income or commencing during the year of income; or

(ii) designated concession income in relation to any listed country;

(b) both of the following conditions are satisfied:

(i) a part of the income or profit is either:

(A) subject to tax in a listed country in a tax accounting period ending before the end of the year of income or commencing during the year of income; or

(B) designated concession income in relation to any listed country;

(ii) the remaining part, or each of the remaining parts, of the income or profit:

(A) is subject to tax in another listed country or in different listed countries, as the case may be, in a tax accounting period ending before the end of the year of income or commencing during the year of income; or

(B) is designated concession income in relation to any listed country.

In applying paragraph 102AAE(1)(a), it is therefore necessary to determine whether each item of income or profit is “subject to tax”, or “designated concession income” in relation to any listed country

When income or profits are taken to be ‘subject to tax’ in a listed country is provided by section 324 of the ITAA 1936.

324(1) [Circumstances where income or profits subject to tax]

Subject to this section, for the purposes of this part, a particular item of income or profits derived by an entity is taken to be subject to tax in a listed country in a particular tax accounting period if, and only if, foreign tax (other than a withholding-type tax) is payable under a tax law of the listed country in respect of the item because the item is included in the tax base of that law for the tax accounting period.

The definition of designated concession income for the purposes of Division 6AAA is given by Section 102AAB as having the same meaning as in Part X. Section 317 in Part X, which provides:

designated concession income in relation to a listed country, means:

(a) income or profits of a kind specified in the regulations if:

(i) foreign tax imposed by a tax law of the country is not payable in respect of the income or profits because of a particular feature; or

(ii) foreign tax imposed by a tax law of the country is payable in respect of the income or profits but there is a feature in relation to that tax;

and the feature is of a kind specified in the regulations; or

(b) capital gains that would be made because of CGT event J1, if the assumptions in paragraphs 383(a) to (c) applied.

Regulation 17 to the ITR 2015 provides an exhaustive list of the items of designated concession income and these items are restricted to income from the listed countries.

Income item 1 - Foreign dividends from Country Y and Country Z

In each income year, foreign dividends were received from Country Y and Country Z sources. For each item of Country Y and Country Z income reported, a corresponding amount of foreign tax was reported as being payable.

The foreign dividend income is subject to tax in a listed country in accordance with subsection 324(1) and satisfies the requirement of subsection 102AAE(1) as the income meets the criteria of paragraph 102AAE(1)(a).

Income item 2 - Interest income from Country X

The only items of income of profits derived by the Trust, which were not subject to tax in the relevant years was the interest income, which had a Country X source.

.

It is therefore relevant to consider whether the interest income meets the definition of “designated concession income”.

The Country X interest income does not come from a listed country as prescribed by Regulation 17 of the ITR 2015. It is not designated concessional income. This particular item of income of profits does not meet the conditions of subsection 102AAE(1).

As a consequence, the Trust is not a listed country estate for the some of the years as it does not meet either paragraph (a) or (b) of subsection 102AAE(1).

Conclusion – Listed Country Trust Estate

The Trust was not a listed country trust estate for some of the years. The Trust was a listed country estate for the other years.

Attributable income

During some of the income years, the Trust received interest income from Country X, in addition to dividend income, which was subject to tax in listed countries.

Section 102AAU provides that if a non-resident trust estate is not a listed country trust estate in relation to a year of income, the attributable income of the trust estate is the “net income of the non-resident trust estate”, reduced under paragraph102AAU(c) by (among other things):

(ii) an amount:

(A) that is paid to a beneficiary, being a resident of a listed country, during the period of 13 months commencing at the beginning of the year of income; and

(B) subject to tax in a listed country in a tax accounting period ending before the end of the year of income or commencing during the year of income; or

(iii) an amount that consists of, or is attributable to, the franked part of a distribution, or the part of a distribution that has been franked with an exempting credit; or

...

In accordance with section 102AAU of the ITAA 1936, the attributable income of the Trust will be equal to the net income of the Trust of the year of income (calculated under subsection 95(1) of the ITAA 1936). Pursuant to subsection 95(1) of the ITAA 1936, the net income of a trust is the total assessable income of the trust calculated as if the trust were a resident taxpayer in respect of that income less all allowable deductions (excluding certain specified deductions). Where there is a resulting loss it is taken into account in calculating the net income of the trust in succeeding income years and is not distributed among the beneficiaries of the trust.

Conclusion

You are an attributable taxpayer in relation to the Trust for the relevant income years. Pursuant to section 102AAZD of the ITAA 1936, you are required to include any attributable income of the Trust in your assessable income. For some of the income years there will be attributable income to be included in your assessable income.

Issue 2: Section 99B

Subsection 99B(1)

Subsection 99B(1) provides:

99B(1) [Amounts received be beneficiary assessable]

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 of the year of income shall, subject to subsection (2), include that amount.

An amount will be paid to you, being property of a trust estate, the Trust. This amount will be paid to you in a year of income, during which you were a resident of Australia. As such, subsection 99B(1) will operate to include the amount paid to you in your assessable income for the relevant year (subject to the operation of subsection 99B(2)).

Subsection 99B(2)

Subsection 99B(2) provides that the amount that would otherwise be included in your assessable income under subsection 99B(1) will be reduced by so much of the amount that represents:

(a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if the amounts 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 (paragraph 99B(2)(a)); or

(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(paragraph 99B(2)(b)); or

(ba) an amount that is non-assessable non-exempt income due to section 802- 17 of the ITAA 1997 (paragraph 99B(2)(ba)); or

(c) an amount:

i. That has been included in the assessable income of the beneficiary in pursuance of section 97 of the ITAA 1936; or

ii. In respect of which the trustee of the trust estate is or has been assessable and liable to pay tax in pursuance of section 98, 99 or 99A of the ITAA 1936; or

iii. That is reasonably attributable to part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessable and is liable to pay tax under subsection 98(4) (paragraph 99b(2)(c)); or

(d) an amount that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD (paragraph 99B(2)(d)); or

(e) if the beneficiary is a company – an amount that is or has been included in the assessable income of the beneficiary under section 102AAZD (paragraph 99B(2)(e)).

The corpus reduction – paragraph 99B(2)(a)

Corpus of the Trust

Paragraph 99B(2)(a) firstly requires the identification of so much of the amount paid to you, or applied for your benefit, as represents corpus of the Trust.

The corpus of the Trust constitutes the initial settled sum, subsequent voluntary transfers of assets (cash) by you and your spouse and the amounts of income not distributed to beneficiaries and accumulated by the Trustee, thereby increasing the corpus of the Trust.

However, the corpus of the Trust for section 99B purposes would not exceed the amount, which the Trustee is capable of appointing to beneficiaries under the Trust Deed.

“Corpus” will take its meaning in section 99B from the context in which it is used. In context, section 99B is addressing the circumstance in which a trustee distributes property to a beneficiary in accordance with the terms of a trust instrument and in conformity with trust law. “Corpus” in this context refers to an amount of funds, which the Trustee is capable of appointing under the trust instrument to a beneficiary.

An amount derived by the trust estate that, if the amounts 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

Paragraph 99B(2)(a) then requires the identification of so much of the corpus of the Trust that is attributable to amounts derived by the Trust, that if the amount 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. These amounts are excluded from the corpus reduction.

In Howard v Federal Commissioner of Taxation (No 2) [2011] FCA 1421, the taxpayer asserted that an amount distributed to him by a non-resident trust estate was a distribution of the corpus of the trust estate and was therefore a capital receipt. The Commissioner did not take issue with this assertion, but said the amount was nevertheless assessable under section 99B to the extent that it was not assessable under section 97. The Court agreed with the Commissioner, finding that when the amount that was later distributed to the taxpayer was derived by the trust, it would have been assessable if it had been derived by an Australian resident taxpayer. This decision was affirmed on appeal by the Full Federal Court in Howard v Federal Commissioner of Taxation [2012] FCAFC 149.

The income amounts derived by the Trust, for the income years ended 19XX to the income year the Trust will be wound up, are “attributable to amounts derived by the Trust, that if the amount 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.” Dividends and interest income are amounts ordinarily included in the assessable income of a resident taxpayer. Dividend income is assessed as income to a resident taxpayer pursuant to subsection 44(1). Interest income is ordinary income, and would be assessed as income to a resident taxpayer under section 6-5 of the ITAA 1997. These amounts are excluded from the corpus reduction.

An amount not included in the assessable income of a resident taxpayer – paragraph 99B(2)(b)

Paragraph 99B(2)(b) reduces the amount that would otherwise be included in your assessable under subsection 99B(1), where that amount, if derived by a taxpayer being a resident, would not have included those amounts in the assessable income of that taxpayer in a year of income.

The amount to be paid to you on the winding up of the trust is (at least in part) attributable to an amount that, if it 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.

The amount to be paid to you includes interest income and dividend income, both of which would have been assessable if derived by a taxpayer being a resident. The amount to be included in your assessable income will not be reduced by paragraph 99B(2)(b).

An amount that is non-assessable non-exempt income due to section 802-17 of the ITAA 1997 – paragraph 99B(2)(ba)

Section 802-17 is not applicable. The net income of the Trust is not reasonably attributable to the whole or a part of the unfranked part of a frankable distribution made by an Australian corporate tax entity that the entity declares, in its distribution statement, to be conduit foreign income. The amount to be included in your assessable income will not be reduced by paragraph 99B(2)(ba).

An amount included in assessable income by other provisions of Division 6 – paragraph 99B(2)(c)

No amounts otherwise included in your assessable income under subsection 99B(1) are or have been included in your assessable income under section 97. Nor have any amounts been assessed to the trustee of the Trust (or any other trustee) under section 98, 99 or 99A. The amount to be included in your assessable income will not be reduced by paragraph 99B(2)(c).

An amount that has been included in assessable income under section 102AAZD – paragraph 99B(2)(d)-(e)

The Country X interest income has been included in your assessable income under section 102AAZD. The amount otherwise included in your assessable income by subsection 99B(1) will be reduced by so much of the amount as represents the amount that has been included in your and your spouse’s income assessable income under section 102AAZD.

Paragraph 99B(2)(e) does not apply as you are not a company.

Conclusion

The amount to be paid to you by the Trust will be included in you assessable income under subsection 99B(1), subject to subsection 99B(2). The amount to be otherwise included in you assessable income under subsection 99B(1) will be reduced by paragraph 99B(2)(a) and 99B(2)(d).