Edited version of your written advice

Authorisation Number: 1051511587517

Date of advice: 02 May 2019

Ruling

Subject: Foreign trust payments

Question 1

Are the payments from a foreign trust exempt from tax under the relevant double tax agreement?

Answer

No.

Question 2

Are the payments from a foreign trust exempt from tax under item 2.1A of the table in section 51-10 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods

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

Year ended 30 June 2023

Year ended 30 June 2024

The scheme commenced on

1 July 20XX

Relevant facts

You were born overseas.

You are an Australian Citizen and have been for many years.

You arrived in Australian in 20XX for the first time since being granted your Australian Citizenship. You travelled to Australia alone and not with other family members. Prior to your arrival you were a foreign resident for tax purposes.

You are currently studying full time at an Australian University. Your degree commenced in 20XX and finishes in December 20XX.

You receive HECS-HELP and your place is a Commonwealth supported place. You have deferred all your HECS-HELP fees.

You also qualify for funding through the Centrelink Youth Allowance for students and Australian Apprentices. You do not receive the Centrelink payments when you go home over the summer holidays.

You intend to remain in Australia, following the completion of the degree for the purpose of undertaking further education, specifically an honours degree and subsequently postgraduate studies.

On completion of your postgraduate studies, you intend to return to the overseas country to gain employment and reside permanently.

You return to country A during the university summer holidays each year to visit your family. You live at home with your mother when overseas.

All your immediate family that you grew up with live in country A. Some of your relations live in Australia.

You originally stayed in the University Halls of Residence, however you have since moved into private rental accommodation with your defacto partner.

Your maintenance and education costs include accommodation, electricity, water, internet, travel cost to university, textbooks, laptop, books, folders, pens and other student equipment, clothing, toiletries, work experience/placement costs, student amenities fee, meals, bedding and room furnishings.

You did some casual work in Australia up to mid-20XX and from early 20XX you have casual employment. In this position you do approximately one to two hours a week.

You have Australian bank accounts. You do not own any property or other investments in Australia.

You are an Australian resident for tax purposes.

You are a beneficiary of a foreign resident discretionary family trust (the Trust).

Part of your maintenance costs while at university are funded by distributions from the Trust. None of the distributions comprise corpus of the Trust.

The amount of income paid to you from the Trust is based on the amount of income that is available to distribute to the beneficiaries, ensuring all the beneficiaries are given equal consideration.

When the Trustee is being requested to reimburse you for your educational expenses, you are required to provide evidence of the amount spent. The Trust then considers the request and then determines when to pay. You rely on the Trust to afford your textbooks, equipment, travel to university and maintenance costs most weeks.

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 6-15.

Income Tax Assessment Act 1997 Section 6-20.

Income Tax Assessment Act 1997 Section 11-15.

Income Tax Assessment Act 1997 Section 51-10.

Income Tax Agreements Act 1953 Section 4.

Australian Treaties Series 22.

Reasons for decision

Assessable income

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

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

Sections 6-15 and 6-20 of the ITAA 1997 are about amounts that are not assessable income and amounts that are exempt income.

Section 11-15 of the ITAA 1997 lists the income which is exempt under the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936).

Double tax agreement

In determining liability to tax for Australian residents, it is necessary to consider not only the income tax laws but also the laws under the International Tax Agreements Act 1953 (Agreements Act) and any applicable double tax agreement contained in the Australian Treaties Series (ATS).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1997 where there are inconsistent provisions (apart from Australia's general anti-avoidance rules and certain provisions dealing with limitations of tax credits).

Article 19 of the relevant double tax agreement relates to students.

Article 19 of the Agreement provides that where a student who was a resident of country A immediately before visiting Australia and who is temporarily present in Australia solely for the purpose of the student’s education, receives payments from sources outside Australia for the purpose of the student’s maintenance or education, those payments shall be exempt from tax in Australia.

Article 19 applies only to students who are in Australia temporarily. Therefore it is necessary to consider the term temporarily.

Temporarily is not defined in the ITAA 1997 or Agreements Act and therefore takes its ordinary meaning.

Temporarily is the adverb from temporary. The Macquarie Dictionary defines temporary as lasting, existing, serving or effective for a time only; not permanent: a temporary need.

Taxation Ruling IT 2650 Income Tax: Residency - Permanent Place of Abode Outside Australia discuss various aspects relating to individuals who leave Australia temporarily to live overseas. Although the situation is different to yours, the terms and principles discussed are relevant.

A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which a person intends to live for the rest of his or her life. The nature and quality of use which a taxpayer makes of a particular place of abode overseas is important (FC of T v Applegate 79 ATC 4307; (1979) 9 ATR 899). In that case, it was determined that taxpayer had a permanent place of abode outside Australia for the two year period. The word ‘permanent’ was contrasted with temporary or transitory.

An intention to return to Australia in the foreseeable future to live does not prevent the taxpayer setting up a permanent place of abode elsewhere (paragraph 14 of IT 2650).

In FC of T v Jenkins 82 ATC 4098; (1982) 12 ATR 745, the taxpayer was transferred overseas for three years. He returned to Australia after 18 months because of ill health. It was still found that he had a permanent place of abode outside Australia even though he had not at any time formed an intention to remain indefinitely in New Hebrides.

As highlighted in paragraph 25 of IT 2650, the longer an individual’s stay in any one place, the more permanent in nature it is likely to be. As a broad rule of thumb, a period of about two years or more would generally be regarded as a substantial period for the purposes of a taxpayer's stay in another country.

In applying the above principles to your case, it is considered that your intention to be in Australia is more than merely temporary. In your case you intend to live and study in city B, Australia for approximately six years. Although you intend to return to country A after your courses, it cannot be said that you are temporarily present in Australia. This is supported by the following:

● you are studying more than the one degree,

● you have a private rental accommodation with your partner,

● you are studying and living in the one place for several years, and

● you have Centrelink income support and some casual employment.

Although you return to the country A each summer holidays, it is considered that your extended stay is not temporary.

As you are not temporarily present in Australia, your payments from the foreign trust are not exempt under Article 19 of the relevant agreement.

Education and training

Section 51-10 of the ITAA 1997 provides an exemption for full time university students. Item 2.1A of the table in section 51-10 of the ITAA 1997 provides that, subject to the exceptions and special conditions contained within section 51-35 of the ITAA 1997, income received by way of a scholarship, bursary, educational allowance or education assistance by a full time student at a school, college or university is exempt from income tax.

The Tax Office view as published in Taxation Ruling TR 93/39 Income tax: friendly society education funds is that a 'scholarship, bursary or other educational allowance or educational assistance' is an award for merit attained as a result of competition or selection on the basis of general criteria.

Generally a family discretionary trust does not have a legal obligation to pay an educational allowance or similar payment to a beneficiary.

In your case, the payments made by the Trust to you are not paid as an award and are not regarded as a scholarship, bursary or other educational allowance or educational assistance. That is, a payment to a beneficiary of a family trust is not the same nature as a scholarship, bursary, education allowance or educational assistance payment.

A payment from one family member to another family member, albeit through a trust, is not regarded as a scholarship, bursary, educational allowance or educational assistance payment for section 51-10 of the ITAA 1997 purposes. The fact that the payment may be used to pay for educational expenses, does not convert the payment to a scholarship, bursary, education allowance or educational assistance.

The payments made by the Trust to you are not exempt under item 2.1A of the table in section 51-10 of the ITAA 1997.

As the payments are not exempt income, they form part of your assessable income.