Edited version of private advice

Authorisation Number: 1051630967428

Date of advice: 17 February 2020

Ruling

Subject: Distributions from a non-resident trust estate

Question 1

Did the balance of the foreign fund at the deceased's date of death represent corpus of the foreign deceased estate and therefore, when distributed to you, will not be included in your assessable income pursuant to paragraph 99B(2)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Where a distribution is made from the foreign deceased estate to you within three years of the estate being administered (from the date of death), will the distribution of accumulated income be excluded from your assessable income pursuant to paragraph 99B(2)(b) of the ITAA 1936, as a liability to income tax during the three-year period would arise on the trustee of the deceased estate?

Answer

No.

Question 3

Where a distribution is made from the foreign deceased estate to you, will the earnings component of the foreign fund that accrued following the date of death of the deceased be included in your assessable income pursuant to section 99B of the ITAA 1936?

Answer

Yes.

Question 4

Will an interest charge pursuant to section 102AMM of the ITAA 1936 apply to the distribution from the foreign deceased estate that was made to you within three years of the date of death of the deceased?

Answer

No.

Question 5

Will an interest charge pursuant to section 102AMM of the ITAA 1936 apply to a distribution from the foreign deceased estate that is made to you more than three years after the date of death of the deceased?

Answer

Yes.

Question 6

To the extent that an amount of a distribution made from the foreign deceased estate to you is subject to income tax in both Country X and Australia, will a foreign income tax offset be available on the proportion of the distribution that is assessable in Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are a citizen of Country X and Australia.

You are a resident of Australia for tax purposes.

Your relative (the deceased) was a Country X citizen and passed away in 20XX in Country X.

The estate of the deceased is a Country X deceased estate and the executor is a Country X citizen.

The Country X deceased estate is in administration and you are the sole beneficiary of the estate.

The deceased estate is the beneficiary of a Country X investment fund (fund).

The fund had a balance of $X at the date of death of the deceased and the balance has increased since that time from accrued fund earnings.

A distribution from the fund was made to the deceased estate and from the deceased estate to you, within three years of the date of death of the deceased. It is intended that the balance of the funds will be distributed to you more than three years after the date of death of the deceased

The earnings in the fund are not taxed in the plan, only at the time of distribution.

You will be subject to tax in Country X on the entire amount of the distributions made to you by the deceased estate. You will be liable to tax at the full relevant Country X tax rate. Concessional tax rates will not apply to the distributions.

The deceased estate is not liable for tax in Country X on any distributions that are made from the fund through the estate to the beneficiary.

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 Paragraph 99B(2)(b)

Income Tax Assessment Act 1936 Section 102AAM

Income Tax Assessment Act 1936 Subsection 102AAM(1)

Income Tax Assessment Act 1936 Paragraph 102AAM(1A)(a)

Income Tax Assessment Act 1936 Subsection 102AAM(1B)

Income Tax Assessment Act 1936 Subsection 102AAM(2)

Income Tax Assessment Act 1936 Section 317

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment (1936 Act) Regulation 2015 Regulation 17

Reasons for decision

Question 1

Section 99B of the ITAA 1936 deals with the receipt of trust income that has not previously been subject to tax in Australia.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

However, subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:

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;

ba) an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the Income Tax Assessment Act 1997;

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; or

                        iii.      that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and is liable to pay tax under subsection 98(4);

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

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.

The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'.

On the death of a person, the property of the deceased person passes to his or her estate, legal control over which is exercised by an executor or administrator. A deceased estate is treated as a trust for tax purposes with the executor taken to be its trustee.

Taxation Ruling IT 2622 confirms that beneficiaries of a deceased estate cannot enjoy present entitlement to income derived by a deceased estate during the administration of the estate. Income of a deceased estate in income years before the administration of the estate is complete, is the income of the executors or administrators and is not income of the beneficiaries.

However, if the executor exercises their discretion to make a payment to a beneficiary, the beneficiary will be presently entitled to that amount. The fact that the estate has not been fully administered does not prevent the beneficiaries in this situation from being presently entitled to the income actually paid to them.

From the information provided, the deceased estate is a non-resident deceased estate and is therefore a non-resident trust for Australian taxation purposes. Consequently, any distributions from the estate may be subject to the provisions of section 99B of the ITAA 1936.

As stated above, section 99B deals with the receipt of trust income that has not previously been subject to tax in Australia.

The balance of the fund passed to the deceased estate as at the date of death of the deceased and, therefore, the balance of the fund at that date is the corpus of the estate.

Consequently, when the corpus is distributed to you it will be excluded from your assessable income under paragraph 99B(2)(a) of the ITAA 1936.

Questions 2 & 3

Although a distribution that represents corpus of a trust is not assessable, paragraph 99B(2)(a) of the ITAA 1936 expressly states that the corpus of a trust estate does not include any part which 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.

Further, paragraph 99B(2)(b) of the ITAA 1936 provides that an amount to be included in assessable income under subsection 99B(1) is not to include any amount that 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.

The phrase 'a taxpayer being a resident' refers to a hypothetical taxpayer as explained in Taxation Determination TD 2017/24:

13. Paragraphs 99B(2)(a) and 99B(2)(b) posit a 'hypothetical taxpayer' who is a resident, but do not otherwise specify characteristics of that taxpayer. In the Commissioner's view, it cannot be assumed that this hypothetical taxpayer has other characteristics; for example, that it is an entity eligible for the CGT discount.

14. Paragraph 99B(2)(a) refers to an amount derived by 'the trust estate', but then hypothesises a scenario in which that amount was derived by 'a taxpayer being a resident'. It is evident from this language that the hypothetical taxpayer is not the trustee of the trust, but an entirely separate, fictional entity. There is support for this approach in Howard v. Federal Commissioner of Taxation where the Full Federal Court observed that the 'hypothesis posited is that the amount received by the [Esparto] trust estate was derived by a resident taxpayer', which was relevantly different from the actual characteristics of that trust and its trustee.

15. Moreover, paragraph 99B(2)(b) identifies the hypothetical taxpayer without reference to any trustee.

16. Both paragraphs 99B(2)(a) and 99B(2)(b) employ the indefinite article 'a' to identify a non-specific taxpayer deriving the amount in a non-specific year of income. This indicates that the hypothesis in these provisions is concerned with resident taxpayers generally, rather than a particular trustee or beneficiary. Nor do those paragraphs refer to any particular category of taxpayer.

Therefore, the phrase 'a taxpayer being a resident' means a generic Australian resident taxpayer, that is, the amount distributed:

·        represents income of a class which is normally included in the assessable income of an Australian resident taxpayer for the purposes of paragraph 99B(2)(a) of the ITAA 1936, and

·        income of a class which is not normally included in the assessable income of an Australian resident taxpayer for the purposes of paragraph 99B(2)(b) of the ITAA 1936.

As income derived from investments is of a class normally taxable in Australia as per paragraph 99B(2)(a) of the ITAA 1936, and is not excluded under paragraph 99B(2)(b), the earnings component of the plan that accrued following the date of death of the deceased will be included in your assessable income under section 99B of the ITAA 1936.

You have stated that income which accumulated in the foreign deceased estate during the first three years of administration (from date of death) should not be subject to tax in your hands. Under Australian tax law, it would have been excluded from your income as it would have been taxed in the hands of the trustee of the estate.

However, this statement would only be true if the foreign deceased estate was liable for tax in Australia on the income derived from the fund, but this is not the case as the deceased estate is a non-resident trust which is not subject to tax in Australia on foreign source income.

We note that the double tax agreement (or convention) between Australia and Country X does not expressly deal with the taxation of trust distributions. However, an article of the agreement confirms that any income not expressly mentioned in the agreement can be taxed by the source country and also by the country where the recipient is a resident. Therefore, the agreement does not prevent Australia from taxing distributions made from the Country X deceased estate.

Questions 4 & 5

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.

The provision applies to 'eligible designated concession income' derived in listed and unlisted countries. The Country X is a listed country.

Broadly, eligible designated concession income in relation to the Country X is income derived from passive investments in the Country X which is either not subject to tax, or taxed at less than the normal company tax rate (section 317 of the ITAA 1936 and Regulation 17 of the Income Tax Assessment (1936 Act) Regulation 2015).

Specifically, in relation to a listed country, subsection 102AAM(1) of the ITAA 1936 states, if:

a)     an amount is included in the assessable income of a taxpayer of a year of income (which year of income is in this section called the current year of income), being the year of income commencing on 1 July 1990 or a subsequent year of income, under section 99B in relation to a trust estate; and

b)     the whole or a part of the amount so included in the taxpayer's assessable income (which whole or part is in this section called the distributed amount) is attributable to:

(i) if the trust estate was a listed country trust estate in relation to a particular non-resident year of income of the trust estate (in this section called the non-resident trust's year ofincome) - so much of the income and profits of the trust estate of the non-resident trust's year of income as represents eligible designated concession income in relation to any listed country in relation to the non-resident trust's year of income;......

then:

c)     the distributed amount is the distributed amount of the non-resident trust's year of income; and

d)     the taxpayer is the original taxpayer in relation to the distributed amount of the non-resident trust's year of income.

Paragraph 102AAM(1A)(a) of the ITAA 1936 states that, unless the contrary is established by a taxpayer, a distributed amount in relation to a listed country trust estate in relation to a non-resident trust's year of income is taken to be wholly attributable to income and profits of the trust estate of that year of income that represent eligible designated concession income in relation to a listed country.

Therefore, the onus is on the taxpayer to provide evidence that the amount was not paid out of income and profits that are eligible designated concession income.

The interest is calculated using the formula in subsection 102AAM(2) of the ITAA 1936.

Notwithstanding the above, there is a concession available in relation to deceased estates. Subsection 102AAM(1B) of the ITAA 1936 states that section 102AAM does not apply to a distributed amount that is attributable to income or profits of the estate of a deceased person if the amount was paid to, or applied for the benefit of, a taxpayer within three years after the death of that person.

In your case, the first distribution from the foreign fund was made within three years of the date of death of the deceased. Therefore, an interest charge under section 102AAM of the ITAA 1936 will not apply to this distribution.

However, an interest charge will apply to the distribution that is made more than three years after the date of death.

You have stated that section 102AAM should not apply as the entire amount distributed to you will be subject to tax in Country X in the year of distribution.

However, this is not relevant for the purposes of section 102AAM of the ITAA 1936, as the provision only looks at whether an amount was not subject to tax, or taxed concessionally, in an income year or years prior to the year in which the funds are actually distributed.

Question 6

Section 770-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a foreign income tax offset can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits or gains. The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for the income year, only a proportionate share of the foreign income tax paid (the share that corresponds to the part that is assessable income) will count towards the tax offset.

The double tax agreement with Country X provides that Australia will allow a credit for Country X tax on income derived by a resident of Australia from sources in Country X.

In your case, you will be entitled to claim a foreign income tax offset that corresponds to the foreign tax paid on the proportion of the distribution from the Country X deceased estate that is included in your assessable income.