Edited version of private advice

Authorisation Number: 1051686894207

Date of advice: 1 June 2020

Ruling

Subject: Temporary residency, distributions from a foreign trust and gifts

Question

Are you a temporary resident under the Income Tax Assessment Act 1997?

Answer

Yes.

Question

Does section 99B of the Income Tax Assessment Act 1936 apply to you if you receive a distribution from your father and mother?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and your spouse moved to Australia in 20XX and entered on Country X passports. You are on the subclass X visa.

You are currently citizens only of Country X.

You have a child born in Australia in 20XX.

On Month X19XX, two trusts in Country X were established:

- Trust X was established by your parent. A few of your relatives and you are discretionary beneficiaries of this trust as to capital and income. Your parent has never been a beneficiary of this trust.

- Trust X was established by your parent. A few of your relatives and you are discretionary beneficiaries of this trust as to capital and income. Your parent has never been a beneficiary of this trust.

The individual trustees of these two trusts have never been resident in Australia.

Your sibling and you are the final beneficiaries of both trusts. Both trusts have a perpetuity period for a number of years which can be brought forward by the trustees.

Trust X has provided your parent and when possible either or both you and your sibling (and/or yours and your sibling's children) with regular income.

Income allocated to you from Trust X has to the extent that it comprises of income from an Australian source, been included in your Australian income tax return.

From the inception of the trusts until when your parent completely retired around 20XX, your parents have made annual gifts to the trusts of the amounts in excess of the amounts owed to them.

The total amount gifted to Trust X was calculated to be $X. These gifts were in consideration of the natural love and affection that your parents had for the beneficiaries of the relevant trusts.

The management and control of both trusts have been carried on by your parents and their co-trustees in Country X.

Most of the investments in the trusts have been realised with part of the proceeds being used to repay the balance of amounts owing to your parents which amount to approximately $X. The balance was deposited in interest bearing accounts in the names of the relevant trustees. This balance represented distributions of either corpus or accumulated revenue and capital profits. As these terms deposits mature, the amounts were transferred to your parents pursuant to the provisions of the trust deeds.

By Month X 20XX, most of the assets in both trusts had been dealt with. The remaining assets consisted of a small amount of cash and a property at Property X with each of the trust having a half interest in this property.

An amount at least equal to the income derived by Trust X from sources in Australia was distributed to you in each of Country X's income years ended 20XX to 20XX. No amount was distributed to you since then.

Trust X Income

The financial statements of Trust X for Country X's income year ended 20XX disclose interest earned on term deposits and other financial investments. These investments were with Country X's incorporated subsidiaries of parent companies which means that the income from these investments were not Australian sourced income.

For Country X's income year ended 20XX Trust X received dividends from the Australian Stock Exchange (ASX) listed companies totalling $X.

The net income of Trust X for Country X income year ended 20XX was $X. Of this amount, $X was distributed to your parent and the balance of $X was retained by the trustees.

Trust X Capital Gains

Trust X realised a capital gain in Country X income year ended 20XX on the sale of a property of $X. The trust realised capital gains in Country X's income year ended 20XX on the sale, transfer or redemption of investments in shares in ASX listed companies.

Composition of Trust X Distribution to your parent

The total distributed to your parent was $X from the corpus of the trust, $X of income and $X of capital gains. These amounts equate to $X.

Out of $X, a number of deposits amounting to $X were made to your parent's personal bank account between Month X 20XX and Month X 20XX.

Most of the amounts distributed in cash to your parent were deposited into their personal bank account which has been your parent's account for a number of years. The balance in this account immediately prior to the first of the trust distributions was $X.

Amount proposed to be given to you

You parents are proposing personally providing you with approximately $X as a gift and as a way of knowing that you and your family will have a mortgage free home and reduction in financial pressures.

Your parent intends to achieve this by gifting the balance of their personal bank account to you with your other parent giving you the additional funds needed to amount to the $X figure.

No deposits sourced from Trust X have been made to your parent's bank account since Month X 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 95(2)

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 subsection 6-15(3)

Income Tax Assessment Act 1997 section 768-910

Reasons for decision

Summary

You are a temporary resident of Australia for taxation purposes for the year ending Month X 20XX.

The distribution of $X that is proposed to be given by your parentsis not assessable income and does not need to be included in your income tax return.

Detailed reasoning

Issue 1 - Temporary resident

Section 768-910 of the ITAA 1997 provides that statutory income derived by a temporary resident from a foreign source (other than a net capital gain which is covered by section 768-915 of the ITAA 1997) is non-assessable non-exempt income and therefore not subject to tax.

Section 995-1(1) of the ITAA 1997 defines temporary resident as:

you are a temporary resident if:

(a) you hold a temporary visa granted under the Migration Act 1958

(b) you are not an Australian resident within the meaning of the Social Security Act 1991; and

(c) your spouse is not an Australian resident within the meaning of the Social Security Act 1991

However, you are not a temporary resident if you have been an Australian resident (within the meaning of this Act), and any of paragraphs (a), (b), and (c) are not satisfied, at any time after the commencement of this definition.

Note: The tests in paragraphs (b) and (c) are applied to ensure that holders of temporary visas who nonetheless have a significant connection with Australia are not treated as temporary residents for the purposes of this Act.

The definition was enacted by Tax Laws Amendment (2006 Measures No. 1) Act 2006 (amending Act) and commenced at the time that the amending Act commenced. As per section 2 of the amending Act it commenced on the day it received Royal Assent, that is 6 April 2006.

Consideration is now given as to whether you are a temporary resident:

(a) Holding of a temporary visa granted under the Migration Act 1958

You satisfy this criterion.

(b) Not an Australian resident within the meaning of the Social Security Act 1991

Subsection 7(2) of the Social Security Act 1991 defines Australian resident to be:

An Australian resident is a person who:

(a) resides in Australia, and

(b) is one of the following:

(i) an Australian citizen;

(ii) the holder of a permanent visa;

(iii) a special category visa holder who is a protected SCV holder

You satisfy this criterion on the basis that you do not satisfy any of the particulars listed in paragraph 7(2)(b).

(c) Spouse is not an Australian resident within the meaning of the Social Security Act 1991

Your spouse satisfies this criterion on the basis that they do not satisfy any of the particulars listed in paragraph 7(2)(b).

Conclusion

As you satisfy conditions (a), (b) and (c) you are a temporary resident as per the definition of that term in subsection 995-1(1) of the ITAA 1997.

Issue 2 - Receipt of gift where part of amount is sourced from trust distributions

Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary.

However, subsection 99B(1) of the ITAA 1936 is qualified by subsection 99B(2) of the ITAA 1936 which broadly reduces the amount included in the assessable income of the beneficiary to the extent that it represents:

·         corpus of the trust estate - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer

·         an amount that would not have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer

·         an amount that is or has been included in the assessable income of the beneficiary under section 97 of the ITAA 1936

·         an amount that has been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, or

·         an amount that has been included in the assessable income of a taxpayer under Division 6AAA of Part III of the ITAA 1936.

As the amounts paid from the trust are specifically exempt by the temporary resident provisions, subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income; therefore, section 99B of the ITAA 1936 will not apply.

Subsection 6-5(2) of 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.

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift provides principles relevant to the determination of whether the receipt of money constitutes a gift.

TR 2005/13 highlights that rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

·         there is a transfer of the beneficial interest in property,

·         the transfer is made voluntarily,

·         the transfer arises by way of benefaction, and

·         no material benefit or advantage is received by the giver by way of return.

Whether a gift is assessable income depends on the character of the gift in the hands of the recipient. Consideration is necessary of the whole of the circumstances in which the gift is received.

A personal gift received by you for personal reasons, where there is no connection between the receipt of the gift and any income-producing activity by you, is not assessable income.

In your situation, your parents intend on giving you $X to help you. The payment will be made to you voluntarily and not as a result of any services that you performed.

Accordingly the amount that you will receive is not assessable income and does not need to be included in your income tax return.