Edited version of private advice

Authorisation Number: 1052059680727

Date of advice: 28 November 2022

Ruling

Subject: Taxation of amounts loaned to a beneficiary of a foreign trust

Question 1

Will the loan from the foreign trust to you be an amount applied for the benefit of a beneficiary, within the meaning in section 99C of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will the loan amount be, in whole or in part, assessable income under section 99B of the ITAA 1936?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

During the year ending 30 June 20XX

Relevant facts and circumstances

You moved to Australia in 20XX.

You are a resident of Australia for tax purposes. You are an eligible beneficiary of a foreign trust.

The foreign trust was established before you moved to Australia.

No trustees are, or will be in each of the income years that this private ruling relates to, an Australian resident.

The central management and control of the foreign trust is, and will be in each of the income years that this private ruling relates to, outside Australia.

The income of the foreign trust has a foreign source.

The property of the foreign trust has never included Australian real property or other Australian assets.

The foreign trust has accumulated income over time.

The Trustee of the foreign trust has proposed to advance a loan (the loan) to you on arm's length terms.

The loan will be from either:

•         Original corpus of the foreign trust, or

•         Accumulated income in the foreign trust.

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 section 99C

Income Tax Assessment Act 1936 subsection 99C(1)

Income Tax Assessment Act 1936 paragraph 99C(2)(c)

Reasons for decision

Paragraph 99C(2)(c) of the ITAA 1936 expressly includes loans as property applied for the benefit of a beneficiary and to which 99B will apply.

Clause 16 of the Explanatory Memorandum to the Income Tax Amendment Bill (No. 5) 1978 (the EM) describes the purpose of section 99C as being 'complementary to section 99B and... designed to ensure that a beneficiary will not escape the provisions of section 99B where indirect or artificial means are used to provide the beneficiary with the benefit of accumulated trust income.'

In respect of loans specifically, the EM further states, in respect of section 99C:

Sub-section (2) reinforces the principle of sub-section (1) by setting out a number of situations where an amount is to be taken for purposes of sub-section (1) as having been applied for the benefit of a beneficiary...

The situations specified are those where -

...

(c) the beneficiary receives a loan or other benefit provided out of the amount;

...

Paragraph 99C(2)(c) does not distinguish between different types of loans, including whether they are made on arm's length terms. All that matters is that it is in fact a loan.

What amounts to an ordinary loan was explained by Sackville and Lehanne JJ in Federal Commissioner of

Taxation v. Radilo Enterprises Pty Ltd (1997) 72 FCR 300; 97 ATC 4151; (1997) 34 ATR 635 as involving an 'obligation on the borrower to repay the sum borrowed'. This creates a corresponding right to receive in the lender. Without an obligation to repay there is no loan (note an obligation to repay can be on call).

Subsection 99C(1) provides that regard shall be had to all benefits that have accrued at any time to the beneficiary. In this regard, the application of section 99B in a particular income year is not affected by:

•         the passage of time between benefits being provided

•         the provision of different benefits to the beneficiary

•         whether there is a series of transactions resulting in indirect benefits.

In your case, if a loan, being an amount paid to you with the obligation that that amount be repaid, is made to you from the foreign trust, that amount will be captured by section 99C as an amount that was applied for your benefit. This is so, regardless of whether the amount is loaned on arm's length terms.

Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives an amount from a foreign trust.

Subsection 99B(1) of the ITAA 1936 provides that where a beneficiary who was an Australian resident at any time during an income year is paid an amount 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 in the income year it is paid.

However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount as represents:

(a)   corpus of the trust, (but not to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer); or

(b)   amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or

(c)   amounts that are or have been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or that are or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or

(d)   amounts included in assessable income under section 102AAZD of the ITAA 1936 (that is, amounts included under the transferor trust measures for a taxpayer having transferred property or services).

In your case, the loan to be made to you may include an amount that represents the corpus of the foreign trust. Amounts that represent earnings of the foreign trust are not corpus. Therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

(a)   the proportion of the loan to you that represents amounts previously deposited to the foreign trust to settle it or to achieve its purpose is excluded from your assessable income, and

(b)   the proportion of the loan to you that represents earnings of the foreign trust (from the commencement date of the foreign trust) is included in your assessable income because the foreign trust earnings are amounts that are not taken to represent corpus; the earnings are attributable to income derived by the foreign trust, which would have been subject to tax had the earnings been derived by a resident taxpayer.

It is important to note that when the corpus exception has been claimed in relation to a loan, that corpus is no longer available for the purposes of claiming the corpus exception for other applications of subsection 99B(1) to payments from the trust.