Edited version of private advice

Authorisation Number: 1052121434766

Date of advice: 27 October 2023

Ruling

Subject: Assessable income - section 99B

Question

Are the amounts you are to receive from Person B to be included in your assessable income under section 99B of the Income Tax Assessment Act 1936?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 202X

Year ending 30 June 202X

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

Person A ("you") is a resident of Australia for income tax purposes.

Your parent, Person B, is a resident of Country X for income tax purposes.

Person B is the Settlor of a foreign investment trust known as the X Trust ("Trust").

The Trust was formed under the governing law of a foreign country on 3 August 20XX.

The trustee of the Trust is XX Trust Company (Country B) Pte. Ltd (Trustee).

Neither the Trustee nor the Trust are residents of Australia for income tax purposes.

On 3 August 20XX, Person B assigned their interest and rights in respect of two loan receivables to the Trustee. The loan receivables were as follows:

(a)          US$XX million loan (interest free, unregistered and unsecured) provided to Company A by Person B.

(b)          US$XX million loan (interest free, unregistered and unsecured) provided to Company F by Person B.

On 3 August 20XX, per the Trustee resolution, Person B gifted to the Trustee X ordinary shares in Company A and X ordinary shares in Company F.

The abovementioned loan receivables and shares in the Company F and Company A represented capital (corpus) of the Trust.

As at 30 September 20XX, the Unaudited Statement of Corpus of the Trust reported an amount of approximately US$XX million as "Initial funds" representing the Loans to the Related Companies.

As at 31 December 20XX, the Unaudited Statement of Corpus reported an amount of approximately US$XX million as the settled corpus of the Trust.

Income of the Trust consists of dividend payments received in respect of the investments (shares) in related party companies A and F.

All income of the Trust is distributed to Person B on an annual basis and they pay tax on this annual income distribution in Country A.

Relevant terms of the trust deed

Article X Clause Z of the Deed states:

The income and principal of each Trust are intended for the sole and individual use and enjoyment of the Persons who are named or described in this Agreement as the beneficiaries of such Trust and are strictly personal to those beneficiaries.

Schedule X, clause Z of the Deed states:

So long as the Settlor shall be living and not Incapacitated:

(1)           ...

(2)           Upon written request of the Settlor, the Trustee may in its discretion pay or apply to or for the benefit of the Settlor and such persons as the Settlor may from time to time nominate by notice in writing to the Trustee so much, up to and including all, of the principal of the Trust Fund.

Schedule X, clause X of the Trust Deed defines "Discretionary Beneficiaries" to mean the following persons:

(c)           The Settlor;

...

(f)            Any person who is a descendant of the Settlor, whether or not living at the date of this Agreement, but born prior to the expiration of the Maximum Trust Period'...

The arrangement

On 23 August 20XX, the Trustee resolved to make a distribution of capital in the amount of US$XX million to Person B, a beneficiary of the Trust.

It was further resolved by the Trustee that it will serve a Notice of Direction to Pay on Company B ("Company"), directing the Company to pay the amount of US$XX million to Person B and such payment constitutes:

(d)          full discharge of the partial loan repayment of US$XX million to the Trust by the Company; and

(e)          full discharge of capital distribution entitlement owed by the Trust to Person B.

It is proposed that during the 20XX FY, Person B will transfer to you the US$XX million distribution they received from the Trust by way of a gift.

There is a Money Grant Agreement (yet to be executed) between you and Person B which sets out the terms of the proposed gift.

Relevant legislative provisions

Income Tax Assessment Act 1936 - subsection 99B(1)

Income Tax Assessment Act 1936 - subsection 99B(2)(a)

Income Tax Assessment Act 1936 - subsection 99C(1)

Income Tax Assessment Act 1936 - subsection 99C(2)(c)

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Reasons for decision

Broadly, section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) deals with the receipt by a taxpayer of trust amounts (including property) 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 the beneficiary's assessable income under subsection 99B(1) by so much of that amount as represents, relevantly:

(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 taxpayer being a resident);...

Further, subsection 99C(1) ITAA 1936 provides that in determining for the purposes of section 99B whether any amount has been applied for the benefit of a beneficiary of a trust estate, it is necessary to have regard to all benefits that have accrued at any time to the beneficiary (whether or not the beneficiary had rights at law or in equity in or to those benefits) as a result of the derivation of, or in relation to, that amount, irrespective of the nature or form of the benefits.

Pursuant to subsection 99C(2) ITAA 1936, an amount shall be taken, for the purposes of section 99B, to have been applied for the benefit of a beneficiary, inter alia, if:

c)            the beneficiary has received or become entitled to receive any benefit (including a loan or a repayment, in whole or in part, of a loan, or any other payment of any kind) provided directly or indirectly out of that amount or out of property or money that was available for the purpose by reason of the derivation of the amount; ...

Application to the taxpayer

In the present case, you are the descendent of Person B and therefore are considered a Discretionary Beneficiary having regard to clauses X and XX of Schedule X and clause X of Article Z of the Trust Deed.

Also, you are to receive an amount of US$XX million from Person B. It is noted that the US$XX million has its origins from a distribution made by the Trust to Person B. In this respect, although you will not receive this amount as a direct distribution from the trust, section 99C ensures that amounts you receive indirectly from a trust are also subject to section 99B ITAA 1936.

Therefore, the Commissioner considers that pursuant to subsection 99C(2)(c) ITAA 1936 and for the purpose of section 99B ITAA 1936, property of the Trust will be indirectly applied for your benefit as beneficiary of the Trust. Accordingly, the amounts you are to receive from Person B is to be included in your assessable income under subsection 99B(1) ITAA 1936.

However, the exclusion under subsection 99B(2)(a) ITAA will apply to reduce the aforementioned amounts by so much as it represents the corpus of the Trust.

To apply the reduction in paragraph 99B(2)(a), the particular transaction and circumstances within the trust that led to a payment to, or for the benefit of, a beneficiary needs to be identified. If the amount is identified as representing corpus, a further examination is needed to determine whether it originated from amounts that had they been derived by a resident would be assessable.

Corpus is represented by whatever assets the trustee chooses to hold from time to time, consistent with the terms of the trust. The starting point is to consider the property with which the trust was settled. The corpus can be increased by further contributions or gifts, or by realised gains made such as through the realisation of assets or the capitalisation of accumulated income. To be able to determine whether an amount represents corpus, the assets representing corpus must be identifiable and the amount of corpus must be available and ascertainable when the relevant amount of trust property is paid to the beneficiary.

If an amount represents corpus, the next step is to determine whether any of that corpus is attributable to an amount derived by the trustee that, if it had been derived by a resident taxpayer, would have been included in their assessable income. This includes capitalised income or capital gains on assets representing corpus. An amount representing corpus may represent both corpus from the settlement sum or further contributions and corpus attributable to assessable income.

In your case, the Unaudited Statement of Corpus of the Trust shows that the original settled corpus was approximately US$XX million in the form of debt assets which was provided by Person B.

At the time the Trust made the distribution of US$XX million ("the distribution") to Person B, the corpus of the Trust was approximately US$XX million. It is noted that all income of the Trust is distributed to Person B on an annual basis and the Trust has no accumulated income in the period the distribution was made.

Further, it is noted that the Trustee resolution dated 23 August 20XX confirms that the distribution made to Person B constitutes the full discharge of the partial loan repayment of US$XX million to the Trust by Company F and full discharge of capital distribution entitlement owed by the Trust to Person B.

Therefore, it is considered that the distribution to Person B wholly represents corpus of the trust. Accordingly, the amounts you are to receive from Person B in respect of the distribution from the Trust will be excluded from your assessable income pursuant subsection 99B(2)(a) ITAA 1936.