Edited version of private advice

Authorisation Number: 1052150258505

Date of advice: 1 March 2024

Ruling

Subject: Foreign deceased estate, restricted inheritance

Issue 1: Distribution from the estate

Question 1

Will you be assessed in Australia on the amount you inherited from your parents living overseas?

Answer

No. Any amount included in your assessable income by subsection 99B(1) will be reduced by the corpus reduction in paragraph 99B(2)(a).

Issue 2: Testamentary trust

Question 2

Will you be taxed on the income from the investments in your personal capacity?

Answer

No. You will not be liable for tax in your personal capacity on income from the investments.

Question 3

Will you as the Trustee of the XYZ Trust be taxed on income from the investments?

Answer

Yes. You in your capacity as Trustee will be taxed on net income to which your sibling is not made presently entitled to in the relevant income year.

This ruling applies for the following period:

1 July 2022 - 30 June 2026

The scheme commenced on:

DD MMMM 20XX

Relevant facts and circumstances

You are an Australian citizen and an Australian resident for tax purposes.

Your parents were residents of Country A for tax purposes.

Your sibling is currently a resident of Country A for tax purposes.

Your parents created a joint Will in Country A before they passed away.

You inherited XXX in a currency A (approximately AUD XXX) from the Will.

After the application of the Country A inheritance tax of 15%, you received a net amount of XXX.

The Will earmarked this amount to be a life interest for your sibling, which upon their death, will then be distributed to you.

The Will requires you to invest this amount in AAA-rated bonds for the benefit of your sibling.

On DD MM 20YY, XXX in currency A was transferred from the estate to a new Country A bank account to be used for the management of inherited amounts. You are the owner of this new Country A account.

On DD MM 20YY, approximately XXX currency A was invested in two Country A bonds.

The bonds are deposited into the Country A account in your name.

Interest income of the bank account and of the acquired bonds are transferred to a bank account in your sibling's name from which payments to your sibling are made according to the Will.

Expenses to third-party advisors to calculate distributions to your sibling as well as any taxes are paid out of the above bank account.

The Will states that necessary calculations of payments shall be made by a specific adviser or, in their absence, by the accounting firm ABC.

The Will states that any excess income from the investment of the capital over the payments allowed under the provisions of the Will are to be added to the capital.

Interest income on the bonds on the Country A bank account as well as capital gains on the bonds are not subject to taxation in Country A.

Assumptions

For Australian tax purposes, the Will settled The XYZ Trust.

Your sibling is the sole beneficiary of the Trust.

You are the sole trustee of the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 95(2)(a)

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subparagraph 99A(2)(i)

Income Tax Assessment Act 1936 subsection 99A(3)

Income Tax Assessment Act 1936 section 99B

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)(a)

Income Tax Assessment Act 1997 section 770-10

Reasons for decision

Issue 1: Distribution from the Estate

Question 1

Will you be assessed in Australia on the XXX you inherited from your parents?

Summary

No. Any amount included in your assessable income by subsection 99B(1) will be reduced by the corpus reduction in paragraph 99B(2)(a).

Detailed reasoning

Taxation of trust distributions

The ATO treats deceased estates as trusts for tax purposes (see QC 49907).

Section 97 of the ITAA 1936 assesses a beneficiary who is made presently entitled to a share of the income of a trust estate and who is not under any legal disability. The provision, however, does not apply to distributions of trust property where it represents trust income of a prior income year.

Section 99B applies to a broader scope of distributions than section 97. Subsection 99B(1) assesses a beneficiary of a trust estate where property of the trust estate is paid to or applied for the benefit of the beneficiary during an income year.

An amount will not be included in a beneficiary's assessable income to the extent that it represents corpus of the trust estate (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) (paragraph 99B(2)(a)).

Application to your circumstances

Subsection 99B(1) will apply to include the XXX you received from the estate in your assessable income. However, the corpus reduction in paragraph 99B(2)(a) will reduce the amount included in your assessable income to zero as the entire amount was corpus of the estate. As a result, you will not be liable to pay tax in Australia on the XXX you received from the estate.

Issue 2: Testamentary trust

Question 2

Will you be taxed on the income from the investments in your personal capacity?

Summary

No. You will not be liable for tax in your personal capacity on income from the investments.

Question 3

Will you be taxed on income from the investments in your capacity as the Trustee of the XYZ Trust?

Summary

Yes. You will be taxed on net income to which your sibling is not made presently entitled to in the relevant income year in your capacity as Trustee. You will not be taxed on net income that your sibling is made presently entitled to in the relevant income year.

Detailed reasoning

Section 99 and 99A of the ITAA 1936 apply to assess trustees on net income to which no beneficiary is presently entitled and is retained by the trustee.

Section 99A assesses the trustee on the undistributed net income of the trust at the highest marginal tax rate for resident individuals. In contrast, section 99 assesses the trustee on the net income as if it was a resident individual without deductions.

Subparagraph 99A(2)(i) gives the Commissioner discretion to assess the trustee of a trust that resulted from a will under section 99 in respect of an income year, rather than section 99A.

This discretion will be exercised if, on considering the matters in subsection 99A(3) in respect of the relevant income year, the Commissioner is of the opinion that it would be unreasonable for section 99A to apply in relation to the estate in relation to that income year. The matters to be considered include:

•                    the manner and price at which the trust acquired its assets;

•                    whether any special rights or privileges are attached to, or conferred on or in relation to, the trust property; and

•                    such other matters as the Commissioner thinks fit.

If during the income year the assets of the trust are increased by, for example, granting of special rights or privileges to the trust, the transfer of the property to it, or the making of loans, the Commissioner may refuse to exercise the discretion. The Commissioner will generally exercise the discretion under subsection 99A(2) where the trust's assets come directly from the assets of the deceased.

In determining the weight to be given to the matters described in subsection 99A(3) of the ITAA 1936, Windeyer J stated in Giris Pty Ltd v. FC of T (1969) 119 CLR 365 that:

'The Commissioner is to ask himself whether it would be unreasonable that section 99A of the ITAA should apply to any particular trust estate. ... That purpose I take it is to enable the Commissioner to keep s. 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose.'

Application to circumstances

As stated at the beginning of this ruling, the Commissioner assumes, for Australian tax purposes, the creation of The XYZ Trust under the Will of which you are the trustee.

The XYZ Trust is an Australian resident trust as you, the trustee, are an Australian resident (paragraph 95(2)(a) ITAA 1936).

The Will outlines your sibling's expenses to be covered by their life interest. It also states that excess income yielded by the investments not necessary to cover your sibling's expenses are to be added to the entailed assets under the Will.

In your capacity as Trustee, you will be liable under section 99 or 99A to pay tax on the net income of the trust not distributed to your sibling in relation to that year of income.

The XYZ Trust was established (for Australian tax purposes) by the Will of your parents following their deaths. The assets of the Trust consist of cash from the estate as well as bonds purchased as instructed by the Will. There have been no assets added to, benefits conferred on, or amounts borrowed or lent by the Trust since that time.

The Commissioner is of the opinion that it would be unreasonable to apply the special rate of tax under section 99A to the net income to which no beneficiary is presently entitled. Accordingly, the Commissioner will exercise his discretion under subsection 99A(2) and assess you in your capacity Trustee under section 99 on any undistributed net income of the Trust for the relevant income year.

Person A in their capacity as Trustee will not be entitled to any foreign income tax offsets (FITO) under section 770-10 of the ITAA 1997 as the Trust is not liable for any income tax in Country A.