Edited version of private advice

Authorisation Number: 1052251302902

Date of advice: 16 May 2024

Ruling

Subject: Temporary resident

Question 1

Are A and B both temporary residents for Australian tax purposes under subsection 995-1(1) of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Will A and B be assessed on the capital distribution from the Trust that is attributable to a source outside Australia?

Answer

No.

This ruling applies for the following period:

20XX income year

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

Both A and B may receive capitalised distributions from an overseas Trust (the Trust), comprising of Trust capital derived from both, income generated by the Trust over several years as well as the original corpus.

A was born in, and is a citizen only of country Q.

B was born in, and a citizen of country R.

B is also a citizen of Country S.

B currently only holds a Country S passport.

A and B first resided in Australia on XX XX 20XX.

Australian visa and movement records for A and B from the Department of Home Affairs.

On each Australian arrival, B enters on the Country S passport.

A currently holds another visa and remained in Australia when on Bridging visas.

A and B are not citizens of, or permanent residents of Australia.

A and B have not been charged or convicted of a crime, removed or deported from Australia or any other country.

Neither A nor B have had tuberculosis.

You both own property in Australia and are considering making your relocation to Australia permanent.

The Trust

The Trust is a discretionary Trust that was settled by A and B in Country S a number of years ago.

A and B are discretionary beneficiaries of the Trust.

There is no corporate Trustee of the Trust.

The current Trustees of the Trust are tax residents of Country S.

The current Trustees of the Trust are not Australian tax residents.

All of the Trust's advisers (accountants, lawyers, and investment advisers) are located in Country S.

The Trust's central management and control is in Country S, not Australia, and:

•         circumstances do not exist that require the Trustees to consult with the Settlors for major investment decisions. The Trustees do remain aware of the needs of the beneficiaries and investment decisions are made having due regard to the Trustees obligations as to the beneficiaries.

•         the Trustees manage the investments on a day-to-day basis keeping aware of maturity dates of term deposits and the performance of the managed funds. The Trustees prepare the annual financial statements for the Trust on a timely basis and file the income tax return In Country S.

•         the trustees meetings are held in Country S usually by telephone conversations and the exchange of emails. The Trustees are both located in the greater city area.

•         the effective management of the Trust is carried out in Country S by the Trustees.

The Trust has no bank accounts in Australia., only a bank account in Country S.

The property of the Trust comprises of a Savings Account, Term Deposit, Investment and Property Funds and Shares in Country S.

The Trust has derived income from the following sources:

•         Interest from bank accounts

•         Interest, Dividends, Capital Gains, Foreign Income from investments

•         Dividends.

The property of the Trust has never included Australian real property or other Australian assets with the exception of Australian equities through the Investment Funds.

All the Trust's other income has been accumulated by the trustees, such that it forms part of the capital of the Trust.

The Trust is based in Country S that has been subject to and paid income tax in Country S on all its taxable income each financial year.

Assumption

Your circumstances (as set out above) relating to your status as a resident, and a temporary resident, as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997, will remain the same for the entire income year ended 30 June 20XX.

The decision makers for the Trust will remain the same for the entire year ended 30 June 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 95(2)

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

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

Income Tax Assessment Act 1936 section 97

Income Tax Assessment Act 1936 section 98

Income Tax Assessment Act 1936 section 99

Income Tax Assessment Act 1936 section 99A

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

Income Tax Assessment Act 1936 subsection 99B(2A)

Income Tax Assessment Act 1936 subsection 99B(3)

Income Tax Assessment Act 1936 section 99C

Income Tax Assessment Act 1936 section 102AAZD

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

Income Tax Assessment Act 1997 section 768-910

Income Tax Assessment Act 1997 paragraph 768-910(1)(b)

Income Tax Assessment Act 1997 subsection 768-910(2)

Income Tax Assessment Act 1997 subsection 768-910(3)

Income Tax Assessment Act 1997 former subsection 768-910(5)

Income Tax Assessment Act 1997 section 802-17

Income Tax Assessment Act 1997 subsection 995-1(1)

Migration Act 1958 section 5

Migration Act 1958 subsection 30(2)

Migration Act 1958 section 32

Migration Act 1958 paragraph 32(2)(a)

Migration Act 1958 subparagraph 32(2)(a)(i)

Migration Act 1958 subsection 32(3)

Migration Regulations 1994 regulation 5.15

Migration Regulations 1994 regulation 5.16

Social Security Act 1991 subsection 7(2)

Social Security Act 1991 subsection (2A)

Social Security Act 1991 subsection (2B)

Social Security Act 1991 subsection (2C)

Social Security Act 1991 subsection (2D)

Reasons for decision

Issue 1 - Temporary resident

A person can only be a temporary resident if they are a resident of Australia for taxation purposes. It is confirmed that A and B are residents of Australia for taxation purposes as declared in their tax returns from 1 July 2008.

Subsection 995-1(1) of the ITAA 1997 defines a 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.

We now consider each criterion to determine if you are a temporary resident.

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

A and B 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 (SCV) holder who is a protected SCV holder

A and B satisfy this criteria on the basis that neither of you satisfy the particulars in paragraph 7(2)(b).

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

This criterion is satisfied as both A and B satisfied criteria (b).

(d) If you have been an Australian resident for taxation purposes and you have satisfied conditions (a), (b) and (c) on and from 6 April 2006

Both A and B have been Australian residents for taxation purposes since XX XX 20XX, it is necessary to consider whether each of you have satisfied conditions (a), (b) and (c) of section 995-1 of the ITAA 1997 on and from 6 April 2006.

Conclusion

A and B satisfy conditions (a), (b), (c) and (d) and are temporary residents as defined in subsection 995-1(1) of the ITAA 1997.

Issue 2 - Receipt of trust income not previously subject to tax, the application of the temporary resident provisions and the tax residency of the Trust

Receipt of Trust income not previously subject to tax

Subsection 99B(1) of the ITAA 1936 states:

Where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount.

Subsection 99B(2):

The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of the trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents:

(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;

(c) an amount:

(i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97; or

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; or

(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.

Subsection 99B(2A):

An amount that is not included in a beneficiary's assessable income because of paragraph (2)(d) or (e) is not assessable income and is not exempt income.

Subsection 99B(3) states:

In paragraphs (2)(d) and (e):

company means a company other than a company in the capacity of a trustee.

A, and B's circumstances relating to your status as an Australian resident for tax purposes will remain the same for the entire 2024 income year.

Subsection 99B(1) of the ITAA 1936 ensures any distributions of trust property to a beneficiary are assessable income and therefore subject to income tax if that beneficiary has been a resident at any time during the income year. This is unless they are specifically reduced by subsection 99B(2). Therefore, at first instance, the effect of subsection 99B(1) would be to treat as assessable income any distributions that involve the payment of money, including:

•         distributions of income of the current year

•         distributions of income of a prior year

•         distributions of capital of any kind.

As highlighted by the meaning of 'distributions of trust property' in section 99C of the ITAA 1936, section 99B of the ITAA 1936 is to apply broadly. Therefore, at first instance, disregarding subsection 99B(2), it would include the distributions that the Trust is proposing to make to the taxpayer.

Paragraph 99B(2)(a) reduces the amount included in a taxpayer's assessable income by amounts that represent 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).

The Trust is a Country S trust that has been treated as a non-resident trust for taxation purposes for the 20XX and earlier income years. The distributions that you will receive are 'capitalised distributions' which are composed of income that has been generated by the trust in the 20XX and earlier income years as well as the original corpus.

The capitalised distributions will be included in your assessable income in the income year in which they are distributed to you under subsection 99B(1). Paragraph 99B(2)(a) will reduce the amount included in your assessable income by value of the corpus you received from the Trust. This is the case unless you are otherwise exempted by the temporary residents' provisions.

Application of the temporary resident provisions

Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt (NANE) income then it is not assessable income. Therefore, if section 768-910 of the ITAA 1997 applies to make the capitalised trust distributions NANE income then they will not be assessable income of the taxpayer.

Section 768-910 of the ITAA 1997 states:

(1) The following are *non-assessable non-exempt income:

(a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source if you are a *temporary resident when you derive it;

(b) your *statutory income (other than a *net capital gain) from a source other than an Australian source if you are a temporary resident when you derive it.

This subsection has effect subject to subsections (3) and (5).

Note: A capital gain or loss you make may be disregarded under section 768-915.

(2) For the purposes of paragraph (1)(b):

(a) if you have statutory income because a particular circumstance occurs, you derive the statutory income at the time when the circumstance occurs; and

(b) if you have statutory income because a number of circumstances occur, you derive the statutory income at the time when the last of those circumstances occurs.

Exception to subsection (1)

(3) However, the following are not *non-assessable non-exempt income under subsection (1):

(a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while you are a *temporary resident;

(b) your *statutory income (other than a *net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while you are a temporary resident;

(c) an amount included in your assessable income under Division 86.

Note: This subsection only makes an amount not non-assessable non-exempt income under subsection (1). It does not prevent that amount from being non-assessable non-exempt income under some other provision of this Act or the Income Tax Assessment Act 1936.

The exceptions in subsections 768-910(3) and (5) do not apply to your case as:

•         Your income concerns capitalised trust distributions and as such is not employment or employment related income or alienated personal services income.

•         the former Subsection 768-910(5) of the ITAA 1997 was repealed by Tax Laws Amendment (2009 Budget Measures No. 2) Act 2009 and therefore does not have application to the years under consideration for this private ruling.

The capitalised distributions the Trust will distribute to both A and B are ordinarily assessable income under section 99B of the ITAA 1936 as stated above. As they are statutory income it is necessary to consider the application of section 768-910 of the ITAA 1997, specifically paragraph 768-910(1)(b).

Subsection 768-910(2) of the ITAA 1997 provides that statutory income is taken to be derived when the circumstance occurs. For income to which section 99B of the ITAA 1936 applies, that is the time at which the distribution is made because that is when the benefit is made to the beneficiary. This is also the time at which source of that income, that is whether it is Australian or foreign sourced income, for the purposes of assessability is determined.

The capitalised distributions are composed of trust income earned in past years that has been accumulated, but not distributed to any beneficiary as well as original corpus. As the capitalised distributions are capital of the Trust, they will take on the same character as the trust itself, that is:

•         if the trust is a resident for taxation purposes in Australia, they will be Australian sourced, and

•         if the trust is a foreign resident, then they will be foreign sourced distributions.

Residency of the Trust under Australian domestic law

A trust estate is a resident trust estate for an income year within the meaning of subsection 95(2) of the ITAA 1936 if:

a)    a trustee of the trust estate was a resident at any time during the year of income, or

b)    the central management and control of the trust estate was in Australia at any time during the income year.

Taxation Ruling TR 2018/5 Income tax: central management and control tests of residency contains the Commissioner's view on of the central management and control test of company residency following Bywater Investments Ltd & Others v. FC of T; Hua Wang Bank Berhard v. FC of T [2016] HCA 45 (the Bywater Case).

The considerations of central management and control in both the joint decisions of French CJ, Kiefel, Bell and Nettle JJ in the Bywater Case and the subsequent explanations provided in TR 2018/5 can be applied in this case.

Considering the information contained in the facts:

•         paragraph 95(2)(a) of the ITAA 1936 is not satisfied as the trustees permanently reside in Country S and they are residents of Country S for tax purposes and not Australian tax residents, and

•         paragraph 95(2)(b) is also not satisfied as the central management and control of the Trust is based in Country S not Australia. This because the Trustee is responsible for the following without the involvement of either of you, such as:

o   making major investment decisions,

o   managing investments on a day to day basis.

o   preparing financial statements and lodgment of the Trust's income tax returns, and

o   holding Trustee meetings.

Therefore, the Trust is:

•         not a resident of Australia under the domestic law, and

•         is only a resident of Country S for taxation purposes.

As such, the Trust is a non-resident trust for Australian taxation purposes for the 20XX and earlier income years.

The intended capital distribution to A and B in the 20XX income year will be NANE and not be assessable in the 20XX income year as you both satisfy the of temporary resident requirements as defined in subsection 995-1(1) of the ITAA 1997.