Edited version of private advice

Authorisation Number: 1052258340580

Date of advice: 1 August 2024

Ruling

Subject: Foreign trust distribution

Question 1

Will amounts loaned to the Australian resident beneficiaries of the Trust, sourced solely out of the Trust Corpus and in accordance with the draft loan agreement and draft resolution (in section X in letter dated XX June 20XX) be included in their assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Will the amounts included in the assessable income of the Australian resident beneficiaries under subsection 99B(1) of the ITAA 1936 be wholly reduced under paragraph 99B(2)(a) of the ITAA 1936?

Answer

Yes.

Having regard to the accounting and bookkeeping information of the Trust Fund you have provided, the Commissioner is satisfied that the loan to you will be wholly composed of only the original corpus of the Trust Fund.

On the basis that the loan you receive will only be sourced from Grantor Contributions which represent the original corpus of the Trust Fund, the Commissioner does not consider that any of the loaned sums you receive will be attributable to amounts derived by the Trust which would be included in the assessable income of a hypothetical resident taxpayer.

Question 3

Will amounts distributed to the Australian resident beneficiaries of the Trust, sourced solely out of the Trust Corpus and in accordance with the draft resolution (in section X in letter dated XX June 20XX) be included in their assessable income under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 4

Will the amounts included in the assessable income of the Australian resident beneficiaries under subsection 99B(1) of the ITAA 1936 be wholly reduced under paragraph 99B(2)(a) of the ITAA 1936?

Answer

Yes.

Having regard to the accounting and bookkeeping information of the Trust Fund you have provided, the Commissioner is satisfied that the distribution to you will be wholly composed of only the original corpus of the Trust Fund.

On the basis that the distributions you receive will only be sourced from Grantor Contributions which represent the original corpus of the Trust Fund and not from income earned on those Grantor Contributions, the Commissioner does not consider that any of the distributions of those funds you receive will be attributable to amounts derived by the Trust which would be included in the assessable income of a hypothetical resident taxpayer.

This ruling applies for the following periods:

30 June 2025

The scheme commenced on:

1 July 2024

Relevant facts and circumstances

In month 20XX the Foreign Trust (the Trust) was established. Foreign resident A was the trust settlor and is the parent of: Taxpayer A, Taxpayer B, Foreign resident B and Foreign resident C. Taxpayer A, Taxpayer B, Foreign resident B and Foreign resident C are all potential beneficiaries of the Trust. Foreign resident A as settlor is not and cannot be a beneficiary of the Trust. Foreign resident D is the wife of Foreign resident A and the mother of Taxpayer A, Taxpayer B, Foreign resident B and Foreign resident C.

Foreign resident A, Foreign resident B and Foreign resident C are all tax residents of a foreign jurisdiction and have been since at least 20XX. For the purposes of foreign jurisdiction tax law, the Trust is a 'grantor trust' and Foreign resident A as the settlor is assessed personally and pays foreign tax in respect of all income generated by the Trust. During 20XX Foreign resident D was added as co-trustee of the Trust with Foreign resident C. The Trust has detailed accounting and bookkeeping records to indicate the Grantor Contributions and amounts of Trust Corpus in the form of balance sheets. The Trust Corpus has since been invested across property assets and multiple funds.

The Trustees propose to make loans and distributions to the four children under a Family Agreement. Loans to the Australian resident beneficiaries, Taxpayer A and Taxpayer B, will be sourced from the Trust Corpus. The Trustee resolves to provide the loans and distributions in this way to ensure that each of the four children of Foreign resident A ultimately receive equivalent benefits from the Trust to avoid any potential family discord. As two of the four children are in a foreign jurisdiction, they will not be subject to further tax in that jurisdiction on loans or distributions from the Trust (whether from income or capital) as all the Trust income has been subject to foreign tax at personal tax rates. The foreign tax system recognises that the loans and distributions have been made from previously taxed amounts.

Clause X of the Trust Deed empowers the Trustee "to decide how and in what proportions to credit, charge or apportion any receipts or disbursements between principal and income in accordance with applicable law".

Interest will be charged on the loans. The term of the loans will be X years, however, may be repaid early. The Australian resident beneficiaries did not acquire their interest in the Trust for consideration nor did they transfer any property or services to the Trust.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 subsection 99B(2)

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