Edited version of your written advice

Authorisation Number: 4120041666470

Date of advice: 9 January 2018

Ruling

Subject: Trust - beneficiary

Question 1

Are the distributions from the foreign trust subject to any Australian tax?

Answer:

Yes.

This ruling applies for the following periods

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on

XX/XX/XX

Relevant facts and circumstances

You became an Australian resident in excess of XX years ago.

Your parent died in the foreign country several years ago (the deceased).

The Executors and Trustees appointed by the deceased’s Will were a solicitor and an accountant, both of which were resident of the foreign country.

A Trust was established by the deceased several years before their death for the general purpose of ensuring that the family’s wealth is owned through one coherent ownership vehicle and to ensure that members of the family were able to benefit from the capital and income of the Trust from time to time.

Before their death the deceased and one of their children (your sibling) were the trustees of the Trust.

The deceased’s Will instructed that after payment of debts, funeral expenses, trustees’ administration expenses and any death duty payable on the dutiable estate, the residue of the estate was to be transferred to the Trust.

All the deceased’s children are beneficiaries of the Trust, including yourself.

Clause 5 of the Trust Deed authorises the trustees:

at any time and from time to time pay apply or transfer the whole or any part of the capital of the Trust Fund to or for the benefit of such of the Beneficiaries as may then be living or in existence or such one or more of them to the exclusion of the others or other or them at such times and if more than one in such proportions and in such manner and subject to such terms and conditions as the Trustees shall think fit.

The Trustees were given the power to:

● retain investments

● invest

● sell

● postpone sale

● let

● borrow

● appropriate and partition.

Before their death the deceased prepared a Memorandum of Wishes to the Trustees for the Trust which served as a general instruction or request to the trustees as to the basis on which the Trust’s assets were to be held, applied, divided and distributed, particularly after their death.

● The deceased expressed the wish to continue to occupy one of the trust’s properties for as long as they were able.

With regard to distributions, it was the deceased’s wish that:

● sufficient of the income should be retained and used to meet the ongoing administration costs, taxation and expenses of the Trust;

● approximately one half of the balance of the income in any year should be accumulated and added to and form part of the capital of the Trust fund;

● the remaining one half of the balance of the income is to be distributed to the three trusts the deceased settled for their children with specific percentages recorded, but upon the death of any one of those children to distribute the share of income amongst the children and grandchildren of that deceased child.

The deceased listed a wish that the trustee could provide assistance to any of the deceased’s beneficiaries to meet education costs or costs associated with any sickness or accident and to make any such appropriate payment before the balance is distributed in any year.

It was a further wish that the capital of the Trust (including accumulated income) be retained and preserved in the form of suitable investments until the Vesting Day.

The Trust Deed identified ‘Primary Beneficiaries’ and ‘Eligible Beneficiaries’.

The Trustees have broad discretion as to the distribution of income and capital among or for the benefit of the Beneficiaries.

The Vesting Day was defined as a date in the distant future. On that date the Trustees hold the trust estate on trust for such of the Primary Beneficiaries as are still living in equal shares as tenants in common. If any Primary Beneficiary has died leaving a child, such child will stand in the place of the deceased Primary Beneficiary.

The Trustees have a power to specify an earlier vesting date.

The deceased suffered an illness showing significant impairment to their memory and ability to concentrate. The deceased struggled with common activities.

The deceased and your sibling visited the deceased’s solicitor where they presented the deceased with a Deed of appointment of new trustees of the Trust. They both signed the Deed which appointed the solicitor and the accountant as joint trustees of the Trust, together with the deceased and your sibling.

The deceased and your sibling also signed a Deed of Variation of Trust as did the new trustees in their positions as new trustees of the Trust. The position prior to the variation was that the deceased had the power to appoint and remove trustees and, upon their death, the power would vest either in the remaining trustees, or a person appointed by deed or in the deceased’s Will. If the deceased was unable to or unwilling to exercise the power, then it vested in the trustees for the time being of the Trust.

The effect of the variation was that the Trust now always had to have a qualified solicitor (the so called ‘Solicitor Trustee’) and a qualified accountant (the so called ‘Accountant Trustee’) as trustees.

The deceased’s Will was also prepared by the solicitors and signed at the meeting. This appointed the solicitor and accountant jointly to the power of appointment of trustees of the Trust. The result of the variation was to ‘lock in’ the solicitor and the accountant as trustees of the Trust for as long as it continued to exist.

Neither the deceased nor your sibling received any independent legal advice before signing the Deed of appointment or the Deed of Variation of Trust.

At this meeting the solicitors also prepared and executed an Enduring Power of Attorney (for property and personal care & welfare). It appointed the accountant as the deceased’s power of attorney in relation to property and appointed your sibling the power of attorney in relation to their personal care and welfare.

Within two years of the meeting the deceased was removed as a trustee due to their illness. Upon the deceased’s removal there were now three trustees: the solicitor, the accountant and your sibling. From this date the solicitor (and/or their successor) and the accountant (and/or their successor) had effectively constituted a majority of the Trust that the deceased originally settled to benefit their children.

The Trust Deed provides that at any time where there are two or more trustees, then the decision of 60 percent of the majority was binding.

On average there have been two Trust meetings each year since that meeting took place. These meetings were generally held at the offices of the solicitor or the accountant.

Between that meeting date and for several years after, the Trust made capital distributions to the Primary Beneficiaries. More recently the Trust made capital distributions to the Primary Beneficiaries. These distributions were a ‘profit top-up’.

In addition the Trust made a quarterly distribution to the Primary Beneficiaries.

From the time of the appointment of the solicitor and the accountant as trustees the Trust has incurred significant professional fees which exceed the total distributions to beneficiaries during the same period.

Company A Limited is a company which owns an area of land and associated buildings in the foreign country.

Company A is 100% owned by the Trust and is the primary investment of the Trust.

Prior to the introduction of capital gains tax in Australia Company A purchased the share capital of Company H. The company’s business was sold to a third party. The company was re-named Company Y. It was put into voluntary liquidation soon after.

The deceased had incorporated Company P. This company amalgamated with Company A and ceased to have a separate existence.

The deceased arranged for Company A to purchase the Company I property which became the asset underlying the trust estate.

You received a distribution from the Trust a few years ago and a further distribution during the same financial year. This income has been included in your relevant Australian income tax return as foreign sourced income.

Soon after this distribution your sibling, a trustee of the Trust, filed an Affidavit in support of an originating application for a Beddoe Order. This included details of the management and operation of the Trust and its assets, deterioration of deceased’s mental capacity and removal as trustee.

The assets were recently sold off by public tender on for a significant amount of money.

The trust’s intention is that this will be distributed prior to the end of the current foreign country’s financial year to all the beneficiaries and the trust will then be wound up.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99B

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

Reasons for Decision

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out what amounts are included in a taxpayer's assessable income. It provides that the following amounts are included:

● income according to ordinary concepts; that is, ordinary income (section 6-5 of the ITAA 1997), or

● an amount which is included by a specific provision about assessable income; that is, statutory income (section 6-10 of the ITAA 1997).

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income derived directly or indirectly from all sources during the income year.

Section 10-5 of the ITAA 1997 lists provisions which include statutory income in a taxpayer's assessable income. Included in this list are receipts of trust income not previously subject to tax under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936).

You are an Australian resident who is a beneficiary of the Trust which is a non-resident trust.

The deceased’s Will instructed that after all expenses had been paid, the residue of their estate was to be transferred to the Trust. At this point, the relationship to the deceased estate ended and any distributions received are from the Trust and not the deceased estate. Therefore the benefits of receiving assets from a deceased estate will not apply to your situation.

Ordinary income

Ordinary income has generally been held to include three categories, namely, income from rendering personal service, income from property and income from carrying on a business.

The amounts you have received from the trust are not any of these forms of income. The distribution you are to receive from the sale of the trust’s property will likewise not fall within these categories.

Statutory Income

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident of Australia at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents either:

● the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

● amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

● amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

Therefore, only income accumulated in the Trust and paid to a resident of Australia that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to them under subsection 99B(1) of the ITAA 1936.

In applying the above to your circumstances, any portion of the distributions from the Trust that would normally be assessable in Australia (for example interest or dividends) no matter when they were derived by the Trust is included in your assessable income under subsection 99B(1) of the ITAA 1936.

Under section 99B of the ITAA 1936, if a capital gain had been derived by a resident taxpayer it would be subject to tax, as residents are required to include capital gains or losses from all sources in the calculation of their net capital gain for a year of income. Therefore if a capital gain forms part of the distribution, then it will be assessable under section 99B.

If the Trust had been an Australian resident the 50% capital gains discount would be applicable under section 115-25 of the ITAA 1997 if the assets were acquired by the trust at least 12 months before the CGT event, being the disposal of the property. When this occurs, gains can be reduced by 50%.

Any amounts that represent the corpus, meaning the amount of money or property that is set aside to produce income for the beneficiary, falls within section 99(2)(a) ITAA 1936 and therefore would not be assessable.