ATO ID 2007/108: Residency: foreign trust income - temporary resident
Date of decision: 19 April 2007
Year of income: Year ended 30 June 2007
Business line: International Centre of Expertise

Issue
Is the receipt by a temporary resident of Australian sourced income distributed from a trust estate resident in the United Kingdom (UK) to be included in the temporary resident's assessable income?

Decision
Yes. The receipt by a temporary resident of Australian sourced income distributed from a trust estate resident in the UK is to be included in the temporary resident's assessable income.

Facts
The taxpayer is a resident of Australia for the purposes of Australian tax and for the purposes of the Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (Canberra, 21 August 2003) - [2003] ATS 22 (the UK convention). The taxpayer is also a 'temporary resident' of Australia as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The taxpayer is a life tenant and sole income beneficiary of a UK resident trust estate created under a will. The taxpayer is presently entitled to a share of trust income and is not under any legal disability. The UK resident trust receives Australian sourced income, which it in turn distributes to the taxpayer after the deduction of relevant expenses. The Australian sourced income is interest income.

Reasons for decision
Summary: Sections 6-5(2) and 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary or statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 10-5 of the ITAA 1997 lists the provisions in respect of statutory income. Relevantly included in this list is section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that where a beneficiary of a trust estate is presently entitled to a share of the net income of the trust estate, the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident. Subdivision 768-R of the ITAA 1997 provides an exemption for most foreign income derived by temporary residents of Australia. The exemption for temporary residents is succinctly explained by the following references to the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006. Paragraph 1.23 explains as follows: This Bill makes ordinary income derived from a foreign source during the period the taxpayer is a temporary resident non-assessable non-exempt income. This measure also applies to all statutory income that has a source other than Australia, including amounts otherwise attributable from a foreign company or a foreign trust, on which the taxpayer would otherwise be taxed. This extends to amounts derived through partnerships and trusts but not to amounts derived by other taxable entities (e.g., not where a trustee is taxable under section 99 or 99A of the Income Tax Assessment Act 1936 (ITAA 1936)). There is no exemption for Australian source income. Specifically, section 768-910 of the ITAA 1997 provides that statutory income derived by a temporary resident from a foreign source (other than a net capital gain which is covered by section 768-915 of the ITAA 1997) is non-assessable non-exempt income and therefore not subject to tax. Section 6B(2) of the ITAA 1936 deems an amount of income derived by a person as a beneficiary in a trust estate to be income attributable to interest income if the amount can be attributed directly or indirectly to interest income. Further, subsection 6B(2A) of the ITAA 1936 deems income to be derived from a particular source if it is attributable by virtue of subsection 6B(2) to interest income derived from that source, in this instance Australia. Accordingly, for Australian tax purposes, the distribution consisting of income that is attributable to Australian sourced interest income retains its character as Australian sourced interest income when it is distributed to the taxpayer. It follows that the distribution of Australian sourced income by the UK trust to the taxpayer remains assessable income of the taxpayer. However given the income is derived through a UK resident trust it is necessary to consider whether Australia's taxing rights are restricted by the application of the UK convention. Article 11 of the UK convention deals with interest arising in one Contracting State that is beneficially owned by a resident of the other Contracting State. In this instance the trust income consists of interest arising in Australia. Further, the taxpayer is the beneficial owner of that interest because they are the sole income beneficiary of the trust and are presently entitled to the trust income. Given the taxpayer is also a resident of Australia for the purposes of the UK convention, the beneficial owner of the interest income is a resident of the same Contracting State as that in which the interest arises. Therefore, Article 11 of the UK convention does not deal with the interest income in this case. Article 20 of the UK convention covers income that is not dealt with in the foregoing Articles of the convention. Article 20.1 provides that such income, wherever arising, that is beneficially owned by a resident of a Contracting States shall be taxable only in that State. Therefore, in this case Article 20 allocates Australia the sole taxing right over the trust income beneficially owned by the taxpayer. In summary, the taxpayer's share of the UK trust income that is attributable to Australian sources will constitute assessable income pursuant to section 6-10 of the ITAA 1997 because the 'temporary resident exemption' provided by section 768-910 of the ITAA 1997 does not apply to Australian sourced income.

Legislative references: Income Tax Assessment Act 1936 subsection 6B(2) subsection 6B(2A) section 96B section 96C section 97 section 97(1)
Related ATO interpretative decisions: ATOID 2006/161
Other references: Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 UK convention [2003] ATS 22 UK convention [2003] ATS 22, Article 11 UK convention [2003] ATS 22, Article 20
Subject references: Double tax agreements Foreign source income Foreign trust measures International tax Temporary resident Treaties Trust distributions United Kingdom