Private ruling: Distribution from a foreign testamentary trust
Date of advice: 17 January 2018
Published: May 2018
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the distribution from the testamentary trust assessable income? | A1: No

Relevant facts and circumstances: You are a resident of Australia for tax purposes. Your relative (the deceased) lived in another country. You were a beneficiary and executor of the deceased’s estate. The deceased passed away in 20XX. Probate was granted for the estate in 20XX. Costs and specific bequests were disbursed from the estate when probate was granted. The remaining corpus of the estate in 20XX was a specific amount in Australian dollars. A trust was formed in the other country with this amount for the purpose of earning income . Your other relative (life beneficiary) was beneficiary of the income under a life interest bequest in the Will. Tax was paid in the other country on any income earned by the trust. There were two trustees of the trust you an Australian citizen and resident for taxation purposes and another family member who is a citizen and resident for taxation purposes of the other country. The trust is managed and controlled by a law firm in the other country on behalf of the trustees. As trustee you did not make decisions regarding investments in the trust. The life beneficiary passed away in 20XX. In 20XX you were paid an interim amount in Australian dollars to your bank account in Australia from the law firm trust account. Amounts outstanding for legal fees and taxes due from the trust were finalised by the law firm administering the trust in 20XX. You became absolutely entitled to the trust assets as the sole Remainderman at the time all taxes fees and charges were dispersed from the lawyer trust account in 20XX. In 20XX you were paid a final amount in Australian dollars to your bank account in Australia from the law firm trust account. The total amount you received is significantly less than the original corpus of the trust.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 128-10 | Income Tax Assessment Act 1997 Subsection 128-15(3) | Income Tax Assessment Act 1997 Section 115-200 | Income Tax Assessment Act 1936 Section 97 | Income Tax Assessment Act 1936 Subsection 6-10(4) | Income Tax Assessment Act 1936 Section 99B | Income Tax Assessment Act 1997 Division 775-40 | International Tax Agreements Act 1953

Reasons for decision: Summary: There are important considerations that can affect how money from an inheritance is taxed the relevant considerations are discussed in detail below. In summary when your relative died the assets of the deceased estate were sold, you received the payments at the time you became entitled to them and those payments amounted to significantly less than the corpus of the trust. For these reasons CGT, income on trust revenue and Forex do not apply to your circumstances. | Detailed Reasoning - Detailed reasoning: Inheritance is a CGT consideration. | Detailed Reasoning - Capital gain or loss on death: Generally, when a person dies, a capital gain or capital loss form a CGT event happening to a CGT asset the person owned just before death is disregarded. A beneficiary or legal personal representative who is a trustee or executor, entitled to assets of a deceased estate is taken to have acquired the assets on the date the deceased passes away. The assets of their estate can then either pass directly to: ● a beneficiary (or beneficiaries), or ● their legal personal representative who may dispose of the assets or pass them to the beneficiary’s Assets or money received from a capital interest under a deceased estate are not income, unless CGT applies these amounts are not assessable. For Australian resident beneficiaries, the rules are the same, regardless of whether the deceased estate is in Australia or overseas. When your relative died the assets of the deceased estate were sold and the proceeds were used as disbursements under the will. The remaining amount was put into a testamentary trust to earn revenue for the life beneficiary. One Trustee of the testamentary trust is a citizen and resident of another country the other Trustee is you a citizen and resident of Australia. For the purpose of the double tax agreement between Australia and the other country the trust is a resident of both countries. To prevent double taxation the Double Tax Agreement provides the trust will be considered a resident of the State in which its place of effective management is situated. In this case that is the the other country. During the life of the testamentary trust taxes were paid on income in the other country by the law firm that managed and controlled the trust. | Detailed Reasoning - Trust revenue: When a beneficiary becomes absolutely entitled to capital assets of a trust and the capital is invested any revenue derived from the investment is assessable as ordinary income under section 6-5 of the ITAA 1997. As an Australian resident this applies if the income is from a foreign source or not, subject to Subsection 6-10(4) of the ITAA 1997. You became absolutely entitled to the remaining trust assets as sole Remainderman at the time all taxes fees and charges were dispersed from the lawyer trust account in 20XX you receive an amount that was significantly less than the corpus of the trust in 20XX. This amount did not include amounts that would be assessable to you as an Australian resident trustee. | Detailed Reasoning - Foreign exchange gains and losses (Forex): Forex gains or losses from 1 July 2003 are covered by Division 775 of the Income Tax Assessment Act 1997 (ITAA 1997). There are five Forex realisation events under sections 775-40,50 and 60 of the ITAA 1997. As you received the payments at the time you became entitled to them there are no Forex losses or gains to be taken into account. | Detailed Reasoning - Additional information: There are no death duties or inheritance tax in Australia.