Private ruling: Foreign income paid to a temporary resident
Date of advice: 13 December 2017
Published: May 2018
Ruling period: Financial year ending 30 June 2018 | Financial year ending 30 June 2019 | Financial year ending 30 June 2020 | Financial year ending 30 June 2021
Date scheme commenced: 1 July 2017

Ruling: Question and Answer | Are amounts of capital distributions from a foreign trust included in your assessable income whilst you are a temporary resident for tax purposes? | No

Relevant facts and circumstances: Personal circumstances You were born in the foreign country where the trust is located You are a citizen of the foreign country where the trust is located You hold a Temporary Visa Your spouse also is born and is a citizen of the same foreign country as you. Your spouse has the same Temporary Visa as you. Your spouse and you will not change your visa status; therefore you will not become permanent residents of Australia or become Australian citizens in the future. You were not in Australia on 26 February 2001 or for periods totalling 12 months during the two years immediately before that date You have never been granted social security payments. You commenced your tax residence in Australia in after retiring from being a trustee. The Trust The Trust is a discretionary trust that was established overseas You are an appointor of the Trust. You retired as a trustee in 201X The Trustees of the Trust are currently a resident of where the Trust is located and a company with is central management and control in that same location. Your spouse and you are the primary beneficiaries of the Trust The capital of the Trust includes real property in the locale of the Trust. The Trustee has accumulated rental income derived from the real property. If the real property is sold, the trustees will accumulate any capital gain. You have gifted funds into the Trust

Relevant legislative provisions: Section 6-5 of the Income Tax Assessment Act 1997 | Section 6-10 of the Income Tax Assessment Act 1997 | Section 768-910 of the Income Tax Assessment Act 1997 | Section 768-915 of the Income Tax Assessment Act 1997 | Section 99B of the Income Tax Assessment Act 1936

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. | Detailed Reasoning - Temporary 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 in the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006. Paragraph 1.23 explains: 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. To be eligible for the temporary resident exemptions, a person must be a "temporary resident”, i.e a person who satisfies three tests. The person: 1. must hold a temporary visa granted under the Migration Act 1958 2. must not be an Australian resident within the meaning of the Social Security Act 1991 , and 3. must not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991. You meet the requirements of a temporary resident. | Detailed Reasoning - Payments from a Trust: Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary. However, subsection 99B(1) of the ITAA 1936 is qualified by subsection 99B(2) of the ITAA 1936 which broadly reduces the amount included in the assessable income of the beneficiary to the extent that it represents: ● corpus of the trust estate - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer ● an amount that would not have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer ● an amount that is or has been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 ● an amount that has been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, or ● an amount that has been included in the assessable income of a taxpayer under Division 6AAA of Part III of the ITAA 1936. As the amounts paid from the trust are specifically exempt by the temporary resident provisions, subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income, therefore section 99B of the ITAA 1936 will not apply. The capital distributions from the Trust are not included in your assessable income.