Private ruling: Income - foreign trust distribution
Published: November 2011
Ruling period: Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015
Date scheme commenced: 1 July 2010

Ruling: Q1: Will you be assessable on the distribution received from a foreign discretionary trust? | A1:  | Q2: Are you entitled to the capital gains tax discount on the distribution received? | A2: 

Relevant facts and circumstances: You are an Australian resident. You are a beneficiary of a discretionary trust resident in Country A. No Australian resident taxpayer has made transfers of property or services to the trust. The investment activities of the foreign discretionary trust comprise investing in equities. Trustee was also a non resident of Australia. Shares were bought by the foreign discretionary trust after September 1985 in a Country A Investment company which held shares in Country B companies. The shares in a Country A Investment company were sold by the foreign discretionary trsut after being held for more than twelve months. You are named as a capital beneficiary in the trust deed. The trustee is likely to make distributions to you in cash out of the trust corpus being capital gains from the sale of shares.

Relevant legislative provisions: Subsection 99B(1) of the Income Tax Assessment Act 1936 | Subsection 99B(2) of the Income Tax Assessment Act 1936 | Section 8AAD of the Taxation Administration Act 1953 | Subsection 104-70(1) of the Income Tax Assessment Act 1997 | Subsection 104-75(1) of Income Tax Assessment Act 1997 | Subsection 104-75(4) of the Income Tax Assessment Act 1997 | Paragraph 104-75(6)(a) of the Income Tax Assessment Act 1997 | Paragraph 104-75(6)(b) of the Income Tax Assessment Act 1997

Reasons for decision: Detailed Reasoning - Trust corpus distribution: Subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that 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: (a) corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer; (b) amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; (c) amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936; or (d) amounts included in assessable income under section 102AAZD of the ITAA 1936. You have received a distribution of corpus from the foreign discretionary trust being the capital gain from the sale of shares in a Country A Investment company. However, if the capital gain had been derived by a resident taxpayer it would be subject to tax, as residents are required to include capital gains or capital losses from all sources in the calculation of their net capital gain for a year of income. Accordingly section 99B of the ITAA 1936 will apply to include the distribution of corpus in your assessable income. | Detailed Reasoning - Capital gains tax discount: A capital gain or loss can only be derived if a CGT event occurs An assessable capital gain can be reduced by the CGT Discount. Accordingly, if no CGT event occurs you are not entitled to a CGT discount. CGT event E4 happens if the trustee of a trust makes a payment to a taxpayer in respect of the taxpayer's interest in the trust where some or all of the payment is not assessable to the taxpayer subsection 104-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997). In your case subsection 99B(2) of the ITAA 1936 will apply to include the distribution of corpus in your assessable income. Also a discretionary beneficiary does not have an interest in a trust (other than a right to be considered for a distribution Taxation Determination TD 2003/28) CGT event E4 accordingly does not apply in your case. CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee [ignoring any legal disability (subsection 104-75(1) of the ITAA 1997)]. The event applies to both the trustee and the beneficiary. CGT event E5 does not happen if: · the trust is a unit trust or a trust to which Division 128 of the ITAA 1997 applies (assets of a deceased person devolving to the legal personal representative or passing to a beneficiary); · the asset to which the beneficiary becomes absolutely entitled was acquired before 20 September 1985 (subsection 104-75(4) of the ITAA 1997) or if the beneficiary's interest in the trust was acquired before that date (paragraph 104-75(6)(b) of the ITAA 1997); · the beneficiary acquired the interest for no expenditure (even if the interest was acquired on or after 20 September 1985), provided it was not by way of assignment from another entity (subsection 104-75(6)(a) of the ITAA 1997) . Note that expenditure can include giving property and · the trust is an employee share trust and the distribution is made as part of an employee share scheme arrangement: The foreign discretionary trust is not a unit trust or a deceased estate or an employee share trust The asset was acquired by the trust after 20 September 1985 You did not acquire your interest in the trust for any expenditure and the interest was not assigned from another entity so CGT event E5 accordingly does not apply in your case. As no capital gains tax event has occurred you are not eligible for any CGT discount. | Detailed Reasoning - Section 99B interest charge: If you are an Australian resident beneficiary of a non-resident trust estate and section 99B includes a distribution of accumulated income from the non-resident trust estate in your assessable income, you may be liable to pay additional tax in the nature of an interest charge on the distribution. The interest charge may apply to a distribution of profits from a non-resident trust estate to the extent the distribution was made from profits that: · are referable to eligible designated concession income derived in an income year when the trust was a resident of a listed country, or · were not subject to tax in a listed country and were derived in an income year when the trust was a resident of an unlisted country. | Detailed Reasoning - Working out the amount of the interest charge: The amount on which interest is payable is worked out using the following formula: Amount on which interest is payable = (distributed amount x applicable rate of tax) _ foreign income tax offset | Detailed Reasoning - Distributed amount: The distributed amount is the amount of the distribution that is included in your assessable income under section 99B. This amount is grossed up for any foreign tax you can claim on that share. | Detailed Reasoning - Applicable rate of tax: For a taxpayer other than a company, the applicable rate of tax is the maximum marginal rate that applies for the income year of the taxpayer in which the trust distribution is received. The maximum rate would apply irrespective of the actual marginal rate of tax applicable to the taxpayer. | Detailed Reasoning - Foreign income tax offset: The foreign income tax offset is the amount you can claim for foreign income tax paid on an amount included in your assessable income for the distribution made by the non-resident trust. The interest charge accrues as follows: Where the trust distribution is paid out of trust income accumulated by the non-resident trust estate in the 1990-91 or a subsequent income year, the charge will accrue from the start of the beneficiary's next income year (that is, the income year first following the income year of the trust estate for which the income would have been included in the assessable income of the trust if the trust had been a resident trust estate). The interest charge will cease to accrue on the last day of the income year in which the distributed amount is included in the assessable income of the beneficiary. | Detailed Reasoning - What interest rate applies?: The rate of interest that applies from 14 September 2006 is the applicable rate under section 8AAD of the Taxation Administration Act 1953 . The applicable rate of interest prior to 14 September 2006 is: · from 1 July 1999 until 14 September 2006 the rate applying under section 214A of the ITAA 1936 · from 1 July 1994 until 30 June 1999 the rate applying under section 214A of the ITAA 1936 less four (4) percentage points · before 1 July 1994 the rate applying under section 10 of the Taxation (Interest on overpayments) Act 1983.

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