Private ruling: Characterisation of foreign entity
Date of advice: 17 December 2025
Published: 9 February 2026
Ruling period: Year ended 31 December 20XX | Year ended 31 December 20XX | Year ended 31 December 20XX | Year ended 31 December 20XX | Year ended 31 December 20XX
Date scheme commenced: 1 January 20XX

Ruling: Q1: Is the trustee of AusTrust subject to tax under subsection 98(4) of the Income Tax Assessment Act 1936 ( ITAA 1936 ) in respect of the share of the net income of AusTrust to which ForeignTrust is presently entitled in an income year? | A1: Yes. | Q2: Will ForeignCo be regarded as a company under subsection 995-1(1) of the Income Tax Assessment Act 1997 ( ITAA 1997 )? | A2: Yes.

Relevant facts and circumstances: Act X 1. ForeignCo was established in accordance with Act X. 2. Act X provides: a. ForeignCo is a juristic person and formed through registration of incorporation. b. Members pay contributions as prescribed by ForeignCo's Articles of Association ( ForeignCo Articles ). c. Members may be disqualified for failing to satisfy membership requirements. d. ForeignCo has a board of representatives and a board of directors. e. The right to receive membership benefits cannot be transferred. f. Capital of ForeignCo is sourced from contributions made by members and government. g. Profits of ForeignCo are accumulated and not used except for compensation for losses and performance of business operations. ForeignCo 3. The ForeignCo Articles provide: a. ForeignCo is a corporation. b. ForeignCo has a separate legal personality from its members and has the power to act, hold property, enter into legal contracts, sue (and be sued) in its own name. c. Principal office of ForeignCo is in Country X (which is not Australia). d. Membership to ForeignCo will be made through application and becomes active on the date of first contribution. e. Members may be disqualified for a number of reasons. 4. ForeignCo exists indefinitely unless dissolved in accordance with rules outlined in the ForeignCo Articles. ForeignTrust 5. ForeignTrust was established in accordance with the ForeignTrust Agreement. 6. A trust in Country X is established by executing a trust agreement between an asset manager and a trustee appointed by the asset manager. 7. AM1 is the asset manager and Bank1 is the trustee of ForeignTrust. AM1 and Bank1 are not residents of Australia for the purposes of subsection 6(1) of the ITAA 1936. 8. ForeignTrust is regulated under Act Y which grants exclusive authority and obligation for the asset manager to make decisions with respect to the day-to-day management and operation of ForeignTrust. In this regard, the Bank1 enters into third-party transactions in accordance with AM1's instructions. The ForeignTrust Agreement regulates the rights and obligations of AM1, Bank1 and investors as beneficiaries of ForeignTrust ( beneficiaries ). 9. ForeignCo holds 100% of the membership interests in ForeignTrust. 10. The ForeignTrust Agreement provides: a. ForeignTrust has a limited term of less than 15 years. b. Beneficial rights of ForeignTrust are divided into units. c. Each beneficiary has equal rights with respect to capital and profits proportionate to the number of units held. d. Bank1 can be replaced as trustee of ForeignTrust without causing ForeignTrust to cease to exist (or to be re-settled). e. A list of the types of property ForeignTrust can invest in. f. Bank1 has a fiduciary duty and must protect the interests of the beneficiaries. g. AM1 and Bank1 are liable for any damages sustained by the beneficiaries resulting from violations of laws and regulations. 11. Under the law of Country X, ForeignTrust does not have a legal personality and cannot be party to any agreements or contracts. Rather, Bank1, as the legal owner of the assets of ForeignTrust, is the contracting party to any contract or agreement. 12. Beneficiaries of ForeignTrust are unable to influence the management of ForeignTrust as this is undertaken by the Bank1 in accordance with the instructions of AM1. 13. Bank1 is in charge of the custody and administration of ForeignTrust's assets and conducts business related acquisitions and dispositions of assets. 14. ForeignTrust is not a body, association, fund or organisation the income of which is exempt from tax by virtue of the operation of Subdivision 50-A or section 51-5, 51-10 or 51-30 of the ITAA 1997 or an organisation the income of which is exempt from tax by virtue of a regulation in force under the International Organisations (Privileges and Immunities) Act 1963 . AusTrust 15. AusTrust is a unit trust established under the AusTrust Deed. 16. AusTrustee is the trustee of AusTrust. 17. AusTrustee is a resident for Australian tax purposes. 18. AusTrust is a resident trust estate for the purposes of section 95(2) of the ITAA 1936. 19. ForeignTrust owns 100% of the units in AusTrust. 20. The AusTrust Deed provides: a. Beneficial interests in AusTrust are divided into units. b. AusTrustee may at any time distribute income or capital to unitholders on a pro rata basis.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 98(4) | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The trustee of AusTrust is subject to tax under subsection 98(4) of the ITAA 1936 in respect of the share of the net income of AusTrust to which ForeignTrust is presently entitled in an income year. | Detailed Reasoning - Detailed reasoning: Liability of Trustee under Section 98 of the ITAA 1936 Section 96 of the ITAA 1936 states: Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate. Subsection 98(2A) of the ITAA 1936 relevantly provides: (2A) If: (a) a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate: (i) 75is a non-resident at the end of the year of income; and (ii) is not, in respect of that share of the income of the trust estate, a beneficiary in the capacity of a trustee of another trust estate; and (iii) is not a beneficiary to whom section 97A applies in relation to the year of income; and (iv) is not a beneficiary to whom subsection 97(3) applies; and (b) the trustee of the trust estate is not assessed and is not liable to pay tax under subsection (1) or (2) in respect of any part of that share of the net income of the trust estate; subsection (3) applies to the trustee in respect of: (c) 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; and (d) so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was not a resident and is also attributable to sources in Australia. Subsection 98(4) of the ITAA 1936 states: (4) If: (a) a beneficiary of a trust estate (the first trust estate) who is presently entitled to a share of the income of the first trust estate: (i) is, in respect of that share of the income of the first trust estate, a beneficiary in the capacity of a trustee of another trust estate; and (ii) is not a beneficiary to whom subsection 97(3) applies; and (b) a trustee of the other trust estate is a non-resident at the end of the year of income; the trustee of the first estate is to be assessed and is liable to pay tax in respect of so much of that share of the net income of the first trust estate as is attributable to sources in Australia at the rate declared by the Parliament for the purposes of this subsection. Accordingly, AusTrustee in its capacity as trustee of AusTrust will be liable to tax under subsection 98(4) of the ITAA 1936 where there is a beneficiary who is: • presently entitled to a share of the income of the trust estate • acting in their capacity as trustee of another trust estate • not covered by the operation of subsection 97(3) of the ITAA 1936 • a non-resident at the end of the income year These requirements are considered below. | Detailed Reasoning - Beneficiary: 'Beneficiary' is not defined in the ITAA 1936 or the ITAA 1997. Lindgren J in Kafataris v DCT [2008] FCA 1454 noted at [42-43]: ...a beneficiary is any person for whose benefit a trust is to be administered and who is entitled to enforce the trustee's obligation to administer the trust according to its terms...The word "beneficiary" reaches beyond a person who has a beneficiary interest in the trust property... Therefore, a beneficiary is a person who benefits from the administration of a trust and is capable of enforcing the trustee's obligation to administer the trust according to its terms. AusTrust is a unit trust. Under the AusTrust Deed, the trustee may at any time distribute income or capital to unitholders for each period. The sole unitholder of AusTrust is Bank1 acting in its capacity as trustee of ForeignTrust. As sole unitholder, it receives the benefits from the administration of AusTrust and is entitled to enforce the trustee's obligation to administer the trust. Therefore, Bank1 acting in its capacity as trustee of ForeignTrust is a beneficiary of AusTrust. | Detailed Reasoning - Present entitlement: The term 'presently entitled' is not defined in the ITAA 1936 or the ITAA 1997. In Harmer & Ors v FCT of T (1991) 173 CLR 264 at 271 the High Court stated: ...a beneficiary is 'presently entitled' to a share of the income of a trust estate if, but only if: (a) the beneficiary has an interest in the income which is vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment. The terms 'vested in interest' and 'vested in possession' both relate to a present right of enjoyment ( Dwight v Commissioner of Taxation (1992) 37 FCR 178, 192). An estate will be vested in interest when there is a present fixed right of future enjoyment, and an estate will be vested in possession when there exists a present right of present enjoyment ( Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490, 496). Consequently, an estate vested in both interest and possession is one in which there is an immediate fixed right of present and future enjoyment. Bank1 as a unitholder of AusTrust will have an absolute, vested and indefeasible interest in distributions and, therefore, will be presently entitled to these amounts. | Detailed Reasoning - Acting in their capacity as trustee of another trust estate: In determining whether Bank1 (as beneficiary of AusTrust) is acting in its capacity as trustee of another trust estate, it must be established whether ForeignTrust is a trust for Australian tax purposes. Jacobs' Law of Trusts Eighth edition defines a trust as: a relation between trustee and beneficiary in respect of certain property...[existing] when the owner of a legal or equitable interest in property is bound by an obligation, recognised by and enforced in equity, to hold that interest for the benefit of others, or for some object or purpose permitted by law. Similarly, Miscellaneous Taxation Ruling MT 2006/1 (MT 2006/1) The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number notes at paragraph [68] that a trust can be described as: An obligation enforceable in equity which rests on a person (the trustee) as owner of some specific property (the trust property) to deal with that property for the benefit of a certain person (the beneficiary) or persons, or for the advancement of certain purposes. MT 2006/1 also states at paragraph [71]: At law, a trust is not a legal person. It is a collection of rights, duties and powers arising from the relationship to property held by the trustee for the benefit of the beneficiaries. The trust itself cannot be a party to legal proceedings nor have other obligations placed upon it. The trustee is the appropriate party. In determining whether ForeignTrust is a trust for Australian taxation purposes, it is necessary to consider its attributes and compare them against the fundamental characteristics of trusts. | Detailed Reasoning - The trustee: Trustee is defined at subsection 6(1) of the ITAA 1936: (1) In this Act, unless the contrary intention appears: ... "trustee" in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes: (a) an executor or administrator, guardian, committee, receiver, or liquidator ; and (b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability; Jacobs' Law of Trusts Eighth edition defines a trustee as: One or more persons who together hold legal or equitable interest in the trust property. A fiduciary relationship exists between the trustee and beneficiaries. This relationship requires the trustee to act honestly and in good faith when serving the interests of the beneficiaries ( Rankine v Rankine [1998] QSC 48). Further, in Austin v Austin (1906) 3 CLR 516 at (525) the court stated: The authorities cited by the late Master of the Rolls I think show that as a general rule a trustee sufficiently discharges [their] duty if [they] take in managing trust affairs all those precautions which an ordinary prudent [person] of business would take in managing similar affairs of [their] own. The ForeignTrust Agreement outlines that the trustee has a fiduciary duty and must protect the interests of the beneficiaries. Therefore, a fiduciary relationship exists between Bank1 and the beneficiaries of ForeignTrust. Additionally, Bank1 is charged with protecting the interests of the beneficiaries which is indicative of it taking precautions which an ordinary prudent person of business would in managing their own similar affairs. Given the above, Bank1 satisfies the role of a trustee. | Detailed Reasoning - The trust property: In Public Curator of Queensland v Union Trustee Co of Australia Ltd (1922) 31 CLR 66 at (75) Higgins J stated: A trust must be associated with property, and rights to property. Further, in Herdegen v Commissioner of Taxation (Cth) (1988) 20 ATR 24 at (29) Gummow J noted: ...in any event, there must be certainty also as to the property bound by the trust Given the above, for a trust to exist, property over which a trust relationship is to exist must be present from inception of the relationship and the property must be sufficiently certain. The ForeignTrust Agreement provides that the trust will be established over a principal amount and outlines the rules by which to calculate the quantum of this principal amount. Further, the ForeignTrust Agreement outlines the property types to which ForeignTrust can invest. Sufficient certainty exists in the identification of this property. Given the above, an initial principal amount of money is provided at the establishment of ForeignTrust ensuring that there is property over which the trust relationship exists from the inception of ForeignTrust. Further, the investment types which ForeignTrust can invest are sufficiently certain. | Detailed Reasoning - The beneficiary: As outlined above, a beneficiary of a trust is a legal person who both benefits from the administration of a trust and who is entitled to enforce the trustee's obligations to administer the trust according to its terms. The ForeignTrust Agreement outlines that the beneficial right to the principal and profits of ForeignTrust is divided into units which have equal rights. As the unitholders derive the benefit from the administration of ForeignTrust and are entitled to enforce the trustee's obligations under the ForeignTrust Agreement, they meet the definition of beneficiary. A Personal Obligation Annexed to the Property In DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW) [1980] 1 NSWLR 510, citing Jacobs' Law of Trusts 3rd ed Hope J.A. stated at [15]: ...the trustee must be under a personal obligation to deal with the trust property for the benefit of the beneficiaries, and this obligation must be annexed to the trust property. This is the equitable obligation proper. It arises from the very nature of a trust and from the origin of the trust in the separation of the common law and equitable jurisdictions in English legal history. The obligation attaches to the trustees in personam , but it is also annexed to the property so that the equitable interest resembles a right in rem . It is not sufficient that the trustee should be under a personal obligation to hold the property for the benefit of another, unless that obligation is annexed to the property. Conversely, it is not sufficient that an obligation should be annexed to property unless the trustee is under the personal obligation. The ForeignTrust Agreement provides that the trustee shall be charged with the custody and administration of ForeignTrust's assets and will conduct business related to the acquisition and disposition of assets. Further the ForeignTrust Agreement states that the trustee has a fiduciary duty and must protect the interests of the beneficiaries. Therefore, a personal obligation applying to Bank1 as trustee exists and this obligation is annexed to the property held by Bank1 for the benefit of the beneficiaries under the ForeignTrust Agreement. | Detailed Reasoning - Consideration of other factors: Other characteristics indicative of ForeignTrust being a trust for Australian taxation purposes include: • ForeignTrust is established under a Trust Agreement. • Under the ForeignTrust Agreement: ­ ForeignTrust is referred to as a trust. ­ ForeignTrust is established for a definite period (being under 15 years). ­ AM1 and Bank1 are liable for breaches of law or the ForeignTrust Agreement. ­ Bank1 can be replaced without causing ForeignTrust to cease to exist (or to be re-settled). • ForeignTrust does not have a legal personality and Bank1 as trustee conducts business and acts as the contracting party for ForeignTrust in accordance with the instructions provided by AM1. | Detailed Reasoning - Conclusion: Therefore, ForeignTrust is both in form and substance a trust for Australian taxation purposes. Consequently, Bank1 is acting in its capacity as trustee of another trust estate. Subject to the operation of subsection 97(3) of the ITAA 1936 Bank1 is not a body, association, fund or organisation the income of which is exempt from tax by virtue of the operation of Subdivision 50-A or section 51-5, 51-10 or 51-30 of the ITAA 1997 nor is it an organisation the income of which is exempt by virtue of a regulation in force under the International Organisations (Privileges and Immunities) Act 1963 . Therefore, Bank1 as beneficiary of AusTrust is not a not a beneficiary to whom subsection 97(3) applies. | Detailed Reasoning - Non-resident: Subsection 6(1) of the ITAA 1936 defines a non-resident as: means a person who is not a resident of Australia. Subsection 6(1) of the ITAA 1936 further provides the definition of resident of Australia with respect to a company: Resident or resident of Australia means : ... (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. Subsection 95(2) of the ITAA 1936 states: (2) For the purposes of this Division, a trust estate shall be taken to be a resident trust estate in relation to a year of income if: (a) a trustee of the trust estate was a resident at any time during the year of income; or (b) the central management and control of the trust estate was in Australia at any time during the year of income. Bank1 is not a resident of Australia and therefore ForeignTrust is not a resident trust estate. | Detailed Reasoning - Conclusion: The trustee of AusTrust will be liable to tax under section 98(4) of the ITAA 1936 in respect of the share of the net income of AusTrust to which Bank1 acting as trustee of ForeignTrust is presently entitled in an income year. | Summary: ForeignCo will be regarded as a company under subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Company is defined in subsection 995-1(1) of the ITAA 1997 as: (a) a body corporate; or (b) any other unincorporated association or body of persons; but does not include a partnership or a non-entity joint venture. | Detailed Reasoning - Body corporate: The term 'body corporate' is not defined in the ITAA 1936 or ITAA 1997. The Macquarie Dictionary defines the term 'corporation' as: An association of individuals, created by law or under authority of law, having a continuous existence irrespective from that of its members, and powers and liabilities distinct from those of its members. MT 2006/1 (at paragraphs 30 to 31) considers the definition of 'body corporate': 30. 'Body corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having a separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contracts, sue and be sued in its own name, just as a natural person can. 31. A body corporate may be created: • By common law, for example a chartered corporation; • By statute, for example a Corporations Act company; or • By registration pursuant to a statute, for example, building societies, credit unions, trade unions and incorporated associations. Accordingly, a 'body corporate', and therefore a 'company' for the purposes of the definition in subsection 995-1(1) includes a corporation which is a body incorporated by statute that: • has a separate legal existence conferred by the appropriate legal authority, • has the ability to continue indefinitely, • has the ability to keep its identity regardless of changes to its membership, and • has the power to act, hold property and enter into legal contracts in its own name, and may sue or be sued. | Detailed Reasoning - Is ForeignCo a body corporate?: In assessing the status of ForeignCo against the four factors outlined above: Separate legal existence Act X establishes that ForeignCo is a juristic person, therefore ForeignCo has a separate legal existence separate from its members. | Detailed Reasoning - Indefinite life: ForeignCo exists indefinitely (regardless of changes in membership). Power to act, hold property, enter into legal contract, sue and be sued ForeignCo has a separate legal personality from its members and has the power to act, hold property, enter into legal contracts, sue (and be sued) in its own name. | Detailed Reasoning - Created by statute: Act X states that ForeignCo shall be incorporated through registration. The ForeignCo Articles state that ForeignCo was established pursuant to Act X. | Detailed Reasoning - Conclusion: Consequently, ForeignCo is a body corporate and satisfies paragraph (a) of the definition of 'company' in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Partnership: Pursuant to the definition of 'company' in subsection 995-1(1) of the ITAA 1997, to be a company, ForeignCo must not be a partnership. Subsection 995-1(1) of the ITAA 1997 defines 'partnership' as: (a) a body of persons (other than a company or limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or; (b) a limited partnership. A 'limited partnership' is defined by subsection 995-1(1) to be: (a) an association of persons (other than a company) carrying on business as partners or in receipt of *ordinary income or *statutory income jointly, where the liability of at least one of those persons is limited; or (b) an association of persons (other than one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a *VCLP, an *ESVCLP, an *AFOF or a *VCMP and to carry on activities that are carried on by a body of that kind. In determining whether the true character of ForeignCo is a partnership or company for Australian taxation purposes, it is necessary to consider what factors favour which characterisation. This approach was taken in ATO Interpretative Decision 2010/27 (ATO ID 2010/27) Classification of a Korean Hapja Hoesa for Australian income tax purposes . The following features incline towards characterisation of ForeignCo as a company, as opposed to a partnership: • Profits are accumulated by ForeignCo, rather than vesting in partners. • ForeignCo was formed by registration of its incorporation. In contrast, a partnership is generally formed under a partnership agreement between partners. • ForeignCo has members rather than partners. • ForeignCo has articles of association, and not a partnership agreement. • ForeignCo has a form of perpetual succession. It will not terminate on the withdrawal of a member, as is the case with a partnership. Instead, it can only be dissolved in accordance with the rules outlined in the ForeignCo Articles. • While membership does not entitle one to vote on the direction of ForeignCo, membership entitles one to vote for representatives in elections for the board of representatives which are then capable of voting on such things. • The business of ForeignCo is carried out by ForeignCo and not by the members in partnership or joint venture. The following features incline towards the characterisation of ForeignCo as a partnership, as opposed to a company: • Members' interests are not freely transferable nor is the right to receive the benefits stemming from membership. • Members can be removed for a number of reasons listed under the ForeignCo Articles. The predominance of characteristics favours classification as a company rather than a partnership. Further, as ForeignCo does not have partners who carry on its business or who receive income jointly, it is not a partnership for the purpose of the definition of 'partnership' or 'company' in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Non-entity joint venture: Pursuant to the definition of 'company' in subsection 995-1(1) of the ITAA 1997, to be a company, ForeignCo must not be a non-entity joint venture. Subsection 995-1(1) defines 'non-entity joint venture' as: an arrangement that the Commissioner is satisfied is a contractual arrangement: (a) under which 2 or more parties undertake an economic activity that is subject to the joint control of the parties; and (b) that is entered into to obtain individual benefits for the parties, in the form of a share of the output of the arrangement rather than joint or collective profits for all the parties. ForeignCo is not a contractual arrangement as it was brought into existence by legislation and is an incorporated juristic person. Activities of ForeignCo are not subject to the joint control of two or more parties. The activities of ForeignCo are controlled by its own representatives. Members receive defined benefits, not a share of the output of a jointly controlled arrangement and any profits are accumulated as reserves rather than distributed. Therefore, ForeignCo does not meet the definition of a non-entity joint venture. | Detailed Reasoning - Conclusion: ForeignCo meets the definition of company contained in subsection 995-1(1) of the ITAA 1997 as it is a body corporate that is neither a partnership nor a non-entity joint venture.

Does Part IVA apply to this private ruling?: Part IVA was not considered as part of this private ruling.