Private ruling: Residency and income
Date of advice: 15 March 2019
Published: May 2019
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021
Date scheme commenced: 1 July 2017

Ruling: Q1: Are you a temporary resident of Australia for taxation purposes? | A1: Yes | Q2: Does 99B of the Income Tax Assessment Act 1936 (ITAA1936) apply to you if you receive capital distributions from the Trust? | A2: No

Relevant facts and circumstances: You were born in Country Y. You are a citizen of Country Y. You are not a citizen of Australia. You are not a permanent resident of Australia. You do not intend on becoming a citizen or permanent resident of Australia. You hold a country Y passport. You enter Australia on your Country Y passport. You arrived in Australia in the 20XX tax year with the intention of living in Australia. You live in a house you own in Australia. You and your spouse have divorced. You and your spouse are not residents of Australia for the purposes of the Social Security Act . You are entitled to receive capital distributions from two Country Y based discretionary Trusts. Trust 1 was established in country Y in 20XX and Trust 2 was established in Country Y in 1994. The trustees for both Trusts are you and your parent, along with your parents’ former spouse. The discretionary beneficiaries are you, your parent and your parents’ former spouse. The property of Trust 1 comprises: ● A house located in country Y which your parent lives in when they are in Country Y ● A residential rental property on which there are two dwellings located in country Y ● Three commercial properties located in country Y ● An interest in a partnership that owns part of a commercial property located in Country Y Trust 2 previously comprised a commercial property in country Y which was sold. The Trust’s only assets are cash, mainly from the sale of the property. The Trusts have never owned any Australian property. Both Trusts have derived income from the following sources: ● Rental income derived from the Country Y real property both directly and indirectly through the partnership. ● Interest from country Y bank accounts. The income from the Trusts is generally distributed to the beneficiaries in the year it is derived. You have not received a distribution from either Trust in the 20XX or the 20XX Country Y tax years. Trust 1 had no net income to distribute to the beneficiaries in the 20XX and 20XX Country Y tax years. Your parents’ former spouse is a resident of Country Y. All of the high level decisions about the Trusts for example regarding the overall direction of the Trusts activities and the kinds of transactions they will enter are made in country Y by your parents’ former spouse. All major investment decisions are made in Country Y by your parents’ former spouse with no input from you or your parent. All decisions are implemented in Country Y. Your parents’ former spouse makes decisions on what to do with the rental income received from the properties, decisions to keep or buy and sell properties, decisions in relation to the identity of the tenants and the terms and conditions of the tenancy agreements and appointing advisors including accountants, lawyers and real estate agents. Resolutions are drawn up in Country Y by your parents’ former spouse and the Country Y accountants.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 99B | Income Tax Assessment Act 1997 Section 768-910. | Income Tax Assessment Act 1997 Section 768-915.

Reasons for decision: Detailed Reasoning - Temporary residency: You are a temporary resident if you: ● hold a temporary visa granted under the Migration Act 1958 ● are not an Australian resident within the meaning of the Social Security Act 1991, and ● do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991. The Social Security Act 1991 defines an Australian resident as a person who resides in Australia and is an Australian citizen, the holder of a permanent visa, or a protected special category visa holder. In your case, you are not an Australian resident within the meaning of the Social Security Act 1991 as you are not an Australian citizen, the holder of a permanent visa, or a protected special category visa holder. In your case you are a temporary resident because: ● you hold a temporary visa granted under the Migration Act 1958 ● you are not an Australian resident within the meaning of the Social Security Act 1991, and ● You do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991. | Detailed Reasoning - Residency of Trust 1 and 2: Under subsection 95(2) of the Income Tax Assessment Act 1936 (ITAA 1936), a trust is a resident of Australia in relation to a year of income if: (a) a trustee of the trust 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. In this case, there are three trustees of the Trust, one who is a resident of country Y and two who are residents of Australia you and your parent. As there was at least one trustee who was an Australian resident, the Trust is an Australian resident for Australian tax law purposes. However, as one of the trustees is a Country Y resident, we need to consider the Double Tax Agreement between Australia and Country Y (the Country Y DTA). The country Y DTA operates to avoid the double taxation of income received by Australian and Country Y residents. Article 4(3) of the DTA provides that where a person other than an individual is a resident of both countries, it will be deemed to be a resident solely of the country in which its place of effective management is situated. The term ‘place of effective management’ is not defined in the Country Y Convention. In interpreting the wording of the DTA, the Commissioner in Taxation Ruling TR 2001/13 accepts that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and on Capital (Condensed Version 2010) (the OECD Commentary. In Hua Wang Bank Berhad & Ors v FCT [2014] FCA 1392, Perram J in the Federal Court stated that the ‘place of effective management’ is an expression used in a treaty but the interpretive principles applicable in those situations do not require one to do more work than determine the meaning of ‘place of effective management’ in the particular treaty. The OECD Commentary states at paragraph 24 on Model Article 4 that: As a result of these considerations, the "place of effective management" has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time. In this case, your former spouse has the responsibility of the day to day running of both the trusts. Your parents’ former spouse makes all of the high level decisions regarding the Trusts and therefore for the purposes of the country Y DTA, the place of ‘effective management’ is in country Y and the Trust is a resident of country Y under the country Y DTA. | Detailed Reasoning - Assessability of income from the Trusts: Subsection 99B(1) of the 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: (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. Section 768-910 of the ITAA 1997 provides that both the ordinary and statutory income derived by a temporary resident, directly or indirectly, from a non-Australian source is non-assessable non-exempt income. Therefore, as you are a temporary resident of Australia for taxation purposes, any capital distributions from the trusts in Country Y will be exempt from income tax in Australia under section 768-910 of the ITAA 1997.