Private ruling: Assessability of income received from a foreign trust
Published: April 2013
Ruling period: Year ending 30 June 2010 | Year ending 30 June 2011 | Year ending 30 June 2012 | Year ending 30 June 2013
Date scheme commenced: 1 July 2009

Ruling: Questions and answers: | 1. Is the dividend income of a family trust in country X assessable for Australian income tax purposes to you as a beneficiary of the trust? | No. | 2. Is the after tax income of a family trust in country X assessable for Australian income tax purposes to you as a beneficiary of the trust? | No. | 3. Is the income you receive by way of drawings (distribution) from a family trust in country X assessable for Australian income tax purposes to you as a beneficiary of the trust in the income year you receive them? | Yes.

Relevant facts and circumstances: You and your spouse became permanent residents of Australia in 2009. You and your spouse are the primary beneficiaries of a family trust established in country X. You and your spouse and a country X resident company are joint trustees of the family trust. The income of the family trust consists of dividend income paid by a country X resident company that is not also the joint trustee of the trust. Country X tax has been paid on the income of the family trust. The family trust does not pay Australian income tax. You make drawings on the family trust bank account in country X on a regular basis. You do not pay tax in country X on your income from the family trust. You have been including the dividend income received by the family trust as assessable income on your Australian income tax returns.

Relevant legislative provisions: Income Tax Assessment Act 1936 Section 97. | Income Tax Assessment Act 1936 Section 98. | Income Tax Assessment Act 1936 Section 99. | Income Tax Assessment Act 1936 Section 99A. | Income Tax Assessment Act 1936 Subsection 99B(1). | Income Tax Assessment Act 1936 Subsection 99B(2). | International Agreements Act 1953.

Reasons for decision: Summary: Subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where a beneficiary who was a resident of Australia at any time during an income 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. In your case, there has been no formal distribution from the trust to you; instead you have drawn funds from the trust bank account on a regular basis at your discretion. Consequently, these drawings represent trust property that has been applied for your benefit. Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) to exclude from assessable income any amount that represents either: · corpus (capital) 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; or · amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or · 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. The income you derive from the country X trust represents trust income of a type which is taxable in Australia, but which has not previously been subject to Australian tax in the hands of either the beneficiary or the trustee. Accordingly, none of the exclusions in subsection 99B(2) of the ITAA 1936 apply. In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. A Schedule to the Agreements Act contains the tax treaty between Australia and country X. The tax treaty operates to avoid the double taxation of income received by Australian and country X residents. Article 21 of the tax treaty deals with the taxation of income not addressed by the other Articles of the tax treaty. This Article gives Australia a taxing right on income such as trust income which has been derived from a country X source. The drawings you receive from the country X trust are assessable income under subsection 99B(1) of the ITAA 1936 in the Australian income tax years you receive them. For Australian income tax purposes you should ignore the dividend income and after tax income of the trust when calculating your assessable income. | Detailed Reasoning - Additional information: Should you wish to change any of your previous income tax assessments you will need to write to us asking for an amendment to be made. There are time limits for making amendments to tax returns which for individuals is generally two years from the original date of assessment. However, where the amendment relates to foreign transactions the amendment period is four years. To give you certainty about your tax affairs, the law does not allow amendments (initiated by us or by you) outside the time limit, but you may be able to lodge an objection instead.

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