Private ruling: Assessability of foreign trust income
Date of advice: 2 May 2019
Published: June 2019
Ruling period: Year ending 30 June 2019 | Year ending 30 June 2020 | Year ending 30 June 2021 | Year ending 30 June 2022
Date scheme commenced: 1 July 2018

Ruling: Q1: Are you a temporary resident of Australia? | A1: Yes | Q2: Will section 99B of the Income Tax Assessment Act 1936 (ITAA1936) apply to you if you receive distributions from the X Trust or the Y Trust that are attributable to a source outside Australia? | A2: No

Relevant facts and circumstances: You were born in country X and are citizens of country X. You are not citizens of Australia or permanent residents of Australia. You moved to Australia to live and are tax residents of Australia. You hold temporary Australian visas. You were not in Australia on 26 February 2001 or for periods totalling 12 months during the two years immediately before that date and have never been granted social security payments on the basis of being protected special category visa holders. You are beneficiaries of the X Trust which is a discretionary trust that was established in country Y. The trustee of the X Trust is a professional trustee based in country Y. The trustee of the X Trust makes and implements all decisions relating to the strategic decisions of the Trust and the day to day administration of the Trust. The trustee does not act on instructions from the beneficiaries. The property of the X Trust has never included any Australian assets and none of the income of the Trust is derived from Australia. Most of the X Trust’s income has been accumulated by the trustee, such that it forms the capital of the Trust. You have never received distributions of income or capital from the Trust. You and your children are beneficiaries of the Y Trust which is a discretionary trust established by one of your two relatives in country X. Your two relatives reside in country X. The Y Trust is a tax resident of country X under its domestic law. The property of the Y Trust comprises of assets located in country X and has never included any Australian assets. None of the income of the Trust is derived from Australia. The three trustees of the Y Trust are you (one of the rulees) and your two relatives. The trustees of the Y Trust make and implement all decisions relating to the strategic decisions of the Trust and the day to day administration of the Trust. Trust resolutions are drawn up in country X with the assistance of a country X attorney and accountant. Investment decisions are implemented in country X as the assets of the Trust are located in country X. Trust decisions are made in accordance with the trust deed of the Y Trust as follows: ● if by a written resolution, jointly by all trustees; or ● if at a meeting of trustees (where a quorum is the majority of trustees, and must include you (one of the rulees) or authorised representative), jointly by the trustees present at the meeting. If the trustees disagree at any time, the decision can instead be made by a majority of the trustees as per a clause of the trust deed. The Australian trustee does not have a veto power in relation to decisions of the Trust. The Australian trustee is not excluded from exercising their trustee powers in relation to decisions involving distributions to them or other family members. In the past, the trustees of the Y Trust have distributed income of the Trust in some years and accumulated it in others.

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 | Income Tax Assessment Act 1997 section 995-1 | International Tax Agreements Act 1953

Reasons for decision: Detailed Reasoning - Temporary resident: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) states that an individual will be a temporary resident if they: ● 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 Soc ial 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. 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 - Trust residency: Under subsection 95(2) of the 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. | Detailed Reasoning - Residency of the X Trust: The X Trust is not a resident of Australia as it has never had either: a) a trustee who was a resident of Australia; or b) its central management and control in Australia. | Detailed Reasoning - Residency of the Y Trust: There are three trustees of the Y Trust; two of these are resident in country X with the other being resident in Australia. Therefore, the Y Trust has been a tax resident of Australia from the time the Australian trustee became a tax resident of Australia. As the Y Trust is also a resident of country X for the purposes of its domestic law, the double tax agreement between Australia and country X (the country X agreement) needs to be considered to determine residency under the agreement. Article 4 of the country X agreement provides that where a person other than an individual is a resident of both countries, the entity 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 X agreement. The Commissioner in Taxation Ruling TR 2001/13 accepts that it is appropriate to have reference to the OECD Model Tax Convention and Commentaries when interpreting the terms used in double tax agreements. Paragraph 24 of the OECD Model Tax Convention and Commentaries (2014) provides guidance on the interpretation of place of effective management as follows: 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, two out of the three trustees are residents of country X and decisions of the Y Trust are made by majority decision. The sole Australian resident trustee cannot out vote the other trustees and effectively control the Trust from Australia. Therefore, for the purposes of the country X agreement, the place of effective management of the Y Trust is in country X and the Trust is solely a resident of country X under Article 4. | Detailed Reasoning - Assessability of trust distributions: 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. 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, any distributions from the X Trust or the Y Trust that are attributable to a source outside Australia will not be assessable under section 768-910 of the ITAA 1997.