Private ruling: Trust distribution from overseas
Date of advice: 18 August 2017
Published: December 2017
Ruling period: Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the distribution from an offshore discretionary trust assessable in part? Answer Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. Your parent, who lives outside Australia, set up the E Trust (the Trust). You and X others are a beneficiaries of the offshore discretionary trust established in another overseas country. X Trust Limited is the trustee of the Trust. The trust was settled in 200A. Additional funds were added later in 200A. The funds were initially invested in policies then sold and transferred into another investment in 200B. Initial funds settled were A in 200A. Additional funds settled were from policies as B and $2H in later 200A. The trust has received dividend and interest income since it was established. Should there have been tax payable, all tax payable would have been paid by your parent. You have not previously received funds from the trust. There have been no distributions from the trust. Your parent now wishes to dissolve the trust and distribute the capital to you. All of the trust assets are to be distributed to you. You have been advised that no part of the distribution is profits. You will receive two lump sum payments: A and $. You have not yet received the payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1936 Section 99B

Reasons for decision: Summary: Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) a resident of Australia is assessable on their worldwide income. You are an Australian resident who is a beneficiary of the X Trust Limited as Trustees of the E Trust (the Trust). As a result of the dissolution of the Trust in the 2017-18 income year, you will receive a distribution from the Trust. We need to determine the assessability of the distribution. As a general rule a beneficiary who is not under a legal disability and who is presently entitled to a share of the income of a trust must include in their assessable income their share of the net income of the trust estate (section 97 of the Income Tax Assessment Act 1936 (ITAA 1936)). Subsection 99B(1) of the ITAA 1936 applies where an amount of trust property is paid to, or applied for the benefit of, a beneficiary during an income year and the beneficiary is a resident at any time during that income year. Where these conditions are satisfied, the amount is included in the assessable income of the beneficiary. However, subsection 99B(1) of the ITAA 1936 is modified by subsection 99B(2) of the ITAA 1936 which broadly reduces the amount included in the assessable income of the beneficiary to the extent that it represents: ● corpus of the trust estate - but not an amount that is attributable to income derived by the trust estate which would have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer ● an amount that would not have been included in the assessable income of a resident taxpayer had it been derived by that taxpayer ● an amount that is or has been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 ● an amount that has been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936, or ● an amount that has been included in the assessable income of a taxpayer under Division 6AAA of Part III of the ITAA 1936. | Detailed Reasoning - Your circumstances: The conditions in subsection 99B(1) of the ITAA 1936 are satisfied as you will receive an amount of trust property during an income year in which you were a resident of Australia. The trust property paid to you, the resident beneficiary, is attributable in part to foreign source interest and dividends derived by the trust. The distribution will include amounts that were interest and dividend income that would have been assessable had it been derived by a resident taxpayer, and as the interest and dividend income has not been included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or been assessed to either the trustee of the trust or the trustee of another trust under Division 6 of Part III of the ITAA 1936 the exclusions in subsection 99B(2) of the ITAA 1936 will apply only to reduce the amount included in the assessable income of the beneficiary by the original capital contributed to the trust (corpus of the trust estate). Any part of the distribution to you that is from accumulated foreign source income (for example, interest and dividends) or gains that would have been assessable income of a resident taxpayer had it been derived by that resident taxpayer rather than the foreign trust will form part of your assessable income.