Private ruling: Withholding obligations for trust distributions
Date of advice: 22 May 2018
Published: July 2018
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does section 98(3) of the ITAA 1936 apply to the distribution of net income of the Trust estate by the Trustee to the Non-resident Beneficiary, who is a beneficiary of the Trust and a foreign resident? | A1: Yes | Q2: Does the double taxation agreement (DTA) between Australia and Country X apply to the distribution of net income of the trust estate by the Trustee to the Non-resident Beneficiary? | A2: Yes | Q3: As a result of the application of the DTA, is the Trustee required to withhold and pay tax to the Commissioner under section 98(3) of the ITAA 1936 in respect of the gain derived by the Non-resident Beneficiary from the Trustee's disposal of a CGT asset that is not taxable Australian property? | A3: No | Q4: Is the Trustee liable to withhold tax on the amount of the net income of the trust estate which represents franked dividend income to which the Non-resident Beneficiary is presently entitled? | A4: No | Q5: Is the Trustee liable to withhold tax on the amount of the net income of the Trust estate which represents unfranked dividend income to which the Non-resident Beneficiary is presently entitled | A5: Yes | Q6: Is the Trustee liable to withhold tax on the amount of the net income of the Trust estate which represents interest income to which the Non-resident Beneficiary is presently entitled? | A6: Yes

Relevant facts and circumstances: The Trust has, at all times, been an Australian resident trust estate for Australian tax purposes. The Trust is a discretionary trust. The Non-resident Beneficiary permanently relocated to Country X. The Non-resident Beneficiary became a non-resident of Australia, for Australian tax purposes. There exists a DTA between Australia and Country X. The assets of the Trust included non-taxable Australian property. The non-taxable Australian property was sold. The Trust had also derived dividend and interest income. The Non-resident Beneficiary received a distribution of the income from the sale of the non-taxable Australian income, interest and dividends income.

Relevant legislative provisions: Section 95 of the Income Tax Assessment Act 1936 (ITAA 1936) | Section 98 of the ITAA 1936 | Section 128B of the ITAA 1936 | Section 128C of the ITAA 1936 | Section 254 of the ITAA 1936 | Section 255 of the ITAA 1936 | Section 855-10 of the Income Tax Assessment Act 1997 (ITAA 1997) | Section 4 of the International Tax Agreements Act 1953 (ITAA 1953) | Section 5 of the ITAA 1953

Reasons for decision: Detailed Reasoning - Application of Section 98(3) of the ITAA 1936: Section 98 of the ITAA 1936 provides the provisions for the liability for income tax of a trustee. Section 98(2A) provides the following in relation to tax liability: If: a) a beneficiary of a trust estate who is presently entitled to a share of the income of the trust estate: i) is 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. The Non-resident Beneficiary meets all of the conditions as outline in paragraph 98(2A)(a) and 98(2A)(b). Given this, subsection 98(3) will apply in respect of the net income of the trust estate attributable to a non-resident beneficiary from sources in Australia. | Detailed Reasoning - Application of the DTA: As the Non-resident beneficiary is a resident of Country X the DTA must be considered. The DTA will apply to the Trust as it is a fiscally transparent entity for the purposes of the DTA. | Detailed Reasoning - Non-taxable Australian Property: The Non-resident Beneficiary received a distribution of income from the sale of non-taxable Australian property. Under section 855-10 of the ITAA 1997 a non-resident can disregard a capital gain that arises from a CGT event related to an asset that is non-taxable Australian Property. As per ATO Interpretative Decision ATOID 2010/55 - Income Tax: Capital gains tax: Australian source capital gains made by a resident trust for CGT purposes , the trustee will be assessable on income covered by section 855-10 of the ITAA 1997. It is the Commissioner’s view that the fact that the beneficiary may be exempt from recognising a capital gain had they purchased the non-taxable Australian property themselves is not relevant to the fact that the income is taxable to the Trust under paragraph 98(3) of the ITAA 1936. However, ATOID 2010/55 does state that the decision does not consider the application of any DTAs. Under the DTA the income from the sale of the non-taxable Australian property is taxable in Country X. The DTA takes precedence over Australian taxation law and so under the DTA there is no need for the Trust to withhold as the gain is assessed by the Country X authorities. | Detailed Reasoning - Dividends: Section 128B of the ITAA 1936 provides that the payer of dividends who is a resident of Australia is liable to withhold tax on dividends paid to non-residents. Taxation Ruling IT 2680 Income tax: withholding tax liability of non-resident beneficiaries of Australian trusts provides that a beneficiary who is presently entitled to a dividend included in the income of a trust shall be deemed to have derived that dividend. IT 2680 also provides that the trustee of the Trust is liable to withhold and remit tax in relation to any dividend distributions. | Detailed Reasoning - Franked Dividends: Paragraph 128B(3)(ga) of the ITAA 1936 provides that there is no requirement to withhold if a taxpayer receives franked dividends. Thus the Trustee will not be required to withhold any tax from distributions of franked dividends to the Non-resident Beneficiary. | Detailed Reasoning - Unfranked Dividends: Paragraph 128B(3)(ga) does not apply to unfranked dividends and the Trustee will be required to withhold for any unfranked dividend distributions. However, the DTA will be applicable and the withholding for any unfranked dividend distributions will be limited to the relevant DTA rate. | Detailed Reasoning - Interest: Similarly to dividends the payer of interest who is a resident of Australia is liable to withhold tax on interest paid to a non-resident of Australia (as per section 128B of the ITAA 1936). Again the beneficiary of such income is deemed to have derived that income as provided by IT 2680 and the Trustee of the Trust is liable to withhold and remit tax in relation to that income. There exists no exemption from withholding from interest payments to non-residents. However, the DTA will be applicable and the amount of withholding will be limited to the relevant DTA rate.