Private ruling: Tax consequences of distributions from a foreign trust
Date of advice: 10 April 2019
Published: June 2019
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will the amount subject to Australian taxation under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) be calculated only with reference to the growth of the Foundation since you became an Australian resident for tax purposes? | A1: No.

Relevant facts and circumstances: You have had periods where you have been a resident of Australia for tax purposes and periods where you were a foreign resident for tax purposes. Before becoming a resident of Australia for tax purposes again on XX/XX/20XX, you had been a foreign resident for tax purposes for a number of years. While you were a foreign resident for tax purposes you worked and accumulated benefits in the Fund. Before returning to Australia you requested that the amounts you had accumulated in the Fund be transferred to the Foundation. Upon entering Australia on XX/XX/20XX, you had a right to call for the vested benefits in the Foundation and are considering accessing these funds.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 99B

Reasons for decision: Summary: Where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount (subsection 99B(1) of the ITAA 1936). The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of the trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents: (a) corpus of the trust estate (except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer of a year of income); (b) an amount that, if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of that taxpayer of a year of income; (ba) an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the Income Tax Assessment Act 1997 (ITAA 1997); (c) an amount: (i) that is or has been included in the assessable income of the beneficiary in pursuance of section 97 ITAA 1936; or (ii) in respect of which the trustee of the trust estate is or has been assessed and liable to pay tax in pursuance of sections 98, 99 or 99A ITAA 1936; or (iii) that is reasonably attributable to a part of the net income of another trust estate in respect of which the trustee of the other trust estate is assessed and is liable to pay tax under subsection 98(4) ITAA 1936; (d) an amount that is or has been included in the assessable income of any taxpayer (other than a company) under section 102AAZD; or (e) if the beneficiary is a company - an amount that is or has been included in the assessable income of the beneficiary under section 102AAZD ITAA 1936 (subsection 99B(2) of the ITAA 1936). The Commissioner has adopted the approach of the Full Federal Court in Howard v. FCT [2012] FCAFC 149 ( Howard’s case) in the Decision Impact Statement addressing the decision. In Howard’s case the Court decided the issue of whether payments received by Mr Howard in the 2006 year from the Esparto Trust (a non-resident Trust) formed part of his assessable income for that year. Payments had previously been made from the Juris Trust (also a non-resident trust) to the Esparto Trust. The Full Federal Court held that the amounts received by Mr Howard were included in his assessable income under subsection 99B(1) of the ITAA 1936. This was so because: ● the amounts met the statutory description of 'property of a trust estate... paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income'; and ● subsection 99B(2) did not apply to reduce what would otherwise be included in Mr Howard's assessable income under subsection (1): while the amounts paid to or applied for the benefit of Mr Howard represented corpus of the Esparto trust estate, they were also 'attributable to amounts derived by [the Esparto Trust estate, namely distributions of corpus from the Juris Trust received by the trustee of the Esparto Trust] that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer' (see paragraph 99B(2)(a)). The Full Court concluded that the distributions of corpus from the Juris Trust to the trustee of the Esparto Trust would have been included in the assessable of a resident taxpayer if they had been derived by such a taxpayer. This conclusion itself followed from the conclusion that the amounts received by the Juris Trust estate from Esparto Ltd would have been assessable income of the Juris Trust had the trustee of the Juris Trust been a resident taxpayer. The Court explained this point as follows: 41....Section 99B(2)(a) will simply apply as many times as there are interposed layers of trusts. Each application of s 99B(2)(a) leads to a hypothetical question about whether the amounts received by the trust estate would have been assessable income if they had been earned by a resident taxpayer. Once an answer to that question is known at the level of the deepest trust the answer cascades back up to the original (genuine) resident taxpayer. To unpick that slightly: if the Juris Trust estate had been a resident taxpayer and the amounts received by it had been assessable income, then the amounts received by the Esparto Trust, although corpus, would have fallen within the parenthetic excision in s 99B(2)(a) and would have been assessable income in its hands. This, in turn, provides the affirmative answer to the question posed by s 99B(2)(a) as to whether the amounts received by the Esparto Trust estate would have been assessable income on the hypothesis that the Esparto Trust estate was a resident taxpayer. But it is that answer on that hypothesis which applies to Mr Howard himself... The amounts received by the Juris Trust estate from Esparto Ltd would have been assessable income had it been a resident taxpayer because ‘that hypothetical taxpayer would have been required to include in its assessable income the dividends paid out of profits deemed by s 159GZZZP(1) to have existed and by s 44(1)(a)(i) to have been assessable’ (paragraph 45 of Howard’s case). (Subsection 159GZZZP(1) of the ITAA 1936 deems the proceeds of an off-market share buyback above paid-up capital to be a dividend paid out of profits and paragraph 44(1)(a) of the ITAA 1936 includes in the assessable income of a resident shareholder of a company dividends paid to the shareholder by the company out of profits derived by it from any source.) | Detailed Reasoning - Application to your circumstances: The Fund paid an amount to the Foundation at your request. The Commissioner’s view, consistent with the decision from Howard’s case is that the Foundation must ask the question about whether the amounts it has received would have been assessable as income if earned by the hypothetical resident taxpayer. It is not just the growth of the Foundation since you became a resident taxpayer which will be assessable to you.