The ATO has recently released two draft tax
determinations – TD 2016/D4 and TD 2016/D5. We expect these
will underpin further audit activity around capital distributions
from foreign trusts.
The ATO says that certain capital gains made by foreign trusts
that are not taxed in Australia under the capital gains tax regime
may be taxed in the hands of Australian resident beneficiaries as
trust income. This draws on their analysis of section 99B.
The ATO view is that, if section 99B applies, the CGT general
discount is not available, and that any capital gains will not be
able to be offset against capital losses.
How section 99B works
Section 99B was introduced to stop Australian residents
accumulating income in foreign trusts and subsequently distributing
that income as untaxed capital in future income years.
However, the provision operates more broadly.
The starting position is that all trust distributions –
income or capital – to Australian resident beneficiaries are
taxed in their hands subject to specific exclusions in section
Distributions of capital from foreign trusts to Australian
resident beneficiaries can produce alarming results. For example,
if a child immigrates to Australia, and subsequently receives a
capital distribution from their parents' overseas trust, the
starting point is that the capital amount is included in the
child's assessable income.
The question is then whether the amounts can be excluded, based
on the specific exclusions in section 99B(2) which include
corpus of the trust but not if the distribution is attributable
to amounts that would have been assessable in Australia if they had
been derived by a resident of Australia; and
amounts that are taxed in Australia under another section
– such as distributions of trust income that are taxed under
If the overseas trust accumulated income for 30 years, a
significant amount of the trust's capital may be attributable
to amounts that would have been assessable income if derived by an
Australian resident. If that accumulated capital is distributed to
Australian resident beneficiaries, it may be caught by section
According to the ATO, it also doesn't matter if the child
has only just become an Australian tax resident. The capital
distribution would still be caught by section 99B even if the
capital was accumulated while all of the family were living
overseas. Scary but true.
Then there are the deeming provisions...
Section 99B does not only apply to amounts that are actually
distributed. It also applies to amounts 'applied for the
benefit of' a beneficiary.
Section 99C, which is relevant in determining when an amount has
been applied for the benefit of a beneficiary, defines this phrase
very broadly and will catch circumstances where, in reality, the
amount is not 'applied for the benefit of' a
We see many instances where clients have inadvertently triggered
a section 99B issue. This is not surprising, as it requires an
Australian resident beneficiary to be alert to the issue –
before a capital distribution is made to them.
The following examples illustrate the potential problems:
A taxpayer becomes a resident of Australia and
then receives a distribution of capital from a foreign
trust. If the amount is attributable to accumulated income, there
is a risk it is subject to tax in Australia under section 99B.
A resident of Australia receives a distribution of capital from
a foreign trust following the death of a distant relative. In these
cases, it is often hard work proving whether (or the extent to
which) the amount is attributable to amounts that would have been
assessed in Australia if derived by an Australian resident. The
taxpayer has the onus of proving that the amount is a corpus
distribution that is excluded undersection 99B(2)(a).
Fortunately, there are solutions...
Onerous legislation sometimes provides opportunities for
solutions. For example, beneficiaries might be deemed to receive
distributions before they become Australian tax residents. New
Zealand citizens residing in Australia may be temporary residents
and not subject to income from foreign sources.
There are also practical lessons. It would be prudent to
maintain records of the different components of trust corpus (e.g.
what portion represents accumulated capital gains) if an Australian
resident beneficiary expects that they may become entitled to a
distribution of capital at some point in the future.
Cooper Grace Ward is a leading Australian law firm based in
This publication is for information only and is not legal
advice. You should obtain advice that is specific to your
circumstances and not rely on this publication as legal advice. If
there are any issues you would like us to advise you on arising
from this publication, please contact Cooper Grace Ward
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