We have recently seen a surge of unhappy cases where Australian residents inherit or receive gifts from overseas relatives, and those amounts have been taxed under section 99B of the Income Tax Assessment Act 1936.
Section 99B is a particularly harsh provision because it taxes capital, not income, in circumstances where an Australian resident beneficiary receives trust capital from a foreign trust.
The sad stories below illustrate some of the problems.
Sad story 1 - gift from a relative living overseas
Haibo is an Australian resident. He has a doting elderly aunt who lives in Labrador, Canada. Haibo's aunt decides to give Haibo a gift of $500,000 so Haibo can pay off his mortgage.
Haibo is excited and sends his bank details to his aunt to receive the transfer.
Unknown to Haibo, his aunt established a trust in Guernsey in the 1980s. Haibo unknowingly became a discretionary beneficiary when he was born.
Haibo's aunt transferred $500,000 in cash from the trust's bank account to Haibo.
Section 99B applies. Haibo can't pay off his house after all. Haibo will need to determine how much of the $500,000 is included in his assessable income (and Haibo can read our previous article on this issue here).
Sad story 2 - inheriting control of a foreign trust
Haibo is an Australian resident. His elderly mother recently passed away in New Zealand. Haibo became one of two beneficiaries of his mother's estate and also inherited control of a trust that previously held primary production properties for many years in New Zealand. The trust remains a tax resident of New Zealand.
Haibo distributes $1m of the trust's capital to himself as a remaining beneficiary of the trust.
Section 99B applies. Haibo will need to identify what amounts were gifted or settled on the trust, as these will not be subject to section 99B. However, to the extent that his $1m reflects a capital gain from the sale of the properties in New Zealand, this amount will be taxed under section 99B.
Sad story 3 - the long-running deceased estate
Haibo is an Australian resident. He became a beneficiary of a deceased estate in Hong Kong when his father passed away in 2008. The estate has been tied up in litigation. During this time, the executors have invested the trust's assets and accumulated significant amounts of trust income. The executors have made periodic payments of capital to Haibo and other non-resident beneficiaries.
Section 99B applies. The amount of the trust property at the time of death will not be subject to section 99B: it is protected by an exclusion. However, the accumulated income, which has been significant since 2008, will be subject to section 99B to the extent it is distributed to Haibo.
So what do I do?
In these cases, the main problem is that the section 99B issue is not identified. If the section 99B issue is identified, often there are options for managing it.
In our first sad story, for example, Haibo's aunt wishes she just gifted those funds to Haibo from her personal assets. In our second sad story, Haibo wishes he received a distribution from the estate, not the trust, as the estate's trust capital was primarily protected by the exclusion for corpus. Sad story 3 may not have produced the same harsh result if Haibo had been entitled to specific types of income or capital.
The application of section 99B is also extended by section 99C, so the provisions will operate more broadly than just distributions of capital. It is important that any options consider both sections.
When confronted with section 99B issues, the next steps are often:
- First, see whether section 99B applies, or whether there is an exemption.
- Second, assuming section 99B does apply, determine the amount of the trust's capital that would be subject to section 99B. Trusts with significant accumulated income will have a greater section 99B problem than trusts that have been recently established and have not yet received significant income (including recently created deceased estates).
- Third, identify your options, and the tax consequences of those options. This may need to be done both on the Australian side, and also the foreign side, particularly if gift tax is an issue in the foreign country.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
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 Lawyers.