Trustee: assessability of foreign investment fund income - subsection 99A(4A)

Is the trustee assessable under subsection 99A(4A) of the Income Tax Assessment Act 1936 (ITAA 1936) on foreign investment fund income (FIF) included in the net income of the trust under subsection 529(2) of the ITAA 1936 where the resident trust estate has non-resident beneficiaries?

Yes. The trustee is assessable on FIF income included in the net income of the trust which is attributable to a period when a beneficiary was not a resident and is also attributable to sources out of Australia.

The resident trust estate's net income under section 95 of the ITAA 1936 for a year of income includes FIF income under subsection 529(2) of Part XI of the ITAA 1936.

The trust has non-resident beneficiaries.

All the beneficiaries of the trust are presently entitled to the income of the trust as determined by the trust deed.

The FIF income is not income attributable to sources in Australia.

Subsection 99A(4A) of the ITAA 1936 states: Where there is a part of the net income of a resident trust estate: (a) that is not included in the assessable income of a beneficiary of the trust estate in pursuance of section 97 (b) in respect of which the trustee is not assessed and is not liable to pay tax in pursuance of section 98; and (c) that does not represent income to which a beneficiary is presently entitled that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia the trustee shall be assessed and is liable to pay tax on that part of the net income of the trust estate at the rate declared by the Parliament for the purposes of this section.

To determine whether the trustee is assessable on any FIF income it is necessary to first consider whether the FIF income is assessable under section 97 or 98 of the ITAA 1936.

Section 97 and 98 of the ITAA 1936 apply to 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.

In respect of the non-resident beneficiaries, section 97 and 98 of the ITAA 1936 will not apply as the FIF income is not attributable to sources in Australia. As a result, paragraphs 99A(4A)(a) and 99A(4A)(b) of the ITAA 1936 are satisfied.

For paragraph 99A(4A)(c) of the ITAA 1936 to be satisfied we need to determine that part of the 'net income' of the resident trust estate that does not represent income to which a beneficiary is 'presently entitled' that is attributable to a period when the beneficiary was not a resident and is also attributable to sources out of Australia.

The reference in subsection 99A(4A) of the ITAA 1936 to a part of the 'net income' of a resident trust estate includes a reference to FIF income as calculated under Part XI of the ITAA 1936. The FIF income is included in the 'net income' of the trust by virtue of section 95 and section 485A of the ITAA 1936.

To determine whether any part of the net income of the resident trust estate does not represent income to which a beneficiary is 'presently entitled', reference is made to the following High Court cases ( Taylor & Anor v. Federal Commissioner of Taxation (1970) 119 CLR 444; 70 ATC 4026; (1970) 1 ATR 582, Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199; (1943) 7 ATD 179; (1943) 2 AITR 421 and Union Fidelity Trustee Co of Australia Ltd & Anor v Federal Commissioner of Taxation (1969) 119 CLR 177; 69 ATC 4084; (1969) 1 ATR 200). The general principle that has emerged from these cases is that 'presently entitled' refers to an interest in possession in an amount of income which is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he/she were not under a legal disability.

FIF income, as determined under Part XI of the ITAA 1936, is a 'notional' amount calculated on an accruals basis and therefore it is not considered to be an amount of income which is legally ready for distribution so that the beneficiary would have a right to obtain payment of it if he/she were not under a legal disability.

When an actual amount of income is distributed from the foreign investment fund this amount represents income to which the beneficiaries are presently entitled in accordance with the trust deed.

It is accepted that for the purposes of section 97 and 98 of the ITAA 1936 the share of net income that is included in assessable income is generally based on the proportion of the trust income to which the beneficiary is presently entitled. This is referred to as the proportionate method.

It is considered that the proportionate method is not applicable to subsection 99A(4A) of the ITAA 1936 as the words used in that subsection clearly differ to those in section 97 and 98 of the ITAA 1936. Subsection 99A(4A) makes reference first to a 'part of the net income' of a trust estate. From this amount you are then required to identify the amount 'that does not represent income to which a beneficiary is presently entitled'.

Therefore, the reference to that part of the net income that does not represent income to which a beneficiary is presently entitled includes a reference to the FIF income as calculated under Part XI of the ITAA 1936. As a result, the trustee shall be assessed and is liable to pay tax on FIF income of the trust estate at the rate declared by Parliament for the purposes of section 99A of the ITAA 1936.