1 Is the distribution you receive from a foreign trust in Country A subject to tax in Australia under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?
1 Yes. As you are an Australian tax resident, section 99B(1) of the ITAA 1936 will apply to trust distributions you received from a foreign trust. Question 2 If it is subject to tax, is the amount of the trust distribution that is included in the assessable income, reduced by the part of the distribution that represents corpus of the trust under sub-section 99B(2)(a) of the ITAA 1936? Answer 2 Yes. Under sub-section 99B(2)(a) of the ITAA 1936 , the amount of a foreign trust distribution received by an Australian resident can be reduced if part of that distribution represents the corpus (the original capital or principal) of the trust. Question 3 Is there tax relief for taxpayers under the Double Tax Agreement (DTA) between Country A and Australia? Answer 3 Yes. Where the distributions are taxed in Country A, you may be eligible for a foreign income tax offset (FITO) in Australia. Question 4 Can you claim a FITO under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997) for the tax withheld by the foreign trust in Country A from the foreign trust distribution? Answer 4 Yes.
Where you are liable for Australian tax on income from a foreign trust in Country A, you may be eligible to claim a FITO under section 770 of the ITAA 1997. This ruling applies for the following periods : 1 July 20XX to 30 June 20XX 1 July 20XX to 30 June 20XX 1 July 20XX to 30 June 20XX The scheme commenced on: XX XX XXXX
You are one of the beneficiaries of the XXXX Discretionary Trust (the "Trust"). The Trust was established in Country A at your parents request in 202X for yourself and your sibling as beneficiaries. The investment is managed in Country A by YYYY Financial Services. The Trust is managed by ZZZZ Law Firm. The original amount was deposited into Country A Trust Fund (the "Fund") in 202X, with 50% share attributable to you, and the other 50% to your sibling. You requested your share earlier this year with the intention of using the funds as a deposit to purchase your first home in Australia where you have been a permanent resident since 200X and are working and paying income tax. The Trustees of the Trust are your parents as well as solicitors of ZZZZ Law Firm. The total Fund amount was initially invested in an offshore fund of stocks and shares. When the stock market took a dip in 202X, your share of the funds was moved to a savings account which was considered a safer option - the funds remain offshore in the Trust.
Under the terms of the Trust, when a disbursement is made, the Trustees sign the withdrawal form, the money is sent onshore and deposited into a ZZZZ Law Firm client account - fees and Country A taxes are then calculated, and the paperwork is completed. The profits of the Fund are liable for Country A tax (Chargeable Event Tax) as the funds still belong to the Trust. You received a Distribution Statement from your solicitor containing the following information: • X XXX 202X to X XXX 202X - a request by you to the Trustees for an amount of X,XXX from the Trust on which no tax was liable as the amount was under the tax threshold; no Australian tax has been paid on this amount • X XXX 202X to X XXX 202X - withdrawal of an amount of XXX made by Trust managers to cover their fees and tax obligations • X XXX 202X - your share of an amount of XXX,XXX was finalised and moved from offshore to a Trust manager's client account • X XXX 202X - an interest amount of XXX was earned while funds were in the Trust manager's client account prior to transfer to Australian account
• Total amount of funds and interest was an amount of XXX,XXX of which a portion was retained to settle the Chargeable Event Tax and another portion was retained to settle the Trust manager's fees and tax obligations • X XXX 202X - the balance was transferred to your Australian bank account which converted to A$XXX,XXX • The Trust managers paid tax in Country A on your behalf You noted that the transfer date on the Distribution Statement incorrectly states XX XXX 202X instead of XX XXX 202Y.
Income Tax Assessment Act 1936 section 99B(1) Income Tax Assessment Act 1936 sub-section 99B(2)(a) Income Tax Assessment Act 1936 sub-section 99B(2) paragraph c Income Tax Assessment Act1997 sub-section 770-10(1) Income Tax Assessment Act1997 s ection 770-15 Income Tax Assessment Act1997 s ection 770-75
Question 1 Is the distribution you receive from a foreign trust in Country A subject to tax in Australia under subsection 99B(1) of the ITAA 1936? Summary Yes. As you are an Australian tax resident, section 99B(1) of the ITAA 1936 will apply to trust distributions received from the foreign trust paid to you, or applied for your benefit, in the income year in which it is so paid or applied. Detailed reasoning Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives an amount from a foreign trust. Section 99B(1) of the ITAA 1936: Subject to section 99B(1), you must include in your assessable income any amount of trust property paid to you or applied for your benefit from a non-resident trust, unless an exception applies. Included in your assessable income are cash distributions, use of trust assets, gifts sourced from the trust and loans from the trust.
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. In your case You must include your trust distributions from the foreign trust in the income year in which they are paid to you or applied for your benefit. Question 2 If it is subject to tax, is the amount of the trust distribution that is included in the assessable income, reduced by the part of the distribution that represents corpus of the trust under sub-section 99B(2)(a) of the ITAA 1936? Summary Yes. Amounts representing corpus of the trust estate are not included in a taxpayer's assessable income. Detailed reasoning Section 99B(2)(a) of the ITAA 1936:
Subject to subsection 99B(2)(a), 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: 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). If a distribution (even if part of corpus) has already been taxed, either to the beneficiary directly or to the trustee on behalf of the beneficiary, then it will be excluded from being taxed again under section 99B. The relevant provision is subsection 99B(2), part c of the ITAA 1936, which is a separate carve-out (compared to the general corpus exemption under subsection 99B(2)(a), for amounts that have already been taxed, regardless of whether they are corpus or income. In your case
Any amounts included in your trust distributions that represent corpus will reduce by that part of corpus, the amount that is included in your assessable income. Note that if you have included any amount of corpus in your assessable income which were previously taxed, or the trustee has paid tax on corpus amounts on your behalf, then these amounts will not be taxed again. Question 3 Is there any tax relief under the Double Tax Agreement (DTA) between Australia and Country A? Summary Yes. The current DTA was signed in 200X and modified by the Multilateral Instrument (MLI). Detailed reasoning The DTA allocates taxing rights between Australia and Country A for: • Employment income • Business profits • Trust distributions • Dividends, interest, and royalties It includes provisions for foreign tax credits, residency tiebreakers, and mutual agreement procedures. Division 770 of the ITAA 1997 governs the FITO system. If an Australian resident receives income from a foreign trust in Country A and pays tax in Country A on that income, they may be entitled to a FITO to avoid double taxation.
The offset is limited to the lesser of: • The foreign tax paid, and • The Australian tax payable on the same income. Article 22 of the DTA covers elimination of double taxation such that: • Australia must allow a credit for tax paid in Country A on income that is also taxable in Australia • The credit is limited to the Australian tax payable on that income In your case As the DTA between Australia and Country A covers trust distributions and elimination of double taxation, you are entitled to relief from double taxation. The DTA also provides provisions for foreign tax credits of which you are eligible. Question 4 Can you claim a FITO under Division 770 of the ITAA 1997 for the tax withheld by the Country A trust from the foreign trust distribution? Summary Yes. Where the distributions are taxed in Country A, you may be eligible for a FITO in Australia, but only if certain conditions are met. Detailed reasoning FITO is governed by Division 770 ITAA 1997in Australia. This legislation provides the framework for claiming relief from double taxation when foreign income has already been taxed overseas.
Subsection 770-10(1) of the ITAA 1997 provides that where the assessable income of a resident contains foreign income and FITO has been paid on that income, a FITO will be allowed. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. Section 770-15 explains how to calculate the offset, including the FITO limit, which ensures the offset doesn't exceed the Australian tax payable on the foreign income. Section 770-75 provides for a FITO limit which operates to limit the offset to the amount of Australian tax otherwise payable on the net foreign income (or other amounts in respect of which the taxpayer has paid foreign income tax) included in assessable income (the offset limit calculation). In your case As the managers of the foreign trust paid tax on your behalf, you are entitled to a FITO. As with your tax affairs generally, you need written evidence to support a claim for a foreign income tax offset, and you must keep such evidence so you can provide it to us on request. QC 67996 provides guidance on the written evidence required: • the amount of foreign income or gains in the foreign currency
• the foreign tax year in which the income or gains were derived • the nature and amount of foreign tax levied on the foreign income or gains • the date on which the foreign tax was paid • whether the tax paid represents an advance, instalment, or final foreign tax payment for the relevant foreign income or gains.