So, you might have an interest in a Foreign Trust?

Last year, the ATO confirmed a major shift in policy when it issued Tax Determination TD 2024/9¹ and Practical Compliance Guideline PCG 2024/3², clarifying the Commissioner’s view of the application of section 99B of the Income Tax Assessment Act 1936 relating to non-resident trusts.

This provision requires certain amounts of trust property distributed to, or used for the benefit of, an Australian resident beneficiary during an income year be included in their assessable income. 

Section 99B was first introduced in 1979 to overcome perceived problems impacting the way trusts were taxed, particularly surrounding opportunities to accumulate money offshore, tax-free. Since then, there have been many significant reforms to our taxation system. This has changed the way trusts – including offshore trusts – have been taxed, due to legislative change or via Court decisions or administrative interpretations.  

The concerns that gave rise to the introduction of section 99B had long disappeared due to those changes; however, section 99B was left untouched.  While there have been situations where the provision could have impacted, we did not see section 99B being applied widely as one or more of those reforms was usually applied instead.

The current era has featured remarkable growth in private wealth and far greater diversity in our population.  When these aspects are combined with the transition of generational equity arising from an ageing population both in Australia and throughout at least the Western world, it is easy to imagine that the application of benefits held in foreign trusts to Australian tax residents will increase – potentially exponentially.  The Commissioner has identified that this trend provides more fertile ground for section 99B to operate, and many of those situations are difficult to rectify.

Application of Section 99B Income Tax Assessment Act

While the full practical impact of these updates will take time to be revealed, section 99B is now being applied more strictly than it previously has for foreign trust interests.  This will inevitably lead to more distributions from non-resident trusts being subject to Australian income tax than ever before.

There are several everyday situations where Australian tax law—specifically section 99B—might come into play including:

• Receiving money from a trust: If a trust makes a payment to you, it could be taxable.
• Getting assets from a trust: If property or investments are transferred to you from a trust, this may also be assessed.
• Using trust-owned property: For example, living in a house owned by a trust or using a trust’s vehicle.
• Borrowing from a trust: Loans from a trust to a beneficiary can trigger tax implications.
• Receiving an inheritance from an estate: In some cases, amounts received from a deceased estate may be caught under these rules.

There are some important exceptions and clarifications that can help you understand when and how this law affects you.

Exclusions

Not all amounts received from a trust are taxable. Some common exclusions include:

• Amounts having a foreign source received by a temporary resident.
• Capital (or ‘corpus’) of the trust: This is the original money or assets put into the trust – not income it has earned.  Where a trust may have been established by other parties in prior years, it’s more challenging to calculate this where a different trust settled funds on the trust being considered.
• Non-taxable income: This includes certain types of foreign income that wouldn’t be taxed in Australia if derived here.
• Amounts already taxed: If the income has already been taxed in Australia (either to you, the trustee, or another trust), it generally won’t be taxed again.
• Amounts linked to another Australian taxpayer: In some cases, the income may already be attributed to someone else.

To determine whether an amount is taxable, the ATO uses a ‘hypothetical resident taxpayer’ test. This means they ask: Would this amount have been taxable if it had been received by a typical Australian resident without any tax attributes? If the answer is yes, then it’s likely taxable under section 99B.

Why this matters

It is almost certain that anyone becoming entitled to benefits from a foreign trust will have tax implications to manage.  While it is helpful to obtain the Commissioner’s views about how section 99B applies in such cases, these updates highlight the challenges many Australians will face when dealing with overseas trusts, especially when access is required to detailed records that may not exist.

We’re here to help

If you’re in this situation, it’s important to seek advice early to ensure you have the information to allow you to understand and then meet your tax obligations. If you have any questions in respect of this matter, please contact your Grant Thornton representative.

_{1) Tax Determination TD 2024/9} 

_{2) Practical Compliance Guideline PCG 2024/3}