The ATO has confirmed a stricter application of section 99B, meaning more distributions or benefits from foreign trusts to Australian residents may now be taxable.
Whether a distribution is taxable depends on factors like its source, prior taxation, and whether it qualifies as trust corpus, assessed using a 'hypothetical resident taxpayer' test.
To avoid unexpected tax consequences, beneficiaries of foreign trusts must maintain detailed documentation and seek early advice, especially as access to historical records may be limited.
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:
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.
The ATO’s Tax Determination TD 2024/9 provides examples to help clarify how this hypothetical resident taxpayer test works:
Only Australian residency is considered in the test— no other factors like whether the person is an individual or a company, the practical impact being that tax concessions for particular taxpayer types are not considered.
Capital gains from selling assets on or after 20 September 1985 (when CGT started) are usually taxable.
Gains from assets acquired before 20 September 1985 are generally not taxable.
If you receive a distribution, you’ll need to show where it came from—whether or not it is from the original corpus. If it didn’t come from the original corpus and was never taxed in Australia, it may be taxable now.
The ATO also released a practical guide (PCG 2024/3), which includes details of what documents you may need to prove the source of the funds or assets. These might include:
A signed and executed trust deed or will of a deceased (for testamentary trusts)
Signed trustee minutes, resolutions or distribution statements confirming an amount was paid or applied for the benefit of a beneficiary from the trust's corpus
Copies of the trust's financial accounts for the relevant years, prepared in accordance with the accounting principles of the relevant country
Various other documents such as bank statements, lists of testamentary/trust assets, accountants workpapers supporting trust accounts and tax returns, advice from foreign professional advisers, etc.
PCG 2024/3 also indicates that the ATO has said it won’t focus on low-risk situations, such as:
Using or borrowing trust property on commercial terms
Receiving distributions from a deceased estate within 24 months of death, as long as the total value is under A$2 million
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.
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