Insight

Taxation of foreign trust distributions and Section 99B

By:
Paul Banister,
Dharav Gandhi
30 Jun 20257 min read
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Contents

Taxation of foreign trust distributions and Section 99B 

Section 99B of the Income Tax Assessment Act 1936 (Cth) seeks to tax a broad range of foreign trust distributions received by Australian resident beneficiaries, including loans, gifts, and use of trust property. This can result in significant and unexpected tax consequences in Australia. See our recent insight.

Until recently, the ATO has issued limited guidance on its application. In recent developments, the ATO released guidance on Section 99B (TD 2024/9 and PCG 2024/3), which seeks to set out the ATO’s view and compliance approach to Section 99B. We have issued a separate private tax technical alert on the topic which can assessed here.

How does Section 99B work? 

Section 99B extends beyond trust distributions of current-year income and covers a broad range of benefits, such as:

  • Distributions from a trust to an Australian tax resident, including what may be considered corpus of the trust and accumulated earnings.
  • Transfer of assets by the trustee to an Australian tax resident beneficiary.
  • A loan from the foreign trust to an Australian tax resident, directly or indirectly through another entity.
  • The foreign trust allows an Australian tax resident beneficiary to use trust property. 
  • An Australian tax resident beneficiary received a gift that was sourced from a foreign trust. 
  • Amounts received by an Australian resident from a deceased estate.

Exclusions from the application of Section 99B

There are distributions specifically excluded from the application of Section 99B. These broadly include:  

  • Distributions of a corpus of a trust, such as the originally settled sum. It is often challenging to determine what is considered corpus for the application of Section 99B.
  • Distributions that would not have been included in the assessable income of the beneficiary had it been derived by the beneficiary directly. For example, gains from the capital asset acquired prior to 20 September 1985.
  • Distributions already assessed to the beneficiary under other income tax provisions. 

If the distribution includes accumulated income that isn't excluded, the Australian resident beneficiary might have to pay an additional interest charge. The practical effect of this may be to reverse part or all of the tax-free benefit of trust corpus.

Common scenarios

Let’s take a look at some common examples of when Section 99B may apply. 

Harry currently lives in the UK and is a UK tax resident. He is the chief engineer of a UK-based technology company. He is also a beneficiary of a family Trust, which has investments in properties and shares. Harry regularly receives distributions from the family Trust. The family Trust is a tax resident of the UK.

Harry’s employer has plans to establish a base in Australia and has asked Harry to relocate and work in Australia for three months to help set up operations and train up employees. Three months into his overseas assignment and Harry enjoys living in Australia so much that he decides to live in Australia for the foreseeable future and gets his Australian permanent residency visa.

Unaware of Harry’s decision to stay in Australia, the Trustee of the UK family Trust resolves to make Trust distributions to Harry. The distributions received by Harry may be taxable in Australia under Section 99B depending Harry’s tax residency status, the nature and source of Trust funds and if any of the above exclusions were to apply. 

Sarah moved from New Zealand to Australia to pursue her studies. She is a beneficiary of a family Trust. Her parents, who reside in NZ, are the trustees of the family Trust. The family Trust is a tax resident of NZ. She has also formed a defacto relationship with an Australian citizen.

Sarah’s parents allow her to occupy a house rent-free while she is studying in Australia. The house is owned by the family Trust. Her parents also allow her to borrow $20,000 from the family Trust to cover some of her living expenses. The loan is interest-free and not on commercial terms.

Use of the house and the loan from the trust are amounts paid to, or applied for the benefit of, Sarah, an Austrlaian tax resident beneficiary, for the purposes of Section 99B. The amount assessable to Sarah under Section 99B would depend on the nature and source of trust funds, Sarah’s tax residency status and if any of the above exclusions were to apply.

 

Key considerations

  • Payments from overseas sources are tracked by The Australian Transaction Reports and Analysis Centre (AUSTRAC) and reported to the ATO. Where the amounts are included in the assessable income of the taxpayer, the onus is on the taxpayer to prove the amounts are not income.
  • Given the ‘catch-all’ nature of Section 99B and the ATO’s renewed focus on foreign trust distributions, due consideration should be given to the tax implications in Australia of any transfer from overseas that may trigger Section 99B before entering into the arrangement.
  • If a beneficiary is looking to move to Australia, the residency status of the beneficiary and the tax implications of foreign trust distributions to the beneficiary should also be considered, again ideally before the beneficiary moves.  This should incorporate assessing whether the person is a temporary resident under Australian tax laws
  • The ATO in the ruling has recognised that it can be challenging to obtain relevant documentation information in certain circumstances. Nevertheless, trustees and beneficiaries need to keep up-to-date records that show where the trust distributions come from and what they are for. It is the beneficiary's responsibility to prove that an amount is exempt from Section 99B.
  • While engaging in estate planning in their home country, family members should consider the Australian income tax implications of the inheritance received by their Australian children and grandchildren. Understanding the income tax consequences upon distribution to the Australian beneficiaries will help family members make informed decisions, ensuring the distribution is equitable among family members. This awareness can also facilitate clear communication within the family and help prevent potential disputes.
  • Families in countries with low or no capital gains tax, like New Zealand and Singapore, often find it hard to grasp the high taxes imposed by Australia. Also, an Australian resident might be upset to find out that the 50% capital gains tax discount does not apply to an amount that is assessable under s.99B.

We’re here to help

If you would like to understand how section 99B could apply to your circumstances or require assistance in navigating the potential tax implications, contact our team of experts today.

Article contributed to by Karen Tran - Private Business Tax & Advisory

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Authors
  • Paul Banister
    Paul Banister Paul leads our Tax division in Brisbane and has over 30 years’ experience working with clients in an array of industries to help them navigate through complex and potentially risky tax and commercial issues. View Profile
  • Dharav Gandhi
    Dharav Gandhi Dharav has over 15 years of experience providing specialist tax and business advisory services to startups, domestic and international family-owned and private businesses and corporates. View Profile

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