Taxation of transfers from overseas – are you across the latest issues to consider?

Australians often face unexpected tax burdens, particularly when receiving transfers from overseas. Ensuring the correct amount of tax is paid on distributions from foreign trusts is one of the key focus areas for the Australian Taxation Office (ATO) and is frequently subject to review.

Without proactive planning and robust documentation, these transfers can result in significant and unforeseen tax liabilities for both Australian residents and their extended overseas families. 

Overseas transfers – frequent scenarios

As at 30 June 2023, Australia’s population included 8.2m people who were born overseas which is about 30.7 per cent of Australia's total population. England, India, China and New Zealand were the countries of birth with the largest populations in Australia.

We often encounter scenarios where individuals initially come to Australia for short-term employment or study and end up permanently settling here. When setting up life in a new country, tax is not considered in the first instance. Similarly, when it comes to undertaking estate or inheritance planning, extended family members overseas might not have considered their children or grandchildren would permanently move to another country and build closer ties in Australia, like living with an Australian partner. 

In addition to these scenarios, someone who has been an Australian tax resident their entire life could receive an inheritance, gifts, loans or other forms of transfers from overseas e.g. from relatives or a deceased estate or because they benefit from a foreign trust established for investment or business (or other) purposes.

As any transfer of $10,000 or more must be reported to AUSTRAC, Australian authorities, including the Commissioner of Taxation, will be aware of any cash transfer soon after it happens.

What tax implications need to be considered?

While these matters seem to be common occurrences, they could inadvertently create a significant Australian tax burden, not only for the Australian tax resident but could also have an indirect impact on extended overseas family members.

For example, section 99B of the Income Tax Assessment Act 1936 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 articles on Section99B and Foreign Trusts. 

It’s possible that more than half of the inheritance, gift or a loan could be subject to Australian tax – especially when the distribution is made from the wealth accumulated in an overseas trust structure. The resident family member must maintain the appropriate documents in support of the receipt as it has the onus of proof. The courts have ruled in favour of the Commissioner where sufficient records are not maintained by taxpayers.

Trust structures and ATO focus on overseas distributions

A trust as a structure is commonly used by high-net-worth families and private groups for various purposes including asset protection and estate planning. Trust structures are widely used in Commonwealth countries such as Australia, the United Kingdom, New Zealand, Singapore, Hong Kong, South Africa, India, and Canada.

The taxation of distributions from an overseas trust is one of the ATO’s recent focus areas. In the guidance, PCG 2024/3 and TD2024/9, the ATO has noted an increase in resident taxpayers who receive an amount of trust property (being a payment or other form of benefit) from non-resident trusts. These guidelines focus on trust property accumulated by a trust during any period that it was a non-resident of Australia for tax purposes.

We’re here to help

Proactive planning is crucial when receiving any transfer from overseas. Key steps include:

• Evaluating how Australian tax law applies to your circumstances, including assessing your own tax status, and planning on how it could impact other extended family members.
• Maintaining detailed and accurate documentation.
• Seeking expert assistance to understand and navigate potential tax implications and monitor latest developments.

If you would like to understand how the Australian tax law applies in your circumstances or require assistance in understanding and navigating the potential tax implications, contact our team of experts today.

Article contributed by Karen Tran - Private Business Tax & Advisory

_{Sources: ABS, NAA, ATO} 

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