Are you an Australian tax resident who is a beneficiary of a foreign trust, and have you received any capital distributions or benefits from this trust? If your answer is yes, section 99B will likely apply to you.
The ATO has recently released a number of draft rulings and updated guidance on their application of s 99B, highlighting that these cross-border transactions are on their radar and due to improved data matching abilities with AUSTRAC it is important to get this right.
Section 99B was originally enacted to deter taxpayers from accumulating foreign sourced income overseas in jurisdictions with lower taxes and then distributing these funds to Australia tax free. This highlights that the prima facie target of s 99B was to capture receipts of trust income that were not previously subject to Australian tax. However, the broad wording of the legislation provided an extreme breadth where it could even apply to Australian trusts and will apply to benefits such as loans provided on arms-length terms from foreign trusts.
The most bizarre part about s 99B is that there is no limit to the ATO reach, this section allows the ATO to capture and tax, distributions of accumulated income which were derived prior to the beneficiary becoming an Australian tax resident. This was confirmed by an ATO interpretative decision where s 99B applied to amounts entirely attributable to foreign sourced accumulated income that was derived by a foreign trustee overtime, years before the beneficiary became an Australian resident.
The ATO essentially treats these capital distribution and benefits like normal income which will be subject to taxes up to 47% and no relief is provided for foreign taxes previously paid. There is a silver lining though, if the income when it was initially derived would not have been subject to Australian tax if it had been derived by a ‘hypothetical Australian tax resident’ then s 99B will not apply and the distribution or benefit will remain tax free.
It is also important to know that while the ATO can now tax this accumulated foreign income due to s 99B, there can be a significant deferral between when the income was initially derived and eventually declared as assessable income by an Australian beneficiary. To compensate this postponement in taxes, throwback interest was introduction. Taxpayers need to be aware that if they receive a distribution from a foreign trust, they could be also liable for this interest charge which can be substantial depending on how much time has passed.
If you receive or expect to receive any type of benefit or capital distribution from a foreign trust, please feel free to contact our office to discuss your circumstances with our advisors and understand how this may affect you.
