Ap_att07

Foreign Trusts: attributable taxpayers

Foreign Trusts - what is an attributable taxpayer of a foreign trust?

When Is A Transferor an Attributable Taxpayer?

Trustee transferring assets of a deceased estate is not attributable taxpayer

Trustee transferring assets under the terms of a divorce settlement is not an attributable taxpayer

Trustee transferring assets under the terms of a family relief trust is not an attributable taxpayer

Examples of a transferor NOT deemed to be an attributable taxpayer IF the transfer was made for a consideration at an arms length amount

If you are not aware of the way trust income is subjected to tax by sections 97, 98 and 99 found in DIVISION 6 of the Income Tax Assessment Act you should probably have a look at the topic on trust income now.

These provisions offer a rather effective incentive to the trustee to distribute as much of the net income of the trust to beneficiaries as is possible. That incentive is found in section99A, which authorises a penalty rate of tax on net income of the trust to which no beneficiary is presently entitled.

However, before the introduction of the foreign tax accruals legislation, foreign source income of a non-resident trust, was not subject to those provisions and could be accumulated indefinitely. There were no penalty provisions encouraging the trustee to distribute the income.

The foreign source income of such a trust was subjected to tax only when it was paid to or applied for the benefit of the resident beneficiary.

The transferor trust provisions of DIVISION 6 AAA now include the income derived by a non resident trust in the assessable income of a new class of taxpayer which can be referred to as TRANSFEROR or ATTRIBUTABLE TAXPAYER.

These are the taxpayers who transfer property to non resident trusts AT LESS THAN THE VALUE a person dealing at ARMS LENGTH would pay for the property, usually for no obvious reason other than the desire to avoid paying tax on the income that those assets will produce.

IF DIV 6 AAA DOESN'T GET YOU, THE OLD PROVISIONS MIGHT

A new provision - section99 B, has been added to DIVISION 6 of the Act, which has the effect of charging interest on income which has been accumulated in such non resident trusts, when it is finally distributed to the beneficiaries of the trust.

What Is A Transferor?

A transferor is a person who transferred property or services to

a non resident DISCRETIONARY TRUST (one for which the trustee can make the decision as to how much income will be distributed to which beneficiaries)

non resident NON DISCRETIONARY trust for no consideration or for consideration which is less than an arms length amount.

The Commissioner can 'deem' such a transfer to have been made in cases in which transferor has used an intermediary to effect the transfer.

When Is A Transferor an Attributable Taxpayer?

A person can transfer goods or property without attracting the operation of the new provisions.

In other words, a transferor will not always be an attributable taxpayer.

Can you think of a situation in which a person would transfer property to a non resident trust without having any intention of deferring payment of tax on any income the property might produce?

Trustee transferring assets of a deceased estate is not an attributable taxpayer

What about someone who before dieing, makes a will, transferring all his assets to an heir who happens to live overseas?

The trustee who makes such a transfer pursuant to directions contained in the deceased person's will or codicil or to a court order which varies the will or codicil will NOT be an attributable person.

There are exceptions such as in the case where a trustee with discretion to invest the money of the deceased estate transfers the money to a

non-resident discretionary trust,

or some entity, other than the deceased person causes the transfer

or the transfer is part of an operation that would attract the operation of the anti avoidance provision in section102AAK

Can you think of another 'innocent' transfer to a non-resident trust, which should not attract the stigma of attributable taxpayer to the transferor?

Trustee transferring assets under the terms of a divorce settlement is not an attributable taxpayer

What about a trust set up under the terms of a divorce settlement?

Where the trust comes into existence by virtue of

a decree or order of dissolution or annulment of a marriage,

or a decree or order of judicial separation or similar instrument

or agreement arising from the breakdown of a de facto marriage

Such a transfer will not cause the transferor to be treated as an attributable taxpayer, as long as the beneficiaries of the trust are

non resident

natural persons,

who are primary potential beneficiaries, which means ....

spouse or former spouse of the natural person

child of the natural person or spouse of the natural person

child of the former spouse of the natural person at a time when the marriage persisted

Trustee transferring assets under the terms of a family relief trust is not an attributable taxpayer

What about family relief trusts set up before these provisions existed?

They can also escape the attributable taxpayer tag if...

they are established and operated for the relief of persons who are in necessitous circumstances

and who are the primary potential beneficiaries, which means ...

non resident,

natural persons

identified by name in the trust deed who are

spouse or former spouse of the natural person

parent of the natural person, or that person's spouse or former spouse

child of the natural person, or that person's spouse or former spouse

grandparent of the natural person

grandchild of the natural person

brother or sister of the natural person, or that person's spouse or former spouse

child of the brother or sister of the natural person, or that person's spouse or former spouse

There are a few more conditions a FAMILY RELIEF TRUST must satisfy.

the assets must not be excessive having regard to the requirements, or likely requirements of the potential beneficiaries

no transfers were made after 12/4/89 - the start date for these provisions

if such a transfer was made, immediately after each transfer, were not excessive having regard to the requirements or likely requirements of the beneficiaries.

Can you think of a similar situation which might also be attract relief?

What about a natural person

Who became an Australian resident after 12/4/89

who transferred property or services to a non resident trust before becoming a resident

and was not in a position to control the trust after becoming a resident

Examples of a transferor NOT deemed to be an attributable taxpayer IF the transfer was made for a consideration at an arms length amount

A public unit trust in which

any of the units were listed on a stock exchange in Australia or elsewhere or were offered to the public

or the units of which were held by 50 or more people

The transferor trust measures will not apply if

it is a public trust AT ALL TIMES during the transferor's year of income

the transfer was made for a consideration at an ARM'S LENGTH AMOUNT

the sole purpose of the transfer was the arm's length acquisition of units in the unit trust.

Discretionary trusts - the prime target of the transferor trust provisions

Even though it is the trustee who has power to ship assets offshore to create foreign income streams from non resident trusts, who is the prime target of this legislation, such transfers will not always transform him, her or it into an attributable taxpayer.

Such a transformation will not take place in the following situations....

Discretionary Trust Transferor Not Attributable Taxpayer - Case 1

Transfer made in the course of carrying on a business ... and ...

made in terms identical or similar to those that relate to transactions undertaken by the transferor, at or about the time of the transfer, in the ordinary course of business with ordinary clients or customers.

In other words, on an arm's length basis

Discretionary Trust Transferor Not Attributable Taxpayer - Case 2

Transfer made otherwise than in the course of carrying on a business .. and

transactions was made on an arm's length basis ... and

neither the transferor nor associates was in a position to control the trust at any time after the transfer and before the end of the current year of income

Discretionary Trust Transferor Not Attributable Taxpayer - Case 3

Transfer made before these provisions took effect (12/4/89) ... and ...

neither the transferor nor associates was in a position to control the trust at any time after 12/4/89 and before the end of the current year of income

In cases 2 & 3, the transferor is not in a position to control the trust when the transfer is made.

If he/she/it subsequently

acquires a position of control over the trust,

makes a non arm's length transfer of property or services to the trust

he/she/it is transformed into an attributable taxpayer, and the previous assessments can be amended to reflect this change of state.

So what is a POSITION OF CONTROL over a non resident trust?

A transferor is taken to be in a position to control a non-resident trust if the transferor (or any of the transferor's associates)

has power to obtain the beneficial enjoyment of the trust corpus or income

was able to control, directly or indirectly, the application of trust income or corpus

was capable, under a scheme, of gaining the enjoyment or control referred to above

was in a position, such that the trustee of the trust was

accustomed,

or under a formal or informal obligation

or might reasonably be expected to act

in accordance with the

directions,

instructions or

wishes

of a transferor or associate of the transferor

has the ability to remove or appoint the trustee or trustees of the trust

Non Discretionary Trusts -

Another target of the transferor trust provisions that can escape the transformation from transferor to attributable taxpayer

If a transferor transfers property or services to a NON DISCRETIONARY TRUST he/she/it can avoid the stigma of attributable taxpayer status if...

it is a non discretionary trust at all times during the year of income

the transfer was made for consideration at an arm's length price

A subsequent non arms length transfer can result in the retrospective transformation of transferor into attributable taxpayer - in other words the attribution provisions will be triggered by such a transaction.