Ap_att09

Foreign Trusts: Section 99 & attributable income

Section 99B - transforming income that is dressed up to look like capital, back into income

Section 99B - the interest levied on the ones that got away

How much interest is payable under section 99 B?

Does sec 99 B offer any escape from the interest on distributions?

The transferor trust provisions are found in Div 6 AAA of the Act, but a relatively newer section has been added to the 'traditional' trust provisions found in Division 6 of the 1936 Income Tax Assessment Act.

The new provision is section 99 B, and it applies to distributions of trust income, which have not been caught by the other trust provisions.

Receipt of trust income not previously subject to tax

(1) Where, at any time during a year of income, an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary of the trust estate who was a resident at any time during the year of income, the assessable income of the beneficiary of the year of income shall, subject to subsection (2), include that amount.

Did you notice the bit about subject to subsection (2)?

Sub section (2) says…

The amount that, but for this subsection, would be included in the assessable income of a beneficiary of a trust estate under subsection (1) by reason that an amount, being property of the trust estate, was paid to, or applied for the benefit of, the beneficiary shall be reduced by so much (if any) of the amount, as represents:

Those exceptions are

distributions from the corpus of the trust

liable to tax in the hands of the beneficiary under sec 97

liable to tax in the hands of the trustee under sec 98, 99, 99A

distributions which represent attributable income which have been attributed to the taxpayer (whether a natural person or a company)

distributions which would not have been assessable income in the hands of the resident taxpayers (such as distributions of exempt income)

So, distributions made by a non-resident trust to Australian resident beneficiaries are assessable under sec 99B UNLESS they are included in the list of exceptions.

Possible solution!

Why not retain the income that will be included in the beneficiary's assessable income as long as possible, thus deferring the payment of tax?

The additional tax payable in the form of interest charge payable under the Taxation (Interest on Non-resident Trust Distributions) Act 1990 - that’s why!

You can read up on the details in paragraph 21-350 of the CCH Master Tax Guide. However here is the gist of the provision…

To avoid the interest charge on such distributions, it will be necessary for you to provide evidence which rebuts the presumption that a benefit has been received from deferring the tax.

If the distribution is from a broad exemption listed country trust estate, only the amount that represents designated concession income is subject to the interest charge. So to avoid the interest, it is necessary to rebut the presumption that the distribution is wholly attributable to designated concession income

If the distribution is from a broad exemption, unlisted countries trust estate, only the amounts, which have NOT been subject to tax in a listed country, are subject to the interest charge. So to avoid the interest, it is necessary to rebut the presumption that the distribution is wholly attributable to income, which has not been taxed in that manner.

How much interest is payable?

Section 102AAM shows how to calculate the amount on which the interest will be charged.

Distributed Amount

Applicable rate of tax

Foreign tax credit attributable to amount of distribution included in income

The rate of interest charged is set in section 214A as the Treasury Note Yield.

(3) Subject to this section, the rate of interest for a month in the first 6 months of

a financial year is the Treasury Note yield for April in the preceding financial

year.

(4) Subject to this section, the rate of interest for a month in the last 6 months in

a financial year is the Treasury Note yield for October in that financial year.
Period over which interest rate accrues

Trust distribution paid out of trust income accumulated before 1/7/90, from the 1/7/90

trust distribution paid out of trust income accumulated after 1/7/90

From the start of the beneficiary's year of income that follows the income year of the trust estate in respect of which the income would have been included in the assessable income of the trust, if the trust was a resident trust

Does sec 99 B offer any escape from the interest on distributions?

There are 2 situations in which the interest will not be levied. They are

Deceased estates (section 102 AAM (1B) )

Public Unit Trusts (section 102 AAM (1CB) )