This part helps you determine whether you are subject to the transferor trust measures. It also shows how to work out the amount to include in your assessable income if the measures do apply.
Are you a transferor in relation to a non-resident trust estate? |
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Are you subject to the transferor trust measures? |
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What amount do you have to include in your assessable income?
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Section 1: Are you a transferor in relation to a non-resident trust estate?
Transfers of property or services
If you have transferred property or services to a non-resident trust estate, the profits of the trust may be attributed to you - that is, the profits may be included in your assessable income, even though you have not received a distribution from the trust.
You will be regarded as a transferor if you:
- have at any time transferred property or services to a non-resident discretionary trust estate, or
- transferred property or services after 7.30pm on 12 April 1989 to a non-resident trust estate that is non-discretionary for either no consideration or for consideration less than an arm's length amount.
Deemed transfers
Certain transfers of property or services made to another entity may be deemed to have been made to a trust estate if the transfer is connected with a transfer to the trust estate.
Example 1
Deemed transfer to a trust estate
Entity A transfers property to Entity B on condition that Entity B transfers the property to a trust estate. In this case, Entity A would be deemed to have transferred to the trust estate the property transferred by Entity B.
Example 2
Marketing of units in a unit trust
The trustee of a unit trust issues units to Entity A, which acts as manager, underwriter or dealer for the placement of the units. Entity A transfers property or services to the trust for the purpose of acquiring the units. Entity A then disposes of the units to Entity B, which transfers property or services to Entity A as consideration for the acquisition of the units.
In this case, Entity B is deemed to have transferred the property or services that Entity A originally transferred to the unit trust - as a result, Entity A will not be taken to have transferred property or services to the trust estate.
Where a partnership has transferred property or services to a non-resident trust estate, each partner is deemed to have transferred property or services in proportion to their interest in the partnership.
Where a trust estate - that is, a discretionary trust that is an Australian trust or a controlled foreign trust - has transferred property or services to a non-resident trust estate, each person who has transferred property or services to the first-mentioned trust estate is deemed to have transferred property or services to the second-mentioned trust estate.
If the partnership or trust estate is in existence at the end of the non-resident trust estate's year of income, any attributable income of the non-resident trust estate is attributed to the partnership or trust estate. If the partnership or trust estate is not in existence at the end of the non-resident trust estate's year of income, any attributable income of the non-resident trust estate is attributed to the partners of the partnership, or the original transferors to the trust estate.
The ATO may also treat you as having transferred property or services to a trust if you benefited from a transfer by a company, partnership or trust that ceases to exist.
If you need further information on deemed transfers, contact the ATO.
Section 2: Are you subject to the transferor trust measures?
The amount to be included in the assessable income of a resident transferor for profits derived by a non-resident trust estate is called 'attributable income'; the resident transferor to whom it is attributed is called an 'attributable taxpayer'.
Exemptions from the transferor trust measures
A number of exemptions are provided from the transferor trust measures. These exemptions depend on the type of trust estate to which you have transferred property or services.
Public unit trusts
The transferor trust measures do not apply to a transfer of property or services to a non-resident trust estate if:
- the trust estate is a public unit trust at all times during the transferor's year of income
- the transfer was made for arm's length consideration, or
- the sole purpose of the transfer was the arm's length acquisition of units in the unit trust.
A unit trust will be a public unit trust if, at any time during the income year, any of the units were listed on a stock exchange in Australia or elsewhere, or were offered to the public. A unit trust will also be a public unit trust if the units in the unit trust were held by 50 or more individuals at all times during the income year.
The transferor trust measures will apply to you if you make a transfer of property or services to a non-resident public unit trust on or after 12 April 1989 for less than an arm's length consideration.
Deceased estates
The transferor trust measures generally do not apply to a trustee of a deceased estate who transfers property or services to a non-resident trust estate according to directions contained in the deceased person's will or codicil, or according to a court order which varies the will or codicil. However, the measures will apply if:
- the transfer is made through the exercise of the power of appointment or of a discretion by the trustee or any other person - for example, where the trustee of a deceased estate has a discretion to invest money of the trust estate and decides to transfer the money to a discretionary trust estate, or
- the trustee transfers property or services to a non-resident trust estate but the transfer was caused by another entity (other than a deceased person), in which case the entity that caused the transfer is treated as a transferor, or
- under a scheme, the trustee transfers property or services to an entity, and another entity transfers property or services to a trust - in this case, the trustee is treated as having transferred the property or services to the trust.
Non-resident family trusts
The transferor trust measures do not apply to an individual who has transferred property or services to a non-resident family trust. However, the trust must be a non-resident family trust at all times when it is in existence after the beginning of the transferor's 1990-91 income year until the end of the current income year - that is, the income year for which the transferor is working out assessable income.
An exemption from the transferor trust measures is also available to an individual who:
- first becomes an Australian resident after 12 April 1989
- makes a transfer to a non-resident family trust before taking up residency in Australia.
To qualify, the trust estate must be a non-resident family trust at all times after the transferor becomes a resident of Australia.
The exception does not apply to an individual who, as trustee, transferred any property or services to the non-resident family trust from any other trust estate.
Two types of non-resident family trusts are covered by this exception:
- post-marital family trusts
- family relief trusts.
Post-marital family trusts
Post-marital family trusts come into existence after a decree or order of dissolution or annulment of a marriage, or a decree or order of judicial separation or similar instrument. Trusts resulting from the breakdown of a de facto marriage also qualify. The beneficiaries of the trust estate must be non-resident individuals and:
- the spouse or former spouse of the individual, or
- a child of the individual or the individual's spouse, or
- a child of the individual's former spouse during the marriage.
Family relief trusts
Family relief trusts are established and operated to help non-resident family members. Trusts with Australian or non-family beneficiaries do not qualify as family trusts. The only beneficiaries permitted are non-residents who are related to the transferor. The following persons are treated as related to the transferor for this purpose:
- a spouse or former spouse
- a parent of the transferor or of the transferor's spouse or former spouse
- a child of the transferor or of the transferor's spouse or former spouse
- a grandparent of the transferor
- a grandchild of the transferor
- a brother or sister of the transferor or of the transferor's spouse or former spouse
- a child of the transferor's brother or sister
- a child of a brother or sister of the transferor's spouse or former spouse.
A trust estate will generally not qualify as a family trust if the assets of the trust are excessive given the requirements of the beneficiaries. The exception to this rule is if there have been no transfers of property or services to the trust after 12 April 1989 - in this case, the trust can have excessive assets and still qualify as a family trust.
Contingent beneficiaries
A trust estate can still be a family trust estate if, in the event of the death of a family member, one or more individuals benefit or are capable of benefiting under the trust. However, these persons must be:
- non-residents, and
- children of the deceased family member.
If all beneficiaries die, the trust estate can still be a family trust estate if there are one or more funds, authorities or institutions covered by an item in the tables in Subdivision 30-B of the ITAA 1997 or item 2 of the table in section 30-15 of the ITAA 1997 (the gift provisions) that would benefit or be capable of benefiting under the trust.
Migrant transferors
An individual who first became an Australian resident after 12 April 1989 will not be subject to the transferor trust measures if they transferred property or services to a non-resident trust estate before becoming a resident and they were not in a position to control the trust estate.
Discretionary trust estates
The transferor trust measures do not apply to a transferor who has transferred property or services to a discretionary trust estate if both the following conditions are met:
- the transfer was made in the course of carrying on a business, and
- the transfer was 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 - that is, on an arm's length basis and subject to similar terms and conditions.
If the transfer was not made on an arm's length basis in the course of carrying on a business, the transferor trust measures will normally apply if at any time after the transfer the transferor or the transferor's associates were in a position to control the trust estate. However, if the transfer was made before 12 April 1989, the transferor trust measures will only apply if the transferor or the transferor's associates were in a position to control the trust after 12 April 1989.
If a transferor subsequently gains control of the discretionary trust estate, all years before the commencement of the transferor trust measures become subject to the measures.
A transferor is taken to be in a position to control a non-resident trust estate if the transferor or any associates:
- have power, by whatever means, to obtain the beneficial enjoyment of the corpus or income of the trust estate
- were able to control, directly or indirectly, the application of the income or corpus of the trust estate
- were capable, under a scheme, of gaining the enjoyment or control referred to in the above two bullet points
- could expect the trustee to follow their directions, instructions or wishes, or
- have the ability to remove or appoint any trustees of the trust estate.
All factors must be taken into account in determining whether the trustee of a trust estate was accustomed, or might reasonably be expected, to follow directions, instructions or wishes of a transferor or an associate of the transferor.
For example, a requirement in a trust deed for the trustee to ignore directions, instructions or wishes would not pre-empt the examination of the actual circumstances to determine whether the transferor or an associate controls the trustee. The way in which the trustee has acted in the past, the relationship between the transferor or transferor's associate and the trustee, and the amount of property or services transferred to the trust estate, are some of the other matters that need to be considered.
Non-discretionary trust estates
The transferor trust measures will not apply to a transferor who transferred property or services to a non-discretionary trust estate before 12 April 1989. In addition, the measures will not apply to a transfer of property or services after 12 April 1989 if:
- the trust estate was a non-discretionary trust estate at all times during the transferor's current year of income, and
- the transfer was made for an arm's length consideration.
If:
- one transferor (the original transferor) makes transfers of property or services to a non-resident non-discretionary trust estate which were all made for consideration at an arm's length amount, and
- another transferor (the second transferor) makes a transfer of property or services to the same non-resident trust estate on or after 12 April 1989 which is made for no consideration or consideration at less than an arm's length amount
the second transferor (but not the original transferor) would become an attributable taxpayer in relation to the trust estate - as a result, all the attributable income of the trust estate would be attributed to the second transferor.
Section 3: What amount do you have to include in your assessable income?
This section is relevant only if you are an attributable taxpayer in relation to a non-resident trust estate.
You must follow the steps in subsection 1 to work out your attributable income if you can obtain the necessary information.
If you cannot reasonably be expected to have access to the necessary information, work out the amount to be included in your assessable income following the steps in subsection 2.
Once you have worked out the amount to include in your assessable income, you may be able to apply for a reduction of this amount - Subsection 3 explains how to do this.
Subsection 1: Working out your assessable income where information is available
Working out the attributable income of a non-resident trust estate
To determine the attributable income of a non-resident trust estate, you must first work out its net income. The net income of a trust estate is worked out as though the trust estate were an Australian resident and taxpayer.
In working out the net income of a non-resident trust estate, you need to identify whether it is a listed country trust estate.
If it is a listed country trust estate, only the trust's eligible designated concession income and foreign investment fund income are taken into account when working out the net income. The balance of the income of the trust estate is treated as exempt income.
If it is an unlisted country trust estate, all its income or gains are included in working out its net income.
A non-resident trust estate is treated as a listed country trust estate if all the income of the trust estate (other than eligible designated concession income) is either subject to tax in a listed country or is assessable in Australia in the hands of the trustee or a beneficiary.
Amounts that may be excluded from attributable income
In determining the attributable amount, the net income of a non-resident trust estate is reduced by the following amounts to the extent they relate to amounts included in the net income of the trust estate:
- amounts that have been included in the assessable income of a beneficiary under section 97 of the Act - that is, amounts to which a beneficiary is presently entitled
- amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 98 of the Act - for example, on behalf of a resident beneficiary under a legal disability
- amounts where the trustee of the non-resident trust estate has been assessed and is liable to pay tax under section 99 or 99A - for example, where the trust has undistributed Australian source income
- amounts paid to beneficiaries who are residents of a listed country if those amounts are paid during the non-resident trust estate's income year or within one month after the end of the income year; these amounts must be subject to tax in a listed country in a tax accounting period ending before the income year or commencing during the income year
- franked dividends - that is, dividends paid by Australian companies or similar amounts paid by corporate unit trusts and public trading trusts, out of profits that have been subject to Australian tax
- amounts included in the assessable income of the trustee of a trust estate where a dividend is grossed up for dividend imputation purposes
- amounts received by a trustee from another trust estate to the extent that the amount has already been attributed to a transferor
- amounts received by the trustee that are referable to the income or profits of a CFC that have been included in the assessable income of any resident taxpayer under the CFC measures
- income or profits of the trust estate (other than eligible designated concession income) that are subject to tax in any listed country in a tax accounting period ending before the end of, or commencing during, the non-resident trust estate's income year
- amounts of foreign tax or Australian tax paid by the trustee or a beneficiary on amounts included in the attributable income of the trust estate.
For a listed country trust estate, exclude only the amounts that relate to the part of the net income that consists of eligible designated concession income.
Modifications made to Australian tax law
Rules that do not apply in working out the attributable income of a trust estate
The following rules do not apply in working out the attributable income of a trust estate:
- the exemption for distributions from profits that have been taxed under the CFC measures
- the exemption for amounts that have been subject to withholding tax in Australia
- the CFC measures
- conduit foreign income.
Conversion of income and expenses to Australian dollars
When calculating attributable income, you must convert all amounts into Australian currency. This conversion is done using the conversion rules under the usual operation of the Act - for more information, see the fact sheet Foreign exchange (forex): the general translation rule.
Choice to use functional currency
The transferor trust may choose to have its attributable income calculated in the sole or predominant currency in which it keeps its accounts - for example, ledgers, journals, and statements of financial performance. This sole or predominant currency is called the 'applicable functional currency'.
When calculating attributable income in functional currency, all amounts that are not in the applicable functional currency (including Australian currency amounts) must be converted into the applicable functional currency. This conversion is done using the conversion rules under the usual operation of the Act. However, when applying these rules, the applicable functional currency is taken not to be foreign currency, and all other amounts (including Australian currency amounts) are taken to be foreign currency.
Once the attributable income is calculated, it is converted into Australian currency in accordance with the relevant conversion rules.
The choice of applicable functional currency must be in writing, but the transferor trust is not required to notify the Commissioner. The transferor trust must keep written evidence of the choice for as long as it is required to keep its tax records.
Generally, the choice will apply to the income year immediately following the one in which the choice is made. However, it will apply to the income year in which the choice is made where the choice is made within 90 days of the beginning of that income year.
The choice to use the applicable functional currency applies until you withdraw it. You can only withdraw a choice where the functional currency has ceased to be the sole or predominant currency in which the trust keeps its accounts. The withdrawal has effect from immediately after the end of the income year in which the choice is withdrawn; and the withdrawal must be in writing and retained with your tax records. You may make a new choice applicable to subsequent income years.
Modified application of trading stock provisions
All items of trading stock are to be valued at cost when brought to account by a non-resident trust estate.
Modified application of depreciation provisions
A non-resident trust estate is allowed depreciation on the same basis as a resident taxpayer. However, assets are treated as having been held for the production of assessable income in income years where there was no calculation of attributable income.
Where the trustee has used a property during an income year partly for producing exempt income and partly for producing assessable income, the ATO can determine the amount that is an allowable deduction.
Modified application of the transfer pricing rules
The ATO can make adjustments reflecting arm's length values to amounts used in working out the attributable income of a trust estate. To avoid double taxation, the ATO can make a corresponding adjustment to an amount in determining the taxable income of another taxpayer.
Modifications relating to capital gains tax
The capital gains tax provisions of the Act (that is, Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997) apply as if the non-resident trust estate were a resident trust for CGT purposes. This ensures that a capital gain on the disposal of a CGT asset which is not taxable Australian property is taken into account under the transferor trust measures. It also ensures that the pre-20 September 1985 status of assets is retained.
Special rules apply to prevent double taxation of capital gains where a trust estate was formerly a resident of Australia. In this case, the cost base of assets that were taxed under the capital gains tax provisions at the residence change time is taken to be the market value of the assets at that time.
Modification of loss provisions
Losses are not available for income years before the year starting 1 July 1990.
The de minimis exemption ensures that the transferor trust measures do not apply to small amounts derived by a trust estate in a listed country.
The de minimis exemption is worked out having regard to the total of the attributable incomes of all trust estates for which a taxpayer is an attributable taxpayer. The de minimis exemption will be satisfied if the total of the attributable incomes of all the trust estates is equal to or less than the lesser of:
- $20,000, or
- 10% of the total of the net incomes of those trust estates.
If these tests are satisfied, the attributable income of listed country trust estates will not be included in the assessable income of the attributable taxpayer. The attributable income from unlisted country trust estates would still be included.
Working out the amount of attributable income to include in your assessable income
If you are an attributable taxpayer in relation to a non-resident trust estate, all the attributable income of the non-resident trust estate for an income year coinciding with your income year is included in your assessable income.
If there is more than one attributable taxpayer, the ATO may allow a reduction of the amount of attributable income to be included in the assessable income of each attributable taxpayer. To obtain the reduction, the taxpayer must apply to the ATO - see subsection 3 for more information.
Resident for part of a year
If you are a resident for only part of the income year, the attributable income included in your assessable income is reduced. The amount included is worked out as follows:
Notional attributable income |
x |
the number of days during |
Example 3
Part-year residency
George is a resident of Australia for 200 days out of the 365 days in the relevant year of income. He is an attributable taxpayer in relation to YZ trust that was a non-resident trust with the same income year. The attributable income of the trust estate was $40,000.
The amount George is required to include in assessable income for that year of income is:
$40,000 x (200/365) = $21,917
Overlapping years of income
If you are an attributable taxpayer and your income year is different from that of a non-resident trust estate, the trust estate's attributable income for the two income years which overlap your income year is apportioned using the number of days that fall within your current income year.
Example 4
Overlapping years of income
Helen's current income year is 1 July 2006 to 30 June 2007. She is an attributable taxpayer in relation to XY trust estate. The trust estate's income years are 1 January 2006 to 31 December 2006, and 1 January 2007 to 31 December 2007. The attributable income of the trust estate is $30,000 for the 2006 income year, and $40,000 for the 2007 income year.
The amount worked out for the trust estate's 2006 income year is:
$30,000 x (184/365) = $15,123
For the trust estate's 2007 income year, the amount is:
$40,000 x (181/365) = $19,835
Helen adds the amounts to give a total attributable income of $34,958 for her 2006-07 income year.
Partnerships and trusts
The attributable income from a trust estate is included in working out the net income of a partnership or a trust estate and is treated as having a foreign source.
Where a partner of a partnership or a beneficiary of a trust estate is an Australian resident for the whole income year, they are to include in their assessable income their share of the net income (including attributable income) of the partnership or trust estate.
Where a partner or beneficiary is a non-resident of Australia at all times during an income year, they would not include any attributable income of the partnership or trust estate in their assessable income.
Subsection 2: Working out your assessable income where you do not have sufficient information to work out attributable income
If you are unable to obtain the information necessary to work out the attributable income of a trust estate, you must include an amount worked out using the following formula in your assessable income.
The formula is to be used for each transfer of property or services you made to the trust estate that is subject to the transferor trust measures.
Work out the amount to include in your assessable income by applying the deemed rate of return to the market value of the property or services you transferred to the trust estate. The market value is adjusted for this calculation to reflect deemed returns for previous periods.
The deemed rate of return applicable to assessments for the income year commencing 1 July 2009 is 5% above the rate of interest that applies for that period under subsection 8AAD(2) of the Taxation Administration Act 1953. If there are two or more rates of interest for 2009-10, you use the weighted average of these rates for the income year.
Use the following formulas to determine the amount to include in your assessable income for transfers of property or services after 12 April 1989.
Transfers made after 12 April 1989
Amount to be included in assessable income |
= |
Adjusted value of the transfer |
x |
Weighted statutory interest rate plus 5% |
The adjusted value for transfers made during the current income year is worked out as follows:
Adjusted value of the transfer |
= |
Market value, immediately before the transfer of property or services of the transferred property or services |
x |
Days after the transfer to |
Example 5
Transfer during current income year
An attributable taxpayer transferred property worth $30,000 to a non-resident trust estate on 31 May 2008. There are 30 days between the transfer on 31 May and the end of the year (30 June 2008).
The adjusted value is worked out as follows:
$30,000 x (30/365) = $2,465
If the transfer occurred before the taxpayer's current income year, the adjusted value of the transfer is the total of:
- the market value, immediately before the transfer, of the property or services transferred, and
- the total of the amounts that would have been included in the transferor's assessable income for that transfer in the income years preceding the taxpayer's current income year, if this method had been used in those years.
Where more than one transfer was made after 12 April 1989, the formula is applied separately to each transfer and then the relevant amounts are added together.
Transfers made before 12 April 1989
Use the following formula to determine the amount to include in your assessable income for transfers of property or services before 12 April 1989.
Amount to be included in assessable income |
= |
Adjusted net worth of the trust estate |
x |
Weighted statutory interest rate plus 5% |
The adjusted net worth of a trust estate is its net worth adjusted for the deemed return on the property or services transferred before 12 April 1989.
The net worth of the trust estate is determined on 1 July 1990. Its net worth on that date is the market value of its assets at 1 July 1990, reduced by its liabilities on 1 July 1990.
To determine the adjusted net worth, the net worth is increased by the total of amounts that would be worked out in each previous income year commencing on or after 1 July 1990 using the above formula.
When using the formula method to work out the amount to include in your assessable income, if two or more taxpayers have transferred property or services to the trust estate, the ATO is empowered to provide relief along lines similar to those referred to in subsection 3.
Subsection 3: What happens if there is more than one transferor?
The assessable income of a transferor in relation to a non-resident trust estate will include the part of the attributable income of the trust estate relating to the period that the transferor was a resident of Australia. This can have the effect of subjecting more than one person to tax for the same income.
The ATO can reduce the amount included in your assessable income if there is more than one transferor. When determining the amount of the reduction, the ATO takes into account the amount of attributable income of the trust estate that relates to the property or services transferred to the trust estate and to any other matters that are considered relevant. You will need to apply to the ATO for the reduction.