Practical Compliance Guideline

With increasing globalisation and migration flows into and out of Australia, we have observed an increase in resident taxpayers who receive an amount of trust property (being a payment or a benefit) from non-resident trusts and therefore an increased need for ATO guidance.

This Guideline is intended to provide guidance and certainty as to the scope of our current focus when considering the application of section 99B.That is, per paragraphs 6 and 7 of the Guideline, we are focused in this guidance on trust property accumulated by a trust during any period that it was a non-resident of Australia for tax purposes. By releasing this Guideline, we do not intend to alter our historical or existing approach.

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whether the beneficiary should include income as assessable in their tax return, then self-object

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if the trustee should obtain a private ruling

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how compliance activities will arise.

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seek advice through a private ruling

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seek independent professional advice, or

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if they have already lodged their tax return, make a voluntary disclosure to reduce penalties that may apply.

As part of our general compliance activities, if a section 99B risk is identified, taxpayers can expect:

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where they have relied on a compliance approach, we will not have cause to dedicate compliance resources to consider the application of section 99B, other than to confirm that the low-risk features of the relevant arrangement are present

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clear guidance on the types of records that may be expected to be provided to substantiate that a reduction in subsection 99B(2) applies, or that the compliance approach criteria is met.

In the final Guideline, Example 3 now clarifies that the recipient's expectation was that they had been in receipt of a gift but the amount was actually a distribution from a trust.

In the final Guideline, Example 7 has been replaced with another common example provided during consultation. See our response to Issue 14 of this Compendium.

While this scenario has been raised during consultation, the most common scenario that arises involves Australian beneficiaries receiving cash or use of property (rather than the transfer of trust assets).

We are of the view that pursuant to paragraph 99C(2)(c), a beneficiary who lends or otherwise has use of the property of a non-resident trust should consider the application of section 99B.

However, providing guidance on how to quantify or value a benefit is outside the scope of this Guideline, which is to provide guidance on:

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common scenarios when section 99B may need to be considered

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practical aspects of record keeping to evidence that subsection 99B(2) applies to reduce the amount that section 99B would otherwise include in assessable income

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our compliance approach to distributions and benefits which we consider to be low risk.

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common scenarios when section 99B may need to be considered

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practical aspects of record keeping to evidence that subsection 99B(2) applies to reduce the amount that section 99B would otherwise include in assessable income

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our compliance approach to distributions and benefits which we consider to be low risk.

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whether the full amount or value or benefit is assessed

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how to value the benefit, and

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consider a de minimis threshold for minor or incidental benefits.

The onus is on the beneficiary to objectively evidence the source of an amount or benefit received, consistent with Campbell and Commissioner of Taxation [2019] AATA 2043. Without objective evidence, the beneficiary would be unable to establish that subsection 99B(2) applies to reduce the amount assessable under subsection 99B(1).

In the final Guideline, the Commissioner should clearly state at paragraph 43 that the core documents include financial accounts of a trust which 'clearly identify the source of the payment' to the resident beneficiary.

Example 4 in TD 2024/9 makes clear that merely debiting an account is not sufficient to establish that a distribution is of corpus or is attributable to amounts which would not be assessable income of a hypothetical resident taxpayer.

For further clarity, in the final Guideline we have refined the wording of Example 12.

We consider that Howard makes it sufficiently clear that section 99B can apply in a situation where there is a chain of trusts and it was not necessary to duplicate that example in the Guideline.

As that decision and paragraphs 35 to 36 of TD 2024/9 demonstrate, where a resident beneficiary receives a distribution from a non-resident trust who in turn received the property paid or applied in its capacity as a beneficiary of another trust, paragraphs 99B(2)(a) or (b) should be considered at each level of distribution in order to ultimately determine whether the resident beneficiary can reduce the amount included in their assessable income under subsection 99B(1).

TD 2024/9 sets out the principles relevant in considering the application of the hypothetical resident taxpayer tests in paragraphs 99B(2)(a) and (b).

The Guideline is unable to include a definitive answer on this and, instead, both the final Guideline and TD 2024/9 clarify our expectations around record keeping and burden of proof.

Paragraphs 32 to 61 of the final Guideline includes guidance on the record keeping requirements to evidence that a reduction applies.

See also the responses to Issues 11 to 13 of the Compendium for TD 2024/9 for further guidance.

Safe harbours allow us to direct our compliance resources to higher-risk arrangements and provide additional certainty and compliance savings for taxpayers involved in low-risk arrangements, as they may otherwise have a heavy compliance cost in determining whether section 99B applies.

In this scenario, section 99B will not automatically apply simply if the arrangement fails to meet the criteria outlined in the compliance approach.

However, we may have cause to dedicate compliance resources to better understand the arrangement and determine if section 99B applies. This will include considering whether any of the reductions in subsection 99B(2) apply or whether another tax provision applies to the arrangement.

The examples in the compliance approach section of the Guideline are included to provide further clarity and guidance to assist taxpayers in determining whether their arrangement is considered low risk. The scope of the Guideline does not extend to determining the application of section 99B.

We agree that a beneficiary who does not meet the low-risk criteria may still be able to apply either paragraph 99B(2)(a) or (b). However, the purpose of the Guideline is to outline how the compliance approach operates for those taxpayers who do qualify.

Paragraph 63 of the final Guideline provides that where an arrangement does not meet the low-risk criteria, we may engage with taxpayers to better understand the arrangement, including whether a reduction to section 99B applies.

Paragraph 64 of the final Guideline provides that where our compliance approach does apply, it means taxpayers can have certainty that we will not have cause to dedicate compliance resources to determining if section 99B applies. See also our response to Issue 39 of this Compendium.

The compliance approach for deceased estates is appropriate where it is based on a low-risk scenario. In developing our approach as to what is 'low risk', we consider 2 aspects:

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the likelihood of the movement in asset value over a period of time

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the risk relevant to the materiality or quantum of potential tax revenue.

These aspects are linked. From an ATO administration perspective, we can extend the time, however then the likelihood of the asset value changing increases and therefore the quantum of value that we can consider low risk subsequently reduces.

Given the feedback on this issue, we undertook further targeted consultation to consider options that would provide the greatest certainty for the greatest number of resident beneficiaries. The feedback confirmed that the 24-month timeframe, with the cap of A$2 million should be retained.

See our response to Issue 48 of this Compendium.

On this basis, extension requests would not be appropriate.

For the compliance approach to be appropriate, it must be a low-risk scenario. We consider there to be a greater risk relevant to the materiality or quantum of potential tax revenue where beneficiaries are receiving amounts in excess of A$2 million.

As outlined in paragraph 63 of the final Guideline, a resident beneficiary should consider the application of section 99B to their arrangement.

Where our compliance approach applies, it does not mean that section 99B does not apply to the arrangement. Rather, it provides taxpayers with certainty that we will not have cause to dedicate resources to determining if an amount is included in assessable income under subsection 99B(1) or whether a reduction in subsection 99B(2) applies. See also our response to Issue 39 of this Compendium.

The final Guideline provides a safe harbour option to further reduce compliance costs in objectively evidencing that an agreement is on commercial terms. Under the safe harbour option, for the interest rate and loan term, the resident beneficiary and trustee of the non-resident trust can rely upon:

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the rate prescribed for Division 7A purposes in subsection 109N(2), and

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the term prescribed for Division 7A purposes in subsection 109N(3).

As provided by paragraph 106 in the final Guideline, the use of the terms under the safe harbour option does not of itself result in the application of Division 7A to the arrangement.

Per paragraph 103 of the Guideline, to be considered low risk for the purposes of the compliance approach, a physical payment should be made to the trustee for the interest, hire or use of the trust property.

A comparable rate in a foreign jurisdiction would only be accepted under the compliance approach if it is commercial or consistent with market rates in the same or similar circumstances, and that can be appropriately evidenced.

We understand that the underlying issue is regarding evidencing contributions to the fund or earnings, for the purposes of the reductions in subsection 99B(2).

As provided at paragraph 43 of the final Guideline, the onus is on the resident beneficiary to provide information and documentation to us to evidence that a reduction is satisfied. Where the onus is not discharged, a reduction to the amount included in assessable income pursuant to subsection 99B(1) will not apply. This applies in general and is not specific to foreign super funds and pension plans.

While the Guideline deals with the most common scenarios that may attract the operation of section 99B, there is existing website guidance with respect to section 99C. See Receiving payments or assets from foreign trusts.

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examples of what the Commissioner considers acceptable versus problematic pre-residency planning strategies, including scenarios where existing trust arrangements are vested or terminated

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guidance on how the Commissioner would apply Part IVA to pre-residency restructures in light of section 99B.