Foreign investment funds guide

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Chapter 9 - Taxation of non-resident trusts

Overview

The FIF amendments to the taxation of non-resident trusts, which commenced in the 1992- 93 income year, supplemented the objective of the foreign source income measures in preventing the deferral of Australian tax. The FIF measures tax Australian resident beneficiaries with an interest or entitlement to acquire an interest in the income or capital of a foreign trust on their share of the trust income. They are taxed on an accruals basis at the time the income is derived by the trust rather then when its income or capital is distributed. You work out your share of the FIF income of a non-resident trust to which the FIF measures apply in the same way you would for other FIFs such as foreign companies.

Where the FIF measures apply to a beneficiary of a non-resident trust estate, they will:

• ensure no amount is included in the assessable income of
  • an Australian beneficiary under section 97 or
  • a trustee, under subsections 98(1) or (2), on behalf of an Australian beneficiary under a legal disability
• set out the way in which the income of a non-resident trust estate is worked out and attributed to Australian beneficiaries [SECTIONS 531 to 600]
• exempt from FIF taxation the beneficiary's and associates' interests in FIFs, FLPs and resident public unit trusts which do not exceed $50 000 at the end of an income year [SECTIONS 96A and 517]
• exempt an Australian beneficiary of a deceased estate from an interest charge on amounts that have been paid to or applied for the beneficiary's benefit within three years after the death of the person that gave rise to the estate [SUB SECTION 102AAM(1B) ]
• exempt a beneficiary from an interest charge on an amount received or applied for the beneficiary's benefit from a public unit trust as defined under the transferor trust measures and which was not a controlled foreign trust under the CFC measures [SUB SECTION 102AAM(1C) ]
• exempt from an interest charge on distribution an amount that was paid to or applied for the benefit of the beneficiary and which was paid out of accumulated profits:
  • other than eligible designated concession income of a broad-exemption listed country trust estate or
  • that has been subjected to tax in any broad-exemption listed country. [SECTIONS 102AAE and 102AAM]

The broad-exemption listed countries are:

• Canada
• France
• Germany
• Japan
• New Zealand
• United Kingdom of Great Britain and Northern Ireland
• United States of America

[SCHEDULE 10 of the Act and R152 of the Regulations]

Who do the FIF measures apply to?

The FIF measures apply to you for all or part of an income year in which you are an Australian resident. [SECTION 485]

Even though you are an Australian resident you are not taxed under the FIF measures for an interest in a foreign trust that you dispose of during an income year - that is, before 30 June each income year. See Interests in a FIF or FLP subject to the FIF measures . Where you dispose of an interest in a non-resident trust, other areas of the Act may apply. [SECTION 485]

Trusts to which the FIF measures apply

The FIF measures will apply to you if you are a beneficiary of or have an interest in a foreign or non-resident trust. A trust is a foreign trust if it is not:

• an Australian trust [SECTIONS 481 and 473]
• a public trading trust which is also a resident unit trust [SECTIONS 102G, 102H, 102J, 473 and 481]
• a corporate unit trust which is also a resident unit trust [SECTIONS 102J, 102H, 473 and 481]
• an Australian superannuation fund
• a complying approved deposit fund
• a pooled superannuation trust. [SECTIONS 267, 470, 477 and 481]

A trust is an Australian trust if the trustee was a resident, or the central management and control of the trust was in Australia, for 12 months preceding the end of your income year. [SECTIONS 473, 481 and 485]

What is an Interest in a foreign trust?

You will have an interest in a FIF that is a foreign trust if you have:

• an interest in the capital or income of the trust - including a unit in a unit trust - or
• an entitlement to acquire such an interest through an option, convertible note, or other instrument. [SECTIONS 470, 475, 482]

Your entitlement to acquire an interest in the income or capital may be absolute or be contingent on some other event. It may arise through a document of a company or the exercise of a right or option or for any other reason. [SECTION 475]

Taxpayers exempt from the FIF measures

You are exempt from the FIF measures if you are an Australian resident and also:

• an attributable taxpayer of a transferor trust or controlled foreign trusts [SECTION 493]
• a beneficiary of a deceased estate - see What is a FIF? [SECTION 481]
• an exempt small investor - see Exemption for an interest of $50,000 or less [SECTION 515]
• an exempt visitor - see Exemption for visitors to Australia [SECTION 517]
• a member of an employer-sponsored foreign superannuation fund - see Exemption for employer-sponsored foreign superannuation . [SECTION 519]

Exempt attributable taxpayer

An attributable taxpayer of a transferor trust or controlled foreign trust is not taxed under the FIF measures because they are attributed income from the foreign trust under other provisions of the Act. See Exemption for attributable taxpayers . [SECTIONS 102AAA, 102 AAZG, 342, 348 and 493]

Small investor exclusion

Certain small investors are exempt from the FIF measures. See Exemption for an interest of $A50,000 or less for more information.

Consistent with this exemption, the FIF measures excluded FIF income from the assessable income of a resident public unit trust when working out a small investor's share of the net income of the trust estate. This exclusion applies only to natural persons and will apply to you if the sum of your interests and those of your associates in FIFs, FLPs and resident public unit trusts at the end of the income year are $50,000 or less. [SUB SECTION 96A(2) ]

In a subsequent year of income, you must work out the trust's net income by ignoring attribution credits which arose during income years when you were exempt because of this small investor's exemption. [PARAGRAPH 96A(2)(d)]

This means that you as the beneficiary will not benefit from:

• the exemption, which applies for amounts previously attributed under the FIF measures [ SECTION 23AK ]
• a reduction in the disposal consideration of the FIF interest because of an unused FIF attribution account surplus from income attributed but not distributed before disposal of the FIF interest. [SECTION 613]

These two benefits arise because FIF income was included in the net income of the trust in a year when you as a beneficiary of the public unit trust were not taxed on that FIF income because of the small investor's exclusion. [PARAGRAPHS 96A(2)(d) to (e)]

Exempt beneficiaries of a foreign deceased estate

The measures do not apply to an Australian resident beneficiary of a foreign trust arising in relation to the estate of deceased persons. The estate of a deceased person who made or did not make a will is not covered by the FIF measures. The measures do not apply even where a court has made an order in respect of the estate of a deceased person. For further information, see What is a FIF? . Also see Deceased estates for an exemption from an interest charge.

Exempt member of an employer-sponsored foreign superannuation fund

For your exemption from FIF taxation on your interest in an employer-sponsored foreign superannuation fund see above.

Attribution of non-resident trust income under the FIF measures

Prior to the FIF measures the assessable income of an Australian beneficiary who was not under a legal disability included the share of the net income of a non-resident trust estate to which the beneficiary was presently entitled and which was attributed to a period when the beneficiary was a resident of Australia. [SECTION 97]

Since the FIF measures your share of the income of a FIF which is a foreign trust is worked out in the same manner as other FIFs, either by the:

• market value method
• deemed rate of return method or
• calculation method.

Since the commencement of the FIF measures, where an amount is worked out in accordance with one of the above methods and included in the assessable income of the beneficiary as FIF income or loss, no amounts are included in the assessable income of an Australian beneficiary under the general trust provisions. [SECTIONS 96A, 97 and 529]

Attribution of non-resident trust income where the FIF measures do not apply

From 1992-93, the share of the income of an Australian beneficiary of a non-resident trust who is not assessed under the FIF measures is worked out by one of two methods. [SECTIONS 96B and 96C]

Method 1

This method is used where all the income, profits or gains derived by the non-resident trust estate during the income year consisted of either or both:

• income, profits or gains to which beneficiaries of the non-resident trust estate were presently entitled
• income, profits or gains to which beneficiaries of the non-resident trust estate were not presently entitled but which were distributed to the beneficiaries within 2 months after the end of the income year.

In the above cases, the beneficiaries are deemed to be presently entitled to a share of the net income of the non-resident trust estate equal to the percentage of the total income, profits or gains of the non-resident trust represented by the total of the amounts:

• to which the beneficiaries were presently entitled or
• to which the beneficiaries were not presently entitled but which were distributed to the beneficiaries of the trust estate within 2 months after the end of the income year. [SUB SECTION 96C(1) ]

Method 2

In any other case, the beneficiaries are deemed to be presently entitled to a share of the net income of the non-resident trust equal to whichever is the greater percentage of:

• the income of the non-resident trust estate represented by the share of income to which the beneficiaries were entitled or were entitled to acquire or
• the capital of the non-resident trust estate represented by the share of the capital to which the beneficiaries were entitled or were entitled to acquire. [SUB SECTION 96C(2) ]

Where the aggregate of the Australian beneficiaries' present entitlement is more than 100 per cent of the income of the non-resident trust estate, the total interests are reduced to 100 percent and each beneficiary's interests are reduced proportionally. [SUB SECTION 96C(6) ]

Australian resident beneficiary of a non-resident trust estate under a legal disability

Prior to the FIF measures the assessable income of a trustee included the share of the net income of a trust estate which related to a period when:

• a beneficiary under a legal disability was a resident of Australia or
• a beneficiary who was deemed to be presently entitled to a share of the net income of the trust estate, because they had a vested and indefeasible interest in the income of the trust estate, was a resident of Australia. [SUBSECTIONS 95A(2), 98(1) and (2)]

Since the FIF measures a trustee is now not assessed on behalf of a beneficiary of a non-resident trust estate where the beneficiary is under a legal disability as the beneficiary is deemed not to be under a legal disability. However, the beneficiary is assessed under section 97 - the general assessing provision for trusts. The beneficiary's own share of the net income of the non-resident trust estate is now worked out under the provisions of section 96C - see the commentary above on section 96C and the FIF measures. [SUBSECTIONS 96B(2), 98(1) and (2)]

Non-resident trusts exempt from interest charges

Public unit trusts

The transferor trust measures do not apply to arm's length transfers to non-resident public unit trusts. [SUB-SUBPARAGRAPH 102AAT(1)(a)(i)(B)]

Consistent with this treatment, from the 1992-93 income year you are exempt from an interest charge on amounts received, or which have been applied for your benefit, that are attributable to the income or profits of a non-resident trust estate which at all times during the year was:

• a public unit trust under the transferor trust measures [DIVISION 6AAA] and
• not a controlled foreign trust within the meaning of Part X. [ SUBSECTION 102AAM(1C) ]

A unit trust will be a public unit trust if, at any time during the year, any of the units in the unit trust were listed on a stock exchange in Australia or elsewhere or were offered to the public.

In addition, a unit trust will be a public unit trust if, at all times during the year, the units in the unit trust were held by 50 or more persons. A unit trust will not be treated as a public unit trust where 20 or fewer persons hold 75 per cent or more of the beneficial interests of the income or property of the trust. [ SECTION 102ABF ]

You must take the following into account when deciding whether a unit trust is a public unit trust at all times during the year of income.

• An entity and its associates are taken to be one person.
• Where units in the trust are held by the trustee of another trust estate that is a public unit trust at all times during the income year, a person who has a beneficial interest in the second trust estate is taken to hold those units. [ SUBSECTION 102AAF(3) ]

A public unit trust cannot also be a controlled foreign trust (CFT). A trust estate will be a CFT if there is an eligible transferor in respect of the trust - that is, if an Australian entity or a controlled foreign partnership, CFT or CFC transferred value to the trust estate:

• in the case of a discretionary trust estate, at any time [SECTION 347]
• in the case of a non-discretionary trust estate, after 12 April 1989 for non-arm's length consideration. [SECTIONS 342 and 348]

A trust estate will also be a CFT if there is a group of five or fewer Australian entities with a 1 per cent interest in the trust estate totalling 50 per cent or more. [SECTION 342]

Deceased estates

Generally, where property of a trust estate is paid to or applied for the benefit of a beneficiary, an amount - unless it has already been subjected to tax in the hands of the trustee or beneficiary - is included in the assessable income of that beneficiary. Under those circumstances, an interest charge usually applies to amounts that are included in the assessable income of that beneficiary. [SECTIONS 99B and 102AAM]

However, from the 1992-93 income year, a beneficiary is exempt from the interest charge on amounts received from the estate of a deceased person where those amounts are paid to, or applied for the benefit of, the beneficiary within three years after the death of that person. [ SUBSECTION 102AAM(1B) ]

Amounts taxed at comparable rates

Where a non-resident trust estate is a broad-exemption listed country trust estate - see Chapter 9 - in an income year, only distributions from certain concessionally taxed income of the trust estate are subject to the interest charge under section 102AAM . Where a non-resident trust estate is not a broad-exemption listed country trust estate in an income year, distributions made from the income and profits of the trust estate for that year are subject to the interest charge if the amount has not been subject to tax in any listed country in a tax accounting period:

• ending before the end of the non-resident trust's income year or
• commencing during the non-resident trust's income year. [PARAGRAPH 102AAM(1)(b)]

Before that amount will be exempt from the section 102AAM interest charge on distribution, you will have to show that an amount that was the property of a trust estate was paid to you or applied for your benefit out of accumulated profits which relate to:

• in the case of a broad-exemption listed country trust estate, income other than eligible designated concession income or
• in any other case, income that has been subject to tax in any broad-exemption listed country. [ SUBSECTION 102AAM(1A) ]

ATO references:
NO NAT 2130