Foreign investment funds guide

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Chapter 9: Taxation of non-resident trusts

Overview

The foreign investment fund (FIF) amendments to the taxation of non-resident trusts, which began 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 of the ITAA 1936, or
  • a trustee, under subsections 98(1) or (2) of the ITAA 1936, 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, foreign life assurance policies (FLPs) and resident public unit trusts which do not exceed $50,000 at the end of an income year [sections 96A and 515]
• 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 [ subsection 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 [ subsection 102AAM(1C) ]
• exempt a taxpayer from an interest charge on the distribution of an amount that was paid to or applied for the benefit of the beneficiary and which was paid out of accumulated profits that relate to income
  • that is not eligible designated concession income of a listed-country trust estate, or
  • that has been subjected to tax in any listed country. [sections 102AAE and 102AAM]

The listed countries are:

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

[Section 320 of the ITAA 1936, subregulation 152C(1) and Schedule 10 of the Income Tax Regulations 1936, and section 141 (transitional provision) of the New International Tax Arrangements (Participation Exemption and Other Measures) Act 2004 ]

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 in chapter 2. If you dispose of an interest in a non-resident trust, other areas of the ITAA 1936 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. [section 267]

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 and 483]

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 are also:

• an attributable taxpayer of a transferor trust or CFT [section 493]
• a beneficiary of a deceased estate - see What is a foreign investment fund (FIF)? in chapter 2 [section 481]
• an exempt small investor - see Exemption for an interest of A$50,000 or less in chapter 3 [section 515]
• a temporary resident - see Exemption for temporary residents in chapter 3 [ section 768-965 of the ITAA   1997]
• a member of an employer-sponsored foreign superannuation fund - see Exemption for employer-sponsored foreign superannuation in chapter 3 [section 519]
• a complying superannuation entity, a life insurance company (in regard to certain assets) and certain fixed trusts - see Exemption for complying superannuation entities, certain assets of life insurance companies and certain fixed trusts in chapter 3. [Division 11A]

Exempt attributable taxpayer

An attributable taxpayer of a transferor trust or CFT is not taxed under the FIF measures because they are attributed income from the foreign trust under other provisions of the ITAA 1936. See Exemption for attributable taxpayers in chapter 3. [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 A$50,000 or less in chapter 3 for more information.

Similarly, when working out a small investor's share of the net income of a resident public unit trust, FIF income is excluded from the trust estate's assessable income. 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 is $50,000 or less. [ subsection 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 ], or
• 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 of a deceased estate.

The deceased estate is not covered by the FIF measures. The measures do not apply even if a court has made an order on the deceased estate. For more information, see What is a foreign investment fund (FIF)? in chapter 2. Also see Deceased estates later in this chapter.

Attribution of non-resident trust income under the FIF measures

Before the FIF measures began, 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 began, your share of the income of a FIF which is a foreign trust is worked out in the same way as other FIFs - that is, by:

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

Since the FIF measures began, if 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

Since 1992-93, the share of the income of an Australian beneficiary of a non-resident trust who is not assessed under the FIF measures has been 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 two 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 derived by the non-resident trust during a year of income.

This percentage is 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 two months after the end of the income year. [ subsection 96C(1) ]

Method 2

Where method 1 cannot be applied, a beneficiary's share of the net income of the trust estate is determined by:

• calculating the beneficiary's share of the net income of the trust estate that relates to interests the beneficiary held in the trust estate for the whole year
• calculating the beneficiary's share of the net income of the trust estate that relates to interests the beneficiary held in the trust estate for only part of the year, and
• adding these amounts to determine the beneficiary's total share of the net income of the trust estate that relates to all the interests the beneficiary held in the trust estate. [subsections 96C(2) to (5)]

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

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

Before the FIF measures began, 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 is 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 began, a trustee is not assessed on behalf of a beneficiary of a non-resident trust estate where the beneficiary is under a legal disability because the beneficiary is deemed not to be under a legal disability.

However, the beneficiary is assessed under section 97 of the ITAA 1936 - 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 of the ITAA 1936 - see Attribution of non-resident trust income where the FIF measures do not apply 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)]

From the 1992-93 income year you have been 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 CFT 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% or more of the beneficial interests of the income or property of the trust. [subsections 102AAF(2) and 102G(3)]

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 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% interest in the trust estate totalling 50% or more. [section 342]

When you are working out if an Australian entity has a 1% interest in the trust, include the direct and indirect interests of the entity's associates in the same trust or trusts.

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 taxed 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, since the 1992-93 income year, a beneficiary has been 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

If a non-resident trust estate is a listed country trust estate - see the Overview earlier in this chapter - in an income year, only distributions from certain concessionally taxed income of the trust estate are subject to the interest charge under section 102AAM of the ITAA 1936.

Where a non-resident trust estate is not a 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
• beginning during the non-resident trust's income year. [paragraph 102AAM(1)(b)]

Before that amount can 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 that relate to:

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

ATO references:
NO NAT 2130