Trusts and Foreign Resident Beneficiaries - ato.gov.au
Trusts and Foreign Resident Beneficiaries Presented by Jade Isaacs Glenn Nottingham Australian Taxation Office 1 February 2019 Overview In this webinar we will discuss the following The application and exemption of CGT events for non-resident trusts and beneficiaries in accordance with Division 855 and Section 115-215 of ITAA 1997. Impacts of reimbursement agreements which involve non-resident beneficiaries in accordance with Section 100A of ITAA 1936.
The re-characterisation of trust income to take advantage of withholding rates attributable to interest, royalties and franked distributions. Credits available to non-resident beneficiaries for tax paid by resident trusts on behalf of nonresident beneficiary under Section 98A of ITAA 1936. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 2 Non-reporting of capital gains by non-residents Section 115-220 of the ITAA 1997 includes a non-resident beneficiarys share of the trust capital gains in the share of net income on which the trustee is assessed and liable to pay the tax under Section 98. A beneficiarys share of the trust capital gains is worked out having regard to: o To the extent that the beneficiary is specifically entitled to the capital gains, and o To the extent that there are capital gains to which no one is specifically entitled, the beneficiaries
share of those capital gains is based on the beneficiarys entitlement to a share of trust distributable income (adjusted for any specific entitlements). Section 115-215 of ITAA 1997 where a trust's net income includes a net capital gain, relevant beneficiaries are treated as having extra capital gains as to allow beneficiarys to apply capital losses and discounts. Sub-section 115-215(4A) of ITAA 1997 notes that the beneficiary is treated as having a capital gain even though no CGT event happened in respect of that beneficiary. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 3 Non-reporting of capital gains by non-residents Section 855-40 of ITAA 1997 exempts capital gains of non-resident beneficiaries in a fixed trust
per Section 115-215 of ITAA 1997 as a result of a CGT event happening to a non Taxable Australian Property (TAP) trust asset (exemption does not apply to non-fixed trusts). Section 855-10 of ITAA 1997 provides a foreign resident can disregard a capital gain from a CGT event if the event happens in relation to a CGT asset that is a non-TAP. Where beneficiary's non-TAP capital gain arises from the operation of section 115-215 of ITAA 1997 and not from the happening of a CGT event, sub-section 855-10(1) of ITAA 1997 is not satisfied, and the capital gain is not disregarded. * Supported by the 'fixed trust' requirement in section 855-40 of ITAA 1997. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 4 Reporting of capital gains by non-residents and foreign trusts
Example provided in ATO ID 2007/60: Does subsection 855-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) disregard a capital gain that a foreign resident beneficiary of an Australian resident non-fixed trust makes because of the operation of subsection 115-215(3) of the ITAA 1997? Decision: No. Subsection 855-10(1) of the ITAA 1997 only disregards a capital gain from a CGT event. A capital gain that a beneficiary of a trust makes because of the operation of subsection 115-215(3) of the ITAA 1997 is not a capital gain from a CGT event. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 5 Reporting of capital gains by non-residents and foreign trusts Related issues in Tax Determination TD 2017/23:
Does the residency assumption in subsection 95(1) ITAA36 apply for the purpose of section 85510 ITAA97, which disregards certain capital gains of a trust which is a foreign trust for CGT purposes? Amounts attributable to non-TAP capital gains from foreign trusts will be assessable upon distribution to an Australian resident beneficiary under section 99B. Only TAP capital gains are taken into account when working out Australian CGT positions and net income of foreign trusts. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 6 Reimbursement agreements and non-resident beneficiaries A reimbursement agreement involves making someone presently entitled to trust income in circumstances where both:
someone other than the presently entitled beneficiary actually benefits from that income, and at least one party enters into the agreement for purposes that include getting a tax benefit. Section 100A of ITAA 1936 will operate to disregard a beneficiarys entitlement where the entitlement arises out of a reimbursement agreement. Therefore, net income that would otherwise have been assessed to the trustee on behalf of a nonresident beneficiary is assessed to the trustee (at the top marginal tax rate) as though the beneficiary was not, and never had been entitled to the trust income. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 7 Reimbursement agreements and non-resident beneficiaries Private Company Step 1
pay $700,000 franked dividend Resident Trust Step 2 appoint $700,000 Non-Resident Parent Son controls the Trust Resident Adult Son UNCLASSIFIED Trusts and Foreign Resident Beneficiaries Step 3 gift $700,000
8 Re-characterisation of trust income The re-characterisation of business and/or rental income seeks to exploit the non-resident withholding rates applicable to interest, royalties and dividends by converting the character of that income. These arrangements typically display all or most of the following features: 1. Steps that cause profits to be converted to interest, dividend or royalty income (e.g. introducing debt, interposing companies into a distribution chain) lack a dominant commercial purpose 2. A non-resident beneficiary is made presently entitled to the interest, dividend or royalty income 3. Little or no tax is imposed on the interest, dividend or royalty income to which the non-resident beneficiary is entitled in the foreign jurisdiction in which that beneficiary is resident
UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 9 Re-characterisation of trust income Resident Parent Step 1 lends $4 million interest free Step 2 lend $4 million at 5% p.a. Rental Trust Step 3 purchase property for $4m Step 4
Step 5 $200,000 p.a. interest $200,000 p.a. rent Real Property UNCLASSIFIED Trusts and Foreign Resident Beneficiaries Finance Trust Step 6 $200,000 p.a. trust entitlement Non-Resident Son 10 Schemes that seek to obtain section 98 tax refunds
Typical arrangements: An Australian resident trust with one or more non-resident beneficiaries. A non-resident beneficiary receives distributions from the resident trust. The beneficiarys investment in the trust is financed in part or in whole by a related-party with interest charged at high non-arms length rates. UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 11 Schemes that seek to obtain section 98 tax refunds Purported outcomes under such schemes:
tax is paid in Australia by the trustee of the Australian trust; there is a refund of some or all of the Australian tax paid to the non-resident beneficiary due to interest deductions due to related party loans; and no interest withholding tax is paid because the loan is between two non-resident entities UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 12 Schemes that seek to obtain section 98 tax refunds Hold Co Interest Equity
Related party loan Beneficiary Co OVERSEAS AUSTRALIA Distribution Units Australian Trust UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 13 Schemes that seek to obtain section 98 tax refunds
External Lender Interest Loan Beneficiary Co Distribution Interposed Trust OVERSEAS AUSTRALIA Distribution Trust UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 14
Tips What attracts our attention: the treatment and amounts of interest expenses by non-residents receiving Australian sourced trust distributions the treatment of withholding tax for interest paid to non-resident entities the treatment of capital gains by non-resident trusts and beneficiaries and the various interpretations within the community UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 15 Question and answer (Q&A)
UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 16 Our commitment to you We are committed to providing you with accurate, consistent and clear information to help you understand your rights and entitlements and meet your obligations. If you feel that this presentation does not fully cover your circumstances, or you are unsure how it applies to you, you can seek further assistance from us by going to ato.gov.au or emailing us at [email protected] COMMONWEALTH OF AUSTRALIA 2019 The information in this presentation was current at 1 February 2019 UNCLASSIFIED Trusts and Foreign Resident Beneficiaries 17
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