The Australian Taxation Office (ATO) has issued guidance on how Section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) applies to distributions from non-resident trusts to Australian residents. This section ensures that, in most cases, Australian residents who receive payments from such trusts are taxed in Australia, unless exceptions apply. Below, we break down the key aspects of Section 99B, its implications, and what beneficiaries and trustees need to know.
What is Section 99B?
Section 99B ensures that distributions made by non-resident trusts to Australian residents are generally taxed in Australia. This section applies when the trust has been a non-resident at any point since its establishment. While the law is not specifically limited to non-resident trusts, the risk of it being applied is higher for such trusts.
A key provision of Section 99B is Section 99B(2), which allows a reduction in the amount taxed if the distribution is made from the trust’s corpus (principal), rather than income. However, this reduction only applies if the income or gains would have been taxed in Australia if derived by an Australian resident.
The Hypothetical Resident Taxpayer
A critical aspect of Section 99B is the ‘hypothetical resident taxpayer’ (TD 2024/9) of the rules. This assumes that the beneficiary receiving the distribution is an Australian resident, regardless of the trust’s actual residency status. The ATO uses this hypothetical resident taxpayer to determine how the distribution should be taxed.
For example, if a foreign trust sells a pre-CGT asset (an asset acquired before 1985, when capital gains tax was introduced) and distributes the capital gain to an Australian resident, Section 99B would reduce the capital gain under Section 99B(2). In this case, no capital gains tax would apply. Notably, the CGT discount does not apply to the hypothetical resident taxpayer, as the ATO treats them as an Australian resident taxpayer for tax purposes.
ATO’s Guidance on Section 99B
The ATO’s PCG 2024/3 provides further details on how Section 99B applies in different scenarios. While the guidelines are broad, they help clarify how low-risk and high-risk situations are treated under Section 99B.
Two common scenarios are identified where the ATO considers the risk of non-compliance to be low:
- Deceased Estates
If a deceased individual was a non-resident at the time of death, the distribution of their estate to Australian beneficiaries may be treated as low-risk, provided:- The property is distributed to the beneficiary within 24 months of death.
- The value of the property received does not exceed $2 million.
- The distribution is not made from a testamentary trust (created by a will).
- Proper documentation, such as the signed will or trust deed, is provided.
If these conditions are met, the ATO considers the distribution to be low-risk and will not focus compliance efforts on it unless something unusual is detected.
- Trust Property Used on Commercial Terms
If a beneficiary uses trust property under commercial terms, the risk is considered low. The conditions include:- The agreement (whether verbal or written) must be on commercial terms.
- The beneficiary must pay the trustee an amount that matches the commercial terms, such as interest or rental payments.
An agreement is considered on commercial terms if the rates and terms align with market rates. There is also a safe harbour for loans where interest rates and terms follow Division 7A loan standards.
Documentation Requirements
Beneficiaries must provide proper documentation to substantiate their claims for reductions under Section 99B(2). This documentation is essential for proving that the distribution is correctly taxed. Required documents include:
- Signed trust deeds or the will of the deceased person.
- Trustee minutes or distribution statements confirming that payments were made from the trust’s corpus.
- The trust’s financial accounts for relevant years, following the accounting standards of the relevant country.
- Additional case-specific documents, such as bank statements, working papers, and other relevant records.
If a beneficiary fails to provide the required documents, the ATO will treat the entire amount as assessable income, meaning the full distribution will be taxed.
For trustees and beneficiaries of non-resident trusts, understanding Section 99B is crucial for managing tax obligations. Always ensure you have the necessary documents to substantiate your claims and stay compliant with Australian tax law.
Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
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This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Yvonne Shao @ Pitt Martin Tax
