In brief
While section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) is not new legislation, the Australian Taxation Office’s (ATO’s) publishing of Practical Compliance Guideline PCG 2024/3 and Taxation Determination TD 2024/9 suggests a shift in focus by the ATO towards resident taxpayers who receive an amount of trust property (being a payment, distribution or a benefit) from foreign trusts.
PCG 2024/3 and TD 2024/9 outline several considerations that foreign trustees and Australian tax resident beneficiaries should be aware of before an amount of trust property is paid to, or applied for the benefit of, a beneficiary of a trust who is an Australian tax resident. The guidance from the ATO also highlights the increased record keeping and compliance management expected by the ATO for future and historical transactions where section 99B of the ITAA 1936 is potentially applicable.
In detail
The ATO’s finalised Practical Compliance Guideline, PCG 2024/3, provides taxpayers with important guidance on the ATO’s approach to section 99B in respect of arrangements where property of a non-resident trust (or trust property accumulated while the trust was a non-resident) is paid to, or applied for the benefit of, a resident beneficiary. The simultaneously released Taxation Determination, TD 2024/9, sets out the Commissioner’s views on certain key technical aspects associated with section 99B.
What is section 99B?
Section 99B requires an Australian tax resident beneficiary to include in their assessable income an amount representing trust property that is paid to, or applied for their benefit (for example, a distribution of income or capital), subject to certain legislated exceptions.
The two most relevant exceptions of the application of 99B, are:
- Corpus exemption - This exception applies to amounts that represent the corpus of the trust estate. However, it excludes amounts that, if derived by an Australian resident taxpayer, would have been included in that taxpayer's assessable income for any income year.
- The non-taxable exemption - This exception applies to amounts that, if derived by an Australian resident taxpayer, would not have been included in that taxpayer's assessable income in any income year.
These exemptions both include what is often referred to as the “hypothetical resident taxpayer” test. TD 2024/9 (discussed further below) outlines the ATO’s current view on the application of the “hypothetical resident taxpayer” tests in section 99B.
Section 99B can apply in a wide range of situations, including:
- distributions of accumulated income and / or capital gains;
- assets transferred by the trustee to Australian resident beneficiaries;
- use of trust property by Australian resident beneficiaries;
- loans from the trustee to Australian resident beneficiaries; and
- amounts received by an Australian resident beneficiary from a deceased estate.
Australian tax resident beneficiaries should also be aware that they may be liable to pay additional tax on the distribution of accumulated income and capital gains (section 102AAM of the ITAA 1936).
Section 99B can apply to both Australian resident trusts and foreign resident trusts. However, the ATO’s guidance only focuses on the application of section 99B in relation to foreign trusts.
When considering the application of section 99B it is important to remember that it applies where a beneficiary of a non-resident trust estate has been a resident at any time during a financial year. Therefore, it can apply in situations where a distribution is made to a non-resident of Australia for tax purposes just before they become an Australian tax resident, if the distribution was made in the financial year in which the beneficiary became an Australian tax resident. This is highlighted in example 7 of PCG 2024/3.
ATO's compliance approach to section 99B
PCG 2024/3 provides taxpayers with guidance on the ATO’s approach to the application of section 99B in relation to arrangements where the property of a non-resident trust is paid to, or applied for the benefit of, a resident beneficiary. Importantly, the PCG 2024/3 applies to arrangements both before and after its date of issue.
The Guideline aims to provide clarity on:
- common scenarios where section 99B may need to be considered;
- the practical aspects of record keeping;
- evidencing that an exception in section 99B(2) applies to reduce the amount that section 99B would otherwise include in assessable income; and
- the ATO’s compliance approach to distributions and benefits which it considers to be low risk, and the record keeping expected to substantiate this.
PCG 2024/3 includes common scenarios in which section 99B may need to be considered, including instances where:
- a non-resident migrates to Australia;
- a resident beneficiary receives a distribution, gift, or loan from a non-resident trust;
- a trustee allows a resident beneficiary to use non-resident trust property;
- a beneficiary receives an amount from a non-resident deceased estate; and
- a beneficiary changes residency and receives an amount from a non-resident trust.
The PCG also outlines the ATO’s compliance approach in respect of two common scenarios where section 99B may apply that are considered to be low risk, namely in respect of deceased estates and the provision of trust property on commercial terms.
Where an arrangement is considered to be low risk in accordance with the criteria set out in the PCG, the ATO 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 in the circumstances. Where the arrangement does not meet the outlined criteria to be considered low risk, this does not necessarily mean that section 99B applies - rather the ATO may engage with the taxpayer to better understand the arrangement, including whether an exception to section 99B applies.
In relation to distributions from a non-resident deceased estate, the ATO will consider the arrangement low risk where the trustee (executor) distributes an amount or benefit of trust property from a non-resident deceased estate of a deceased who was a non-resident at their date of death, to a resident beneficiary and each of the following criteria are satisfied:
- The trust property, including cash or proceeds from the sale of trust assets is distributed to the resident beneficiary within 24 months of the date of death.
- The total value of trust property received, whether in multiple payments or in one lump sum payment, by the resident beneficiary does not exceed A$2 million at the time the amount is paid to or applied for the benefit of a resident beneficiary.
In relation to the provision of trust property, the ATO will consider an arrangement to be low risk where the non-resident trust provides trust property to a resident beneficiary as part of an agreement for the beneficiary to borrow, hire or use that property on commercial terms and each of the following are satisfied:
- The borrowing, hire or use of the trust property is subject to an agreement, whether written or verbal.
- The agreement is made on commercial terms.
- The resident beneficiary makes a physical payment to the trustee equal to the interest, hire or use per the commercial terms.
The ATO will accept that an agreement is on commercial terms where the resident beneficiary is able to provide documentation objectively evidencing that at the time of entering into the agreement that the rate applied for the interest, use or hire is consistent with market rates in the same or similar circumstances, and the terms of the agreement are consistent with terms available in the market in the same or similar circumstances.
To reduce compliance costs, a safe harbour option is available for monetary amounts loaned from a trustee of a non-resident trust, for the purposes of the compliance approach outlined. Under the safe harbour option, the resident beneficiary and trustee of the non-resident trust can rely upon:
- the interest rate prescribed in the law applicable for deemed dividend Division 7A purposes, and
- the term of the loan as prescribed in the law for Division 7A purposes.
Where the safe harbour is relied upon, this in itself does not result in the application of Division 7A to the arrangement. Under these circumstances, consideration should also be given to the application of non-resident interest withholding tax to the payment of interest by resident to a non-resident.
Factors taken into account in applying the exceptions to section 99B
Subsections 99B(2)(a) and 99B(2)(b) operate to exclude certain amounts of trust property paid to, or applied for the benefit of, resident beneficiaries from being assessed under subsection 99B(1) and depend upon specific tests, referred to as the hypothetical resident taxpayer tests.
TD 2024/9, which applies both before and after its date of issue, sets out the ATO’s view on whether the following are relevant in applying the hypothetical resident taxpayer tests:
- characteristics of the hypothetical taxpayer other than residency;
- in determining whether an amount would be assessable, the circumstances that gave rise to the relevant amount in the hands of the trustee; and
- the source of the amount paid or applied to the beneficiary.
The Determination states that for the purposes of the hypothetical resident taxpayer tests, the only characteristic of the hypothetical taxpayer is that they are an Australian resident. Further, in applying the hypothetical resident taxpayer tests to determine whether an amount would be assessed to the hypothetical taxpayer, it is necessary to consider the circumstances that gave rise to the relevant amount in the hands of the trustee.
Given the only relevant characteristic of the hypothetical resident taxpayer is their status as an Australian resident, concessions, such as the Capital Gains Tax (CGT) discount, are not considered when determining whether an amount would or would not be included in the assessable income of the hypothetical resident taxpayer (i.e., there is no reduction in the assessable amount under section 99B for concessions such at the CGT discount). This is because the CGT discount is not available to all resident taxpayers and is only available to specific classes of resident taxpayers. Similarly, other concessions such as the small business concession also do not apply.
Concessions that are available to all taxpayers however can be considered when determining whether an amount would or would not be included in the assessable income of the hypothetical resident taxpayer. For example, gains arising from assets of a trust estate acquired before 19 September 1985 and that are considered pre-CGT assets would be excluded as this applies to all taxpayers.
The ultimate source of the amount paid or applied to the beneficiary is also taken into account in determining whether it is ‘attributable to’ amounts which would be assessed in the hands of a hypothetical resident taxpayer for the purposes of subsection 99B(2)(a) or whether an amount ‘represents’ an amount that would not have been assessable if derived by the hypothetical resident taxpayer for the purposes of subsection 99B(2)(b). The Determination also includes examples to illustrate these points.
The final Determination includes an example of the application of subsection 99B(1) to the situation where a foreign trust becomes an Australian tax resident trust and subsequently makes a distribution to an Australian resident beneficiary. The ATO’s application of subsection 99B(1) to this situation results in the gain that accrued on the disposal of post-CGT assets held by the trust prior to the trust becoming a resident trust being covered by section 99B, subject to the application of an exception under section 99B(2). This is because the change in residence of the trust is not relevant in working out the section 99B assessable amount.
The takeaway
With increasing globalisation and migration flows into and out of Australia, section 99B is not only becoming more relevant to Australian taxpayers, but also clearly becoming a focus area of the ATO.
Taxpayers should take the time to understand the potential broad application of section 99B before an amount of trust property is paid to, or applied for the benefit of, a beneficiary of a trust who is an Australian tax resident, as well as understand the application of section 102AAM of the ITAA 1936 to distributions subject to section 99B(1).
Taxpayers should also ensure they are aware of the proposed record keeping, and compliance management suggested by the published ATO guidance. Maintaining contemporaneous records of any distributions, loans or gifts made by a trustee of a foreign trust to a resident beneficiary and access to trust deeds and other historical information regarding the establishment and maintenance of the trust is critically important to properly assess whether any section 99B exceptions might apply.
Michael Dean
Nathan Greene
Samantha Vidler
Simon Le Maistre
Angela Reid
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