Section 99B Explained – What Australians Need to Know About Foreign Trust Taxation

Welcome to a deep dive into the complexities of Section 99B and its implications for you, as an Australian. Explore tax codes and tax treaties may not be a ‘page-turner’ for too many people, but for Australian expats, and residents of Australia, having a clear understanding of these can ensure you’re making the right financial decisions for you.

This blog aims to unravel the intricacies of foreign trust income taxation under Australian law, helping you navigate through the maze of legal provisions and understand how they may impact your financial decisions.

Understanding Section 99B

As an Australian resident, you might be wondering how your overseas financial interests, specifically those involving foreign trusts, align with the Australian taxation system. Here’s where Section 99B of the Income Tax Assessment Act 1936 steps in, playing a pivotal role in shaping your tax obligations.

In simple terms, Section 99B is the gatekeeper that determines when and how income or assets received from foreign trusts are taxed in Australia. If you’re a beneficiary of a foreign trust – whether it involves cash, property, shares, or any other assets – and you receive a distribution or benefit from this trust, it’s likely that Section 99B will come into play.

But why does this matter to you? Consider this: If you’re living in Australia and have relatives abroad who’ve set up a trust, or if you’ve invested in a foreign trust, any distribution made to you from that trust could significantly influence your tax returns.

It’s important to note, that given the complexity of this area, seeking professional tax financial advice would be a wise move.

The Breadth of Section 99B

To appreciate the extent of Section 99B, let’s delve into what it covers. This provision applies when you, as a beneficiary of a foreign trust, receive money or other assets. These assets can range widely, including loans made to you by the trust, payments made on your behalf by the trust, or even assets transferred to you, such as shares.

It’s crucial to understand that the value of these assets or money is not merely a transactional figure. Instead, it forms part of your assessable income in the year you receive it. This means that when you file your tax return, these amounts need to be declared and will naturally impact your overall tax liability.

Exceptions to Section 99B

Now, before you start recalculating your taxes, it’s important to know that Section 99B isn’t all-encompassing. There are specific exceptions where this section does not apply.

Firstly, if the payment or asset you received has already been assessed under another provision of the income tax law, then Section 99B won’t double dip. This prevents the same income from being taxed twice under different provisions.

Secondly, and quite significantly, is the corpus exception. If what you received represents either the initial corpus of the trust or additional contributions to the corpus, then it’s exempt from being included in your taxable income. The term ‘corpus’ refers to the principal amount or the original assets of the trust. This exception is particularly relevant if the trust was established with a significant amount of capital or property, and what you’re receiving is part of this original set-up.

However, it’s not always straightforward. Determining whether what you’ve received is indeed part of the corpus can be complex and often requires thorough documentation and history tracing of the trust’s assets. Therefore, when dealing with such situations, seeking professional advice is not just recommended; it’s essential.

Key Considerations and Questions

As you navigate through the nuances of Section 99B, there are certain key considerations and questions you need to ponder. Understanding the nature and source of the money or assets you receive from foreign trusts is paramount.

For instance, if you receive money from a foreign trust, either directly or indirectly, you need to probe further. Questions like whether you are an actual beneficiary of the foreign trust or where the trust obtained the money are vital. These inquiries help in determining the source of the money, which is crucial for tax assessment purposes. Similarly, understanding why the money was paid to you – whether it was for services, a gift, a distribution, or a loan – assists in clarifying the nature of the payment.

These considerations are not just a matter of formality. They are crucial in defining how the Australian Tax Office (ATO) views these transactions under Section 99B and, subsequently, how they impact your tax obligations.

Practical Examples of Section 99B Application

You, as an Australian resident, might be wondering how Section 99B applies in real-life scenarios. Let’s look at some examples:

• Family Member Transactions: Imagine your aunt, who resides overseas and has a foreign trust, sends you money. If you’re a beneficiary of this trust, this transaction falls under the purview of Section 99B. The money received is not just a family gift; it’s a distribution from a foreign trust that you need to declare.

• Capital Distributions: Perhaps you receive a capital distribution from a foreign trust. This distribution, particularly if it stems from the trust’s accumulated income from previous years, is taxable under Section 99B. It’s important to understand that even though it’s labelled as ‘capital distribution’, its roots in accumulated income bring it within the scope of taxation.

• Indirect Benefits: In a scenario where your parents gift you money that they received from their foreign family trust, and you happen to be a beneficiary of this trust, guess what? Section 99B considers this too. The indirect benefit you receive via your parents is still traceable back to the trust, making it taxable income.

• Loans from Foreign Trusts: Receiving a loan might feel like a relief, but if this loan comes from a foreign trust and is sourced from its prior year income, you’re back in Section 99B territory. Such loans are not just financial aids; they are assessable under this section.

These examples illustrate the broad reach of Section 99B. It’s not just direct distributions that count; indirect benefits and loans are also under the microscope. It’s all about the origin and nature of the assets or money you receive.

Case Study: Campbell v Commissioner of Taxation

To give you a clearer picture, let’s examine the case of Campbell v Commissioner of Taxation. In this legal battle, the taxpayer, Ms. Catherine Campbell, received distributions from a New Zealand-based trust totalling $463,200 across two income years. The crux of the matter? These distributions were not declared as income.

The Administrative Appeals Tribunal found that these distributions from a foreign trust were assessable under Section 99B. The case highlights several key points:

• Disclosure Is Crucial: Distributions from foreign trusts must be disclosed and are assessable. This includes amounts referring to accumulated prior year income.
• Accuracy in Record-Keeping: Claiming a distribution as ‘corpus’ of the trust requires accurate and consistent records in trustee minutes and trust accounts.
• Expect Scrutiny: AUSTRAC and the ATO are vigilant and share information about international transactions. Any income from overseas is likely to be queried by the ATO.

The outcome? The taxpayer was penalised for failing to declare the distributions, underscoring the importance of transparency and accurate record-keeping when it comes to foreign trusts and Section 99B.

Special Considerations for Australian Expats

As an Australian expat, your financial landscape becomes more intricate, especially when it involves foreign trusts. Here’s what you need to know about Section 99B:

• The Global Reach of Section 99B: If you’re an Australian tax resident receiving distributions from an overseas trust, you must consider Section 99B. This provision doesn’t just apply to domestic trusts; it has a global reach, encompassing any foreign trust in which you are a beneficiary.

• Corpus Exclusion and Its Implications: Remember, while distributions representing the ‘corpus’ of the trust are typically exempt, proving this requires detailed records. As an expat, if you’re planning to relocate to Australia, it’s crucial to understand the history of the trust’s corpus. This involves tracing the contributions and ensuring proper documentation to establish that these are indeed original contributions, not subject to tax under Section 99B.

• Planning Ahead for Relocation: If you’re an Australian expat considering moving back to Australia, it’s essential to plan ahead. Consider the implications of Section 99B on any foreign trusts you’re involved in. For example, distributions from a U.S. Retirement Fund (like a 401k or IRA) to an Australian resident are subject to the provisions of Section 99B. Strategic financial planning before you become an Australian tax resident can help mitigate potential tax liabilities.

Conclusion

Navigating the complexities of Section 99B requires diligence and a keen understanding of the nuances of international trust taxation laws. As you’ve seen through examples and case studies, the implications of this provision are far-reaching and can significantly impact your financial standing as an Australian resident. Whether you’re receiving distributions from a foreign trust, contemplating a move back to Australia, or just managing your international investments, it’s imperative to stay informed and compliant.

Remember, while this guide provides a comprehensive overview, each situation is unique. Seeking professional advice is not just a recommendation; it’s a necessity in ensuring that your financial decisions align with the legal requirements of Section 99B. Stay informed, plan strategically, and when in doubt, consult with a tax expert to navigate this complex yet crucial aspect of your financial journey.

Ally Wealth Management is the trusted ally in finance for Australians at home and across the globe. As both Australian expats and residents, the founders of Ally have a unique understanding of the common personal financial challenges faced.

Book your complimentary appointment with our team at Ally Wealth Management to discuss how we can help you to achieve your financial goals.

Ally Wealth Management Pty Ltd is a Corporate Authorised Representative of Sentry Advice Pty Ltd ABN 77 103 642 888. Sentry Advice holds an Australian Financial Services Licence (AFSL) No. 227 748.

General Advice Warning: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.