If you are a tax resident of Australia and beneficiary of a foreign trust (or any trust for that matter) receiving a distribution or benefit, be warned as the ATO may come knocking.

In essence anything a Trust pays to a beneficiary is taxed under Section 99B (or Section 99C) unless it is excluded.

The exclusions are listed in Section 99B(2), and include:

a) Corpus

b) an amount that if it had been derived by a taxpayer being a resident, would not have been included in the assessable income of the taxpayer of a year of income

c) an amount that is non-assessable non-exempt income of the beneficiary because of section 802-17 of the iTAA1997

d) Section 99(2)(c) effectively excludes amounts caught by Section 97 or 98,99 or 99A.

e) Section 99(2) (c) then excludes further amounts under 102AAZD.

Some taxpayers think that rather than distributing income or accumulated income from the trust, the foreign trust will loan funds to the beneficiary at arm’s length rates, does this work? Well a recent private biding ruling says NO. Section 99C will apply where an amount has been applied for the benefit of a beneficiary, this includes a loan. Therefore the mere loan (regardless of whether an interest rate is charged) will be caught by Section 99C. However, if the loan is sourced from Corpus it may be outside of Section 99C.

The area of Foreign Trusts and 99B and 99C is complex. If you need specific advice we recommend you consult with a qualified tax advisor.

The above is general in nature and should not be relied upon as tax advice. Tax laws often change, therefore the above may also be out of date. If you need to speak with a specialist please contact our member on 02) 8264-0755.

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