Foreign Trust Distributions – Section 99B of ITAA36 – is it taxable?

Foreign trust distributions to a resident beneficiary are not assessable if they are from corpus. That is, a capital contribution made to the trust. Any profits are taxable in the hands of the resident beneficiary. Thus, any income derived by the trust is fully assessable to the foreign beneficiary. A distribution includes a loan to a resident beneficiary.

Taxpayers need to be diligent in having documentation that substantiates their claims that the distribution was derived from corpus. Unless documentary evidence exists it is unlikely that Australian Taxation Office will allow the claim and it will be fully taxable.

Campbell’s case

Remember, the taxpayer bears the burden proof for foreign trust distributions. Lack of evidence was the principal issue in a tax case at the AAT, Campbell and Commissioner of Taxation.

In this case, the AAT affirmed the ATO’s decision to issue default assessments and penalties to a taxpayer who had not lodged tax returns declaring foreign distributions. The taxpayer stated that the distributions received were from loans drawn from corpus of the trust. However, when further information was requested by the ATO from the taxpayer, they did not provide the information.

At the tribunal hearing the taxpayer was unable to provide adequate information and documentation to discharge their onus of establishing the default assessment were incorrect. The accounts and trust minutes that were provided to the Tribunal were inconsistent and contradicted the taxpayer’s position.

Key Lessons

The Campbell matter provides key lessons to taxpayers:

• Ensure that financial statement and trust accounts are prepared accurately, and support claims that distributions are received from corpus of the trust
• If the trust accounts have been changed for Australian tax purposes, to separate corpus from other equity, ensure that the changes are substantiated with other evidence
• Ensure trust resolutions identify the characterization of the distributions and identify the source. Trust resolutions should be consistent with trust accounts and other documents.

Foreign Trust Distributions – How can Waterhouse Lawyers help you?

If you are receiving distributions or expecting to receive a distribution from a foreign trust, we would recommend that obtaining legal advice from Waterhouse Lawyers to ensure that the characterization of distributions is determined prior to any audit or review action from the ATO.

Our team is highly experienced in providing taxpayers advice on foreign distributions. We have prepared voluntary disclosures for taxpayers who had incorrectly prepared their tax returns in prior years and have minimised any penalties associated with the disclosure for our clients. Please contact us through our inquiry form or at tax@waterhouselawyers.com.au.