Leslie Massey
Trusts are a popular way for families in Australia to protect their assets, distribute income to family members, and enjoy tax concessions. However, the tax implications for overseas family trusts can be complex and depend on various factors, such as the residency status of the beneficiary and the source of the trust income. For example, if a beneficiary is a non-resident of Australia for tax purposes, they are generally only liable to pay tax on their Australian-sourced income. On the other hand, resident beneficiaries are taxed on their worldwide income. Understanding these rules is crucial for effective financial planning and compliance with Australian tax laws.
| Characteristics | Values |
|---|---|
| Tax on overseas family trust money in Australia | If the beneficiary is an Australian resident, they will be taxed on their worldwide income, including any income from the trust. If the beneficiary is a non-resident, they will only be taxed on their Australian-sourced income. |
| Tax on trust distributions to non-resident beneficiaries | The trustee is liable to pay tax on the beneficiary's share of the trust's net income that is attributable to Australian sources. |
| Tax on conduit foreign income | If an Australian company makes an unfranked frankable distribution to a trustee and declares it as conduit foreign income, the trustee is not liable to pay tax on a non-resident beneficiary's share of the net income reasonably attributable to that distribution. |
| Tax on trust income not distributed to beneficiaries | If the trust income is not fully distributed to beneficiaries, the trustee must pay tax on the retained income at the top marginal rate of 45%. |
| Tax on trust distributions to minor beneficiaries | The trustee must pay tax on behalf of beneficiaries under 18 years old. If the distribution exceeds $1,308, the top marginal tax rate of 45% is imposed on that portion of the trust income. |
| Capital gains tax (CGT) on overseas family trust money | Australian expats with overseas trusts can minimise CGT liabilities through strategic planning, such as holding assets for longer than 12 months to qualify for the CGT discount, utilising exemptions and concessions, and exploring rollover relief options. |
| Land tax on overseas family trust money | Each Australian state has its own laws regarding family trust land tax. Trustees are liable to pay surcharge rates and are required to lodge income tax returns for their family trusts. |
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What You'll Learn
Tax on trust distributions to non-resident beneficiaries
In Australia, the tax treatment of a trust depends on the residency of the trust, the residency of the beneficiaries, and the type of income the trust generates.
If a trust beneficiary is a non-resident at the end of an income year, the trustee is taxed on the beneficiary's share of the trust's net income. This is to ensure that Australian tax is collected on the income. The trustee is liable to pay tax under subsection 98(4) of the ITAA 1936. The trustee is taxed as if they were the beneficiary, and the beneficiary can then claim a credit for the tax paid by the trustee when they prepare their Australian tax return. This does not apply to trustees of Australian managed investment trusts or Australian trustee intermediaries.
If an Australian company makes an unfranked frankable distribution to a trustee and declares it as conduit foreign income, the trustee is not liable to pay tax on a non-resident beneficiary's share of the net income, provided the beneficiary is presently entitled to that share. Similarly, a non-resident beneficiary is not assessed on their share of the net income that is reasonably attributable to the distribution.
When an Australian trust makes a distribution to a non-resident beneficiary, the trust is often required to pay tax on the distribution. This is a type of withholding tax, which acts as a security measure to ensure the collection of Australian tax. The rate of withholding depends on the type of income and whether Australia has a double tax agreement with the country of the beneficiary's residence. The withholding tax is collected from the trustee under the pay-as-you-go withholding rules in the Taxation Administration Act 1953.
It is important to note that the specific tax implications can vary based on the structure and nature of the trust, and it is always advisable to consult with a tax advisor or specialist to determine the precise tax treatment.
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Tax residency status
The tax residency status of an individual is a crucial factor in determining their tax obligations in Australia. This status is determined based on an individual's circumstances, and there are several tests that can be applied to ascertain residency for tax purposes.
The primary test is the 'resides' test, which is satisfied if an individual resides in Australia. If this test is not met, three other statutory tests can be applied: the domicile test, the 183-day test, and the superannuation test.
The domicile test considers an individual's permanent home, or 'domicile', which is defined as a place of permanent abode by law. This test applies to individuals arriving in Australia, and they will be considered residents if they are physically present in the country for more than half of the income year, regardless of whether their presence is continuous or interrupted.
The 183-day test is similar, requiring an individual to be present in Australia for at least half of the income year, either continuously or with breaks.
The superannuation test is another factor that can be used to determine residency status, but it is not explicitly explained in the sources.
If an individual is an Australian resident going overseas to work, they generally remain an Australian resident for tax purposes. To change this status, one must show that they have severed connections with Australia. If an individual's status changes during the income year, they should answer 'yes' to the question 'Are you an Australian resident?' on their tax return, ensuring they are taxed at resident rates for that year.
Additionally, tax residency can be influenced by tax treaties between Australia and other countries.
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Tax treaties
Australia has tax treaties with over 40 jurisdictions, also known as tax conventions or double tax agreements (DTAs). These treaties are formal bilateral agreements that aim to foster cooperation between Australia and other international tax authorities, prevent double taxation and fiscal evasion, and enforce respective tax laws.
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, or the Multilateral Instrument (MLI), is a multilateral treaty that enables jurisdictions to swiftly modify their tax treaties to address multinational tax avoidance and resolve tax disputes more effectively. The MLI has already modified some of Australia's tax treaties, with further modifications expected in the future.
The United States and Australia have a tax treaty and one amendment, known collectively as the US-Australia Treaty, which entered into force on September 27, 2001. This treaty generally subjects dividends to a reduced tax rate of 15%, which may be lowered to 5% if the beneficial owner is a company owning 10% or more of the voting stock of the company making the dividend payment. Additionally, royalty payments arising in one country and paid to a resident of the other are typically taxed at a reduced rate of 10%.
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Tax on trust distributions to minor beneficiaries
Trusts are a popular choice for families in Australia as they provide asset protection, allow income to be distributed flexibly, and enjoy a range of tax concessions. While Australia does not levy an inheritance tax, a family trust can protect its capital from capital gains and income taxes. This allows a greater amount of wealth to be distributed to children.
Minors can be listed as beneficiaries of a family trust, but this is discouraged by a high tax rate. Beneficiaries under 18 can receive a maximum of $1,308 from the trust; any gain higher than that is taxed at the top marginal rate of 45%. The trustee must pay tax on behalf of beneficiaries who are under 18 years old as of 30 June of the relevant financial year. This tax is designed to deter families from making trust distributions to minors.
The trustee is responsible for managing a trust's affairs, including fulfilling the trust's tax obligations, such as lodging an annual tax return. The trustee will need to provide each beneficiary with details of their share of the net income, so that the beneficiaries can include this amount in their tax returns. The trustee will also need to distribute the net income or profit of the trust among the eligible beneficiaries at the end of each financial year.
The net income of a trust is generally taxed to beneficiaries of the trust under section 97 of the Income Tax Assessment Act 1936 (ITAA 1936). However, if the beneficiary is a non-resident at the end of an income year, the trustee (rather than the beneficiary) is taxed on the beneficiary's share of the trust's net income. This is to assist in the collection of Australian tax on the income.
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Capital gains tax
If a resident trust sells an asset for a gain, it would be required to pay capital gains tax on the gain, even if the beneficiaries are not Australian residents. If a non-resident trust sells an asset for a gain, it would not be required to pay CGT on the gain unless the asset is considered an Australian real property interest.
In the case of a non-resident trust, the trustee is generally liable for tax on the trust's income. However, this tax liability could be shifted to the beneficiaries under certain conditions. Non-residents may also need to pay CGT if they dispose of certain Australian assets. Non-resident beneficiaries are generally liable to pay Australian capital gains tax on their share of the trust's capital gains.
Australian family trusts do pay capital gains tax, but they benefit from a 50% CGT discount. If a trust beneficiary is a non-resident at the end of an income year, the trustee is taxed on the beneficiary's share of the trust's net income.
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Frequently asked questions
A family trust is a relationship where one party, the trustee, holds assets for the benefit of another party, the beneficiaries. Family trusts are set up to distribute capital to a nominated list of family members.
If you are a resident of Australia for tax purposes, you will be liable to pay Australian tax on your worldwide income, including any income that you earn from your trust. If you are a non-resident of Australia for tax purposes, you will only be liable to pay Australian tax on your Australian-sourced income.
The trustee is liable to pay the taxes of any beneficiary who is not an Australian resident for tax purposes. If the beneficiary is a non-resident at the end of an income year, the trustee (rather than the beneficiary) is taxed on the beneficiary's share of the trust's net income.
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