The ATO recently finalised its Tax Determination and accompanying Practical Compliance Guideline dealing with the Australian tax consequences for an Australian beneficiary of a Foreign Resident Trust.
Of interest to many Australians with family members overseas, is the ATO’s proposed compliance approach outlined in PCG 2024/3.
The ATO are aware of an increase in the flow of foreign money and property to Australian residents because of either family gifts or inheritances.
Section 99B is an obscure provision within the Tax Act that seeks to tax the “receipt of trust income not previously subject to tax”.
In recent years the ATO have sought to clarify what they believe section 99B applies to and in the PCG outline the following:
- Section 99B may apply where a resident beneficiary receives an amount of trust property from a non-resident trust estate, including:
- distributions paid by the trustee to a beneficiary;
- assets transferred by the trustee to a beneficiary;
- use of trust property by a beneficiary;
- loans from the trustee to a beneficiary;
- amounts received from a deceased estate
The PCG then goes on to provide 27 examples of scenarios that may occur involving foreign trusts and outlines what the ATO’s compliance approach would be. 7 of those examples relate to deceased estates.
The ATO has stated that an arrangement will be considered Low Risk where the trustee/executor distributes an amount or the benefit of trust property from a non-resident deceased estate to a resident beneficiary and both 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; and
- 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 or applied to the resident beneficiary.
The ATO further state that the compliance approach outlined in the PCG is confined to a non-resident deceased estate and does not extend to any testamentary trust established under the will of the deceased.
Should the ATO undertake a review of the foreign distributions they will expect to be provided sufficient documentation to be able to determine whether any part of that distribution might represent an assessable distribution under section 99B.
In order to be considered Low Risk, in addition to the earlier criteria, beneficiaries also need to be able to hold or provide the following documents.
- a document confirming the date of the deceased’s death;
- the will of the deceased, letter of wishes or correspondence from executors or their legal advisers stating the terms of the will;
- documentation confirming that the assets were owned or held by the deceased at the time of death; and
- documentation setting out the distribution to the Australian-resident beneficiary and the assets of the deceased used to fund this distribution.
Where the inheritance does not meet the Low Risk criteria, resident beneficiaries will likely be faced with an ATO review that seeks to include the full amount of the inheritance in their assessable income. The PCG provides a number of other examples where the ATO states that if a beneficiary is not able to provide sufficient records to establish that the distribution is not assessable, the ATO will administer section 99B on the basis that the full distribution is taxable.
If you or your clients are beneficiaries of a foreign deceased estate it is vitally important that you are able to obtain the records required by the ATO to support the nature and source of the payment.
If you are faced with this scenario , please contact Sean Pearce for assistance.