Do I need to pay tax on foreign trust distributions?

In a more globalised world (despite bans on international travel), we more commonly see taxpayers receiving distributions from foreign trusts – and not understanding whether they are taxable in Australia. Firstly, you need to understand the characterisation of the distribution – are the amounts corpus or income?

What is corpus?

Corpus of a trust is the sum of money or property that is set aside to produce income for a named beneficiary or class of beneficiaries. It also referred to as capital of the trust. It is important to identify income that has subsequently been capitalised in the trust – as these amounts can still be taxable when distributed.

Why is the characterisation of the distribution significant?

Section 99B needs to be considered where an Australian resident beneficiary receives monies from a trust during an income year. If section 99B applies to the distributions, the amount received must be included as assessable income in the beneficiary's tax return for the relevant income year.

However, there are some exceptions to section 99B, where:

• corpus of the trust has been paid to the Australian resident beneficiary,
• an amount that would not have been included in the assessable income of the Australian resident beneficiary had it been derived by the beneficiary,
• an amount that is or has been included in the assessable income of the Australian resident beneficiary under section 97,
• an amount that has been assessed to either the trustee of the trust or the trustee of another trust, or
• an amount that has been included in the assessable income of the taxpayer under another Division.

As a result, understanding the make-up of your distribution is essential to avoid paying additional taxes.

This is also a very important issue in planning for a change in residence to Australia, as taking a distribution of income BEFORE you become a resident may be far preferable to doing so AFTER you are already an Australian resident.

What documentation do I need to keep for foreign trust distributions?

If you receive trust distributions from a foreign trust, it is important that you have substantiation documents if you are ever queried by the ATO for potential non-disclosure of income.

Substantiation documents that should be kept include:

• Financial statements and trust accounts that are prepared accurately and support claims that a distribution received by you is from corpus of the trust
  
• If the trust is in a jurisdiction where corpus is not identified separately in the trust accounts, ensure that any changes made to the accounts for Australian tax purposes to separate corpus from other equity is substantiated with other evidence, and
  
• Ensure trust resolutions identify the characterisation of the distributions and source, ie, specify amount from corpus. The trust resolutions should be consistent with other trust documents. 
  

How can Tax Controversy Partners help you?

Understanding trust laws in Australian and other jurisdictions can be very difficult – and it is very important you understand how the different jurisdictions will tax a distribution you receive or pay, so you can make the right choices about both what is distributed to you and when such a distribution may be made.

At Tax Controversy Partners, our experienced lawyers can advise you on distributions you are expecting to receive or distributions who have received in the past to ensure that they have been properly characterised and accurately reported to the ATO. Additionally, we can ensure that you hold the required substantiation documents if your distribution is not required to be disclosed or taxed. Please contact us using our online contact form, via email at admin@taxcontroverypartners.com.au or by phone at 02 8513 3813.