The Australian Taxation Office (ATO) has issued its final Practical Compliance Guideline (PCG) 2024/3, providing taxpayers with clarity on its compliance approach under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936) regarding the taxation of amounts received by resident beneficiaries from non-resident trusts. This guideline serves to mitigate uncertainty and outlines low-risk arrangements and the record-keeping standards expected by the ATO.
Unpacking what Section 99B is about
Section 99B acts as a residual taxing provision, primarily targeting amounts distributed or applied for the benefit of resident beneficiaries from trust property. It applies broadly to foreign trusts and ensures that amounts not previously subjected to Australian tax are brought into the tax net.
Under subsection (1), any amount from the property of a trust paid to or used for the benefit of a resident beneficiary during an income year must generally be included in the beneficiary’s assessable income for that year.
However, subsection (2) provides important exclusions to this rule, reducing the taxable amount to the extent it represents:
- Corpus of the trust – Principal amounts that are not attributable to income or gains that would have been assessable had the trust been a resident taxpayer.
- Amounts not ordinarily assessable – For example, amounts that would not be taxable to a resident taxpayer under Australian law.
- Non-assessable non-exempt income – Certain exempt income under section 802-17 of the Income Tax Assessment Act 1997 (i.e. amounts of Conduit Foreign Income) .
- Amounts already taxed – Distributions already included in the beneficiary’s assessable income under section 97, or where the trustee has already been taxed under sections 98, 99, or 99A, or where a similar tax has been paid in another trust structure.
- Amounts taxed under specific anti-avoidance provisions – Such as those under section 102AAZD for closely held trusts, particularly if the beneficiary is a company.
Subsection (2A) clarifies that amounts excluded from assessable income under these specific provisions are not taxable and do not qualify as exempt income.
In essence, section 99B ensures that any untaxed amounts received from foreign trusts by resident beneficiaries are appropriately assessed, closing potential gaps in tax compliance while excluding amounts already taxed or non-taxable by design.
Key Highlights of PCG 2024/3
Scope and Purpose
The guideline focuses on:
- Distributions or benefits from non-resident trusts that have accumulated property during periods of non-residency.
- Providing compliance confidence for taxpayers operating within low-risk parameters.
- Highlighting scenarios where section 99B(2) may reduce assessable income.
While the PCG provides practical guidance, it doesn’t override the law. Taxpayers remain obligated to comply with section 99B.
Understanding Common Scenarios Under Section 99B
Several examples in the guideline illustrate situations where section 99B may apply, with varying tax implications depending on the beneficiary’s ability to substantiate their position.
1. Migrating to Australia (Example 1)
Scenario: Marty migrates to Australia and receives listed shares from a non-resident trust. The shares, accumulated from reinvested trust income, are distributed to Marty post-migration.
Key Consideration: Marty must determine if the reductions under section 99B(2)—such as corpus exclusion—apply.
2. Receiving Loans or Distributions (Examples 2–4)
Scenario: Australian-resident beneficiaries receiving loans, gifts, or distributions from non-resident trusts.
Key Consideration: Beneficiaries must evaluate whether amounts represent income or corpus and maintain adequate records to substantiate claims under section 99B(2).
3. Use of Trust Property (Example 5)
Scenario: Beneficiaries using non-resident trust assets, such as artwork or property.
Key Consideration: The ATO will examine whether the benefit constitutes assessable income and whether reductions apply.
4. Deceased Estates (Examples 6–7)
Scenario: Beneficiaries receiving amounts from deceased estates held in non-resident trusts.
Key Consideration: Low-risk criteria may apply if distributions occur within 24 months of death and do not exceed AUD 2 million.
Compliance Simplified: Low-Risk Arrangements
Taxpayers adhering to specified low-risk arrangements may avoid detailed ATO scrutiny:
- Deceased Estates: Beneficiaries must:
- Receive distributions within 24 months.
- Ensure total distributions remain under AUD 2 million.
- Retain records substantiating the deceased’s date of death, will terms, and trust assets.
- Commercial Agreements: Use or borrowing of trust property on commercial terms requires:
- Written agreements or supporting evidence for verbal agreements.
- Market-consistent terms and documentation.
- Payment of interest, rent, or hire charges aligned with market rates.
Practical Record-Keeping Expectations
Compliance hinges on meticulous record-keeping, particularly where beneficiaries rely on section 99B(2) to reduce taxable amounts. Required documents include:
- Trust deeds and trustee resolutions.
- Financial statements and distribution summaries.
- Evidence of the source and nature of funds or assets distributed.
For deceased estates, additional documentation—such as wills, valuation reports, and executor correspondence—is critical.
Takeaways for Taxpayers
- Assess Your Risk – Understand whether your arrangement falls within the ATO’s low-risk parameters. This can significantly reduce compliance burdens.
- Prioritise Documentation – Retain detailed records to substantiate claims, especially for corpus exclusions under section 99B(2)(a) or non-taxable income under section 99B(2)(b).
- Engage Early – For high-value or complex arrangements, seek professional advice to ensure compliance and mitigate potential tax risks.
- Leverage Commercial Terms – When using trust property, ensure agreements are on market-consistent terms and backed by evidence.
Conclusion
PCG 2024/3 provides valuable insights for beneficiaries navigating the complexities of section 99B. By adhering to the low-risk criteria and maintaining robust documentation, taxpayers can manage compliance efficiently while reducing the likelihood of ATO intervention.
For tailored advice or support on navigating section 99B, Andersen’s expert tax advisers are here to help.
