Tax complications for Trusts with Australian resident beneficiaries, trustees or protectors
If you have a New Zealand trust, with Australian resident beneficiaries, trustees or protectors they could be assessed by taxation on capital distributions from your trust, both during your lifetime and after your death under section 99B Income Tax Assessment Act 1936 (Australia).
In Australia payments to the Australian bank account of a resident by a non-resident will generally be flagged by AUSTRAC which will pass this information along to the Australian Tax office (ATO), often resulting in information requests from ATO. Both distributions and loans from New Zealand trusts to an Australian resident can have nasty Australian tax consequences.
For example:: Norman, who lives in Brisbane, had a Messenger call from his mother in Auckland in which she advised that she was distributing her 4 children NZ$200,000 each from the sale of a property. She asked for his Australian bank account details. Norman, who was extremely grateful, gave her the bank details. Because such a distribution would not create a New Zealand tax liability no one thought about Australian tax.
After receiving the money in his Australian bank account, Norman purchased a new Audi and used the remainder to pay for renovations to his home BMW.
Two months later, Norman received a polite ATO letter requesting that Norman explain where the $200,000 in his bank account came from and whether it should be included in his tax return as assessable income. Norman talked to his friends who told him that he did not have to pay tax on gifts. Norman advised ATO that the $100,000 was a gift from his mother and that no tax was payable.
The ATO wrote back requiring details of where the money came from.
Just before receiving the money, George had received an email from his mother advising that her Trust, the Sphinx Trust, had paid a capital distribution of NZ$200,000 into his bank account. Norman sent a copy of that email to ATO thinking that would satisfy them. Instead, Norman was assessed for taxation on NZ$200.000 at his marginal income tax rate (the top tax rate is 45%) under section 99B Income Tax Assessment Act 1936. If he had ignored the request for information a substantial tax penalty would have been imposed.
Problems with loans from Trusts to Australian residents
In the case of Campbell v Commissioner, an Australian resident individual received advances in the 2013 and 2014 income years from a New Zealand trust that were said to be loans drawn from the corpus of the trust. Details of these advances were provided to the ATO by AUSTRAC.
Based on this information, the ATO requested information from the taxpayer as to why 2013 and 2014 returns were not prepared (including the advances as assessable income). The taxpayer did not respond, and consequently, the ATO issued default assessments including the advances as income along with a 75% penalty (together totalling almost $300,000).
Before the Administrative Appeals Tribunal, the taxpayer lost the case because she could not prove that what she had received was corpus (capital) of the trust.
What section 99B does
At first instance, s.99B taxes anything that is paid out of a trust to a beneficiary of the trust who is a tax resident. However, there are some very important exclusions to the section’s operation. This is where the difficulty in applying this provision lies.
Excluded from being taxed (among other things) are:
Amounts paid from the corpus (capital) of the trust;
Amounts already assessed to a beneficiary or trustee; and
Amounts that, if they had been derived by a tax resident taxpayer, would not have been assessable income.
Beware of section 99B!
Section 99B has existed in the income tax law of Australia for many years. However, it is an obscure provision and many tax agents and accountants in public practice are not aware of its existence nor aware of the shock to clients that can arise when the provision is applied.
Accountants, tax agents and lawyers need to be aware of what can be the dramatic and unexpected operation of s.99B., and take expert Australian taxation advice before making Trust distributions or loans to Australian residents. We are not Australian tax experts.
Solutions
You should see us as soon as possible to discuss the need to update your will and your Trust deed.
You need new wills with those to be detailed by you as trustees (who must be over 20). As a result of the Trusts Act 2019 all wills need to be rewritten to include Trustees’ powers that comply with the provisions of the Trusts Act 2019. This is because under s 4B of the Administration Act 1969, the duties incidental to the office of an administrator under that Act are taken to be express trusts for the purposes of the Trusts Act 2019, and the Trusts Act 2019 applies, with any necessary modifications, to those trusts. In addition, if you have children or other loved ones living overseas (especially in Australia), and have a Trust, your wills must be updated to include a provision that enables the distribution of your estate via your will to overseas resident beneficiaries if a distribution to them from the Trust would cause adverse taxation consequences.
Your Trust deed needs to be updated to include a special clause enabling distributions from the Trust to your Estate after you die.
To be safe, Australian residents should not be Trustees or Protectors of your Trust during your lifetime or after your death unless you receive expert Australian taxation advice to the contrary. If an Australian resident becomes the only Trustee (or possibly one of the Trustees) of a New Zealand Trust it will become Australian tax resident. It is then liable for Australian capital gains tax on the sale of New Zealand assets at non-resident tax rates (between 32.5% and 45%).
While you are alive all distributions to Australian residents should be made by you personally, and not from your Trust, unless you receive expert Australian taxation advice to the contrary.
There are no inheritance or estate taxes in Australia. If your Australian resident beneficiaries receive their inheritance from your Estate they will pay no Australian inheritance or estate tax.
Further information
For further information see:
