Beware Section 99B

by Tony Nunes

Section 99B of Australia’s Income Tax Assessment Act 1936 (ITAA 1936) applies when money or another asset of a foreign trust is paid to an Australian resident, or applied for their benefit, and the Australian resident is a beneficiary of the foreign trust. Section 99B is primarily aimed at preventing untaxed income from a foreign trust being accumulated offshore, capitalised, added to the foreign trust's corpus, and subsequently distributed to Australian beneficiaries as non-taxable trust corpus distributions.

Section 99B(1) includes the relevant amount distributed to the beneficiary in the beneficiary’s assessable income where:

A beneficiary of a foreign trust is paid money from the foreign trust; or
A foreign trust distribution is applied for the benefit of the beneficiary; and
Unless the amount is subject to reduction by one of the exempting provisions in section 99B(2).

The difficulty in applying section 99B

Consider this simple scenario: a young Australian resident receives a generous capital sum from a trust set up by her late grandfather in Rome. Back in 2010, her grandfather settled AUD 800,000 on the trust.

Fast forward to 30 June 2023, when the Australian resident beneficiary becomes entitled to her share of the trust's capital. Prima facie, section 99B includes the amount in the Australian resident’s assessable income. However, section 99B(2) excludes certain amounts from being taxed. The key exclusion is for the trust’s corpus, to the extent that such corpus, had it been attributable to the Australian resident taxpayer, would have been assessable income of that taxpayer.

If it can be proved that her share of the capital was indeed part of the original AUD 800,000 settlement, the beneficiary may qualify for an exclusion under section 99B(2)(a). However, it is often very difficult to trace amounts to corpus. Assume that this trust has over the years used the original corpus to invest in assets. It has made capital gains and losses over the years. Is the amount paid out to the Australian resident still traceable to the original corpus? And if not, what portion is?

If a taxpayer intends to rely on the exclusion clauses outlined in section 99B(2), it is essential to ensure they have the necessary documentation and evidence including:

Carefully prepared trust financials;
Properly drafted trustee resolutions; and
Adequate and reliable information supporting the source of payments received from the offshore trust.

Considering that many, if not most, offshore trusts may not be aware of the broad scope of section 99B, Australian residents often find their receipts of this nature subject to income tax.

Tony Nunes has over 25 years’ experience in providing tax advice to clients, especially on issues affecting cross-border transactions, acquisitions and restructures, and on all aspects of structuring the ownership and financing of corporations and their operations.

Trust & Estate Planning