Transferor trusts – the impact of not bringing your wealth to Australia

The transferor trust regime acts as an integrity measure to ensure that Australian residents are not settling assets to trusts outside the Australian tax net. Broadly speaking, Australia’s transferor trust measures impose accruals taxation by attributing to an Australian resident “transferor” income derived by a non-resident trust estate to which the Australian resident has transferred property or provided services.

A transferor trust is essentially a non-resident trust to which an Australian resident has transferred property or provided services. An Australian tax resident will be an “attributable taxpayer” for a year of income with respect to a non-resident trust where: 

• The trust is a non-resident discretionary trust; 
• The Australian tax resident has transferred property or provided services to the trust; and 
• The transfer was not made under an arms-length transaction or in the ordinary course of carrying on a business. 

Broadly speaking, the attributable income of a transferor trust will be the net income of the trust, calculated as though the trust was an Australian taxpayer. Prima facie, all passive income derived by a non-resident trust will be attributable income. However, where the non-resident trust is located in a comparably taxed jurisdiction (i.e. one of seven “listed countries”, such as New Zealand, the UK, and the US), only certain classes of income – called eligible designated concession income – will be attributable to the transferor of the non-resident trust. 

The attributable income attributed to the Australian taxpayer is reduced by the amount of any attributable trust income that has been included in the assessable income of a beneficiary of the non-resident trust.

Regarding transferor trusts in non-listed countries, there are some limited exemptions to these rules. These include:

1. A trust established under a will;
2. A trust that satisfies the conditions of a family relief trust or post-marital trust;
3. Transfers to trusts that occurred prior to the taxpayer becoming an Australian resident, or which are not controlled by the Australian resident; or
4. The property was transferred into the trust before 12 April 1989.

These exemptions are very limited in scope, and each of the above exemptions is subject to specific conditions, which make them very difficult to access in most cases. 

Any Australian resident with an offshore trust needs to take cognisance of the transferor trust regime, as its broad scope can have a significant impact on a resident’s tax liability. 

---

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.

Matthew Broadhurst has over 5 years’ experience advising clients with applied knowledge of managing tax disputes including audits, objections, and litigation. He has worked in both the public and private sectors providing a unique outlook that is beneficial to clients in navigating Australia taxation system.