Anti-avoidance: overseas entities indirectly benefit from Australian trusts

By Tony Nunes and Jane Harris, Kelly + Partners Chartered Accountants

In Australia, the beneficiary of a trust must pay income tax on any income received from the trust. If no beneficiary is entitled to the trust’s income at 30 June, the trustee is taxed on the income at the top tax rate of 47%. Thus Australian trusts often prefer to distribute income to an Australian resident individual or company rather than to a non-resident beneficiary, as these payments are taxed at a lower rate.

If the Australian resident passes on the benefits of the trust distribution to a non-resident in a tax-free way (e.g., as a loan, gift, or fully franked dividend), the total Australian tax could be as low as 30%, instead of the 47% that would have been required had the non-resident individual received the distribution directly.

However, the Australian Taxation Offce (ATO) is reviewing these arrangements and seeking to apply anti-avoidance provisions, specifically section 100A, which applies where:

1. a beneficiary is presently entitled to a share of the income of the trust;
2. there is an agreement, arrangement or understanding that someone other than the beneficiary will benefit from the distribution;
3. as part of the arrangement, there is a payment or transfer of money or property or provision of services to a person other than the beneficiary presently entitled; and
4. the purpose of the arrangement was to reduce the Australian tax payable. These provisions are broad and can even apply to informal understandings that are not legally enforceable. Further, the ATO has an unlimited period within which to make an assessment under section 100A.

Where section 100A applies, the net income that would otherwise have been assessed to the beneficiary (or trustee on their behalf) is instead assessed to the trustee at the top marginal tax rate. Given this circumstance, care should be taken when non-residents indirectly benefit from Australian trust income.

Tony Nunes

GGI member firm
Kelly + Partners Chartered Accountants
Advisory, Auditing & Accounting, Corporate Finance, Tax, Fiduciary & Estate Planning
Sydney, Australia
T: +61 2 9933 8866
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: kellypartners.com.au

Kelly + Partners Chartered Accountants is a specialist chartered accounting business that assists private businesses, private clients, and families to manage their business and personal financial affairs. The Kelly + Partners Tax Consulting practice is respected as one of the foremost tax advisory firms in Australia and offers the full range of direct, indirect, and international tax services.

Tony Nunes has over 22 years’ experience in providing tax advice. He has extensive experience in advising clients on issues affecting cross-border transactions, acquisitions, and restructures, and in all aspects of structuring the ownership and financing of corporations and their operations.

Jane Harris

GGI member firm
Kelly + Partners Chartered Accountants
Advisory, Auditing & Accounting, Corporate Finance, Tax, Fiduciary & Estate Planning
Sydney, Australia
T: +61 2 9933 8866
E: This email address is being protected from spambots. You need JavaScript enabled to view it.
W: kellypartners.com.au

Jane Harris has over ten years of experience assisting high-net-wealth and SME clients with taxation matters. She provides clients with structuring, negotiation, and tax legal advice, predominantly in income tax. Jane also frequently advises on the opportunities and risks of operating personal and business affairs through a variety of structures, including trusts.

Published: Trust & Estate Planning Newsletter, No. 07, Spring 2021 l Photo: M S - stock.adobe.com