PART I – Foreign resident beneficiaries – income tax issues

A globalising economy and workforce has increased the complexity of the Australian taxation landscape.  One impact of this is Australian resident trusts more often having non-resident beneficiaries and foreign sourced income.

This has been made more challenging by the concerted targeting by Australian and foreign governments of the cross-border dollar.

There are real opportunities, but also very real risks, when distributing trust income to foreign residents so the necessary planning must happen before 30 June with carefully drafted distribution resolutions.

In short, classes of income subject to final withholding tax such as interest, dividends and royalties (referred to as WHT Income) can achieve more tax -effective outcomes if distributed to foreign residents.  But beware;

  • The impact of section 100A needs to be considered if the funds are retained (see my previous article on reimbursement agreements)
  • The ATO are likely to review and challenge non-genuine distributions to foreign residents of WHT Income to access the lower withholding tax rates;
  • The ATO does not accept streaming other than for dividends and capital gains.  For example, if an Australian trust has interest and capital gains the resolutions would need to be carefully drafted to achieve the outcome of the foreign resident being taxed on the interest only.

On the flip side, other trust income (the non-WHT Income) distributed to a foreign resident is taxed to the trustee (other than foreign income that is not capital gains*) and for foreign individuals this could mean being taxed at the top marginal rate and then potentially having to lodge Australian tax returns.

In essence, poorly drafted resolutions that fail to stream classes of income can result in non-resident beneficiaries receiving a proportionate share of ALL classes of income.  This can then result is an unexpected tax liability for the trustee and otherwise unnecessary compliance obligations for the non-resident beneficiary.

*In part II we will address the CGT issues particularly the problems with foreign sourced capital gains for non-resident beneficiaries.

Author – David Marschke