A recent Administrative Appeals Tribunal decision illustrates the importance of ensuring trust documentation such as financial accounts and distribution minutes are correctly prepared.
In Campbell, an Australian resident individual received advances in the 2013 and 2014 income years from a NZ 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, which monitors money transfers in and out of Australia.
Before the Tribunal, the taxpayer was unable to discharge her onus of establishing that the default assessments were incorrect on the basis that the advances from the trust were drawn from corpus and not assessable. The Tribunal was not satisfied by the taxpayer’s ‘sparse and inconsistent evidence’, including two sets of inconsistent accounts and trust minutes that contradicted the taxpayer’s position. The Tribunal also affirmed the penalty assessments.
Beware of section 99B
Most notably, amounts drawn from the corpus of the trust are not assessable except to the extent they are attributable to amounts that would have been taxable had they been derived by a resident taxpayer.
For example, amounts attributable to capital gains of a NZ trust would not generally be taxable in NZ when derived by the trustee, but would be taxable to an Australian resident.
Lessons for beneficiaries of foreign trusts
- Payments to the Australian bank account of a resident by a non-resident will generally be flagged by AUSTRAC who will pass this information along to the ATO, often resulting in information requests.
- Ignoring requests for information from the ATO will usually result in default assessments and penalty assessments at a rate of 75%.
- The burden of proof is on the taxpayer in tax cases. Practically, it becomes harder to convince the ATO that amounts are not assessable after default assessments are issued. Therefore, it is vital that information requests are taken seriously and responded to in a timely and complete manner.
- Australian beneficiaries of foreign trusts must be alert to the scope and operation of section 99B.
- It is vital that trust accounts accurately, coherently, and consistently support the source of payments (including loans) to beneficiaries and the characterisation of such amounts.
- Where the accounts are changed/re-stated, such changes will need to be clearly explained and supported by evidence. For example, if accounts are re-stated to separate out ‘corpus’ amounts for Australian tax purposes from other ‘equity’ then such changes should be fully supported by other evidence.
- Section 99B will apply equally to ‘loans’, meaning any loan amounts not drawn from corpus will be subject to 99B.
- Trust resolutions should clearly identify the source of any distributions or loans and should be consistent with the accounts and other contemporaneous documents (such as foreign tax returns).
Click here to read our article on Campbell and section 99B published in the Weekly Tax Bulletin.
How ABL can help
Arnold Bloch Leibler's market leading taxation team have significant experience advising on the taxation issues associated with foreign trusts and managing ATO compliance activity. Our experience and knowledge give us a valuable insight into the needs and challenges facing both trustees and beneficiaries in these matters.
If you would like further details about the information contained in this bulletin or assistance with any tax-related issues, please contact one of our team members below.