PCG 2024/3 – the ATO’s practical approach to section 99B
The ATO has finalised its practical compliance guidance Practical Compliance Guideline PCG 2024/3 (Guideline) to clarify how the ATO will apply its compliance resources in relation to the application of section 99B when Australian residents receive payments or benefits from non-resident trusts. The guideline outlines common scenarios, record-keeping expectations, and low-risk arrangements.
The Guideline, which contains twenty-seven examples, aims to assist taxpayers in complying with section 99B when they receive payments or benefits from trusts, with the ATO indicating that its current focus is on trust property accumulated while the trust was a non-resident of Australia.
What is section 99B?
In short, any amount, being property of a trust estate, which is paid to (or applied for the benefit of) a beneficiary, who is an Australian resident at any time during the income year, is included in assessable income pursuant to subsection 99B(1). However, section 99B will not apply if one of the carve-outs under subsection 99B(2) applies.
The ATO demonstrates the breadth of subsection 99B(1) with seven examples. These examples provide no consideration of reduction provisions in subsection 99B(2) but serve to emphasise the Commissioner’s broad interpretation on subsection 99B(1). Some examples are useful, while others are of minimal utility. The examples include:
Example 1 and 7 – non-resident migrates to Australia
Marty, freshly moved to Australia, begins the process of winding up his overseas assets, including a non-resident trust. The non-resident trust owns listed shares, and all income earned from the listed shares has been accumulated and reinvested in further shareholdings. In the year after he becomes a resident, Marty receives a distribution of the shares from a non-resident trust.
Christine migrates to Australia and, the week before she migrates, receives a distribution from a non-resident trust controlled by her father. The profits of the trust are usually reinvested in the trust assets.
The ATO says Marty and Christine need to consider the application of subsection 99B(1).
These examples are, in effect, a reiteration of ATO ID 2011/93 and emphasise the need for careful consideration of Australian tax laws in respect of people looking to move to Australia and become tax residents. However, ATO ID 2011/93 includes more useful analysis than the “need to consider” comment in the Guideline.
Example 2 and 3 – the gift that may be taxable
Alice, an Australian resident, is trustee of XVB Trust. Alice asks her parents for financial assistance to fund the investment activities of XVB Trust. Alice’s parents, in their capacity as trustees of a non-resident trust, appoint funds to Alice in her capacity as trustee of XVB Trust. XVB Trust is a beneficiary of the non-resident trust.
Jack, an Australian resident, receives a gift from his grandmother. Upon receiving the gift, Jack’s grandmother advises that the money was paid from a non-resident trust that she controls and of which Jack is a beneficiary.
The ATO says both Alice and Jack need to consider the application of subsection 99B(1).
Example 4 and 5 – temporary use of trust assets
Vicky, a resident of Australia, and a beneficiary of a non-resident trust. She receives a loan from her father (a non-resident) in his capacity as trustee of the non-resident trust.
Adam, a resident of Australia and a beneficiary of a non-resident trust controlled by his uncle. Adam asks to borrow one artwork to hang in his business for 2 years. His uncle agrees.
The ATO says both Vicky and Adam need to consider the application of subsection 99B(1). They may also wish to consider the ATO’s compliance approach in relation to the temporary use of assets, detailed below, and examples 20 to 27 in the Guideline.
Example 6 – deceased estate
Amanda is a resident beneficiary of a non-resident deceased estate of her grandfather. Amanda receives a distribution from the estate of money which is sourced from both cash and the proceeds from the sale of shares held by her grandfather at the time of his death.
The ATO says Amanda needs to consider the application of subsection 99B(1) and may also wish to consider the ATO’s compliance approach in relation to what it considers to be low-risk arrangements involving deceased estates, detailed below, and examples 13 to 19 in the Guideline.
These simple examples are meant to be just that, scant on detail, even scanter on guidance, and certainly insufficient to consider whether subsection 99B(2) could reduce the otherwise assessable amount. All these examples show is that subsection 99B(1) has broad scope and some things may, or may not, fall within that scope although the examples themselves do not say one way or another.
The reduction in subsection 99B(2) – onus, proof, and evidence
The difficulty that the broad scope of subsection 99B(1) creates for taxpayers and their advisers is, once the elements of subsection 99B(1) are established, the taxpayer has the onus of establishing that one of the carve-outs in subsection 99B(2) applies in order to reduce (or eliminate) the amount included in assessable income under subsection 99B(1).
The carve-outs, or reduction provisions, apply where the relevant amount represents:
corpus of the trust, except to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by “a taxpayer being a resident”, would have been included in the assessable income of that taxpayer (paragraph 99B(2)(a));
an amount that, if it had been derived by “a taxpayer being a resident”, would not have been included in the assessable income of that taxpayer (paragraph 99B(2)(b));
an amount included in the assessable income of the beneficiary under section 97;
an amount is in respect of which a trustee is assessed and liable to pay tax under sections 98, 99 or 99A;
an amount that is non-assessable non-exempt income of the beneficiary under section 802-17 (conduit foreign income); or
an amount included in the assessable income of a taxpayer under section 102AAZD (transferor trust rules).
The hypothetical resident taxpayer tests contained in paragraph 99B(2)(a) and paragraph 99B(2)(b), and the factors taken into account in applying those tests are considered in Taxation Determination TD 2024/9 (our consideration of TD 2024/9 is available here).
The Guideline sets out the core documents and information that the resident beneficiary should obtain to discharge the onus of proof in respect of satisfying that an amount satisfies paragraph 99B(2)(a). The ATO indicates that the core documents that a resident beneficiary will need, as appropriate, to provide are:
a copy of the signed and executed trust deed or will;
signed trustee minutes, resolutions or distribution statements confirming an amount was paid or applied for the benefit of a beneficiary from the trust’s corpus;
copies of the trust’s financial accounts for the relevant years, prepared in accordance with the accounting principles of the relevant country.
While this may seem limited, often when dealing with section 99B, the “relevant years” will be far in excess of merely the year of the relevant payment or application of trust property which gives rise to the application of subsection 99B(1). Further, the Guideline goes on to provide that the ATO will require further documentation and information on a case-by-case basis, including, but not limited to:
records detailing the property used to settle the trust, such as payment records or documents demonstrating the transfer of property;
for a deceased estate, a document setting out the assets owned by the deceased at their date of death, or a valuation of their assets at the date of death;
documents showing property being contributed to the trust;
other records or working papers prepared by the trustee or their professional advisers, for example, accounting working papers;
bank statements or payment records;
copies of all trustee minutes, resolutions or distribution statements confirming the payment of capital amounts;
accounting records, for example, general ledgers;
correspondence from the executors or their legal advisers setting out the terms of the will;
advice from professional advisers, including foreign advisers, to support the evidence provided;
foreign legal advice;
tax distribution statements;
foreign country tax returns of the beneficiary where the beneficiary is required to lodge in the foreign jurisdiction;
foreign resident withholding tax statements from the foreign jurisdiction.
What the ATO suggests is necessary is not always easy to obtain or may not exist. The ATO seems to recognise that stating:
We also acknowledge that the ability for a resident beneficiary to obtain documents and information from a non-resident trustee can be hindered depending on the relationship between the resident beneficiary and the non-resident trustee, and the relevant laws in the overseas jurisdiction.
However, the onus is on the resident beneficiary to provide information and documentation to us to evidence that a relevant reduction is satisfied. Where the onus is not discharged, we will administer section 99B on the basis that the full amount should be included in the beneficiary's assessable income.
That proposition in the second paragraph stems from the decision of Campbell v FCT [2019] AATA 2043 and is not controversial. However, when trying to rely on that decision, the Commissioner must remember that it involved multiple sets of financial statements recording different amounts of corpus which were not explained.
Examples 8 to 12 provide different scenarios of evidence that is, or is not, sufficient to satisfy the burden of proving paragraph 99B(2)(a).
Low-risk arrangements
The Guideline then provides for two circumstances where the ATO will not devote compliance resources to what are referred to as low-risk arrangements. The low-risk arrangements are:
distributions from a non-resident deceased estate to a resident beneficiary where:
The trust property, including cash or proceeds from the sale of trust assets, is distributed to the resident beneficiary within 24 months of the date of death.
The total value of trust property received, whether in multiple payments or in one lump sum payment, by the resident beneficiary does not exceed A$2 million at the time the amount is paid or applied to the resident beneficiary.
2. the provision of trust assets on commercial terms.
The Guideline’s compliance approach will not apply where:
There are elements of a contrived nature that seek to enable you to fall within the compliance approach.
The arrangement was entered into for the purpose of enabling the resident beneficiary to provide a benefit to another resident beneficiary of the trust.
As it is the ATO’s compliance approach, the ATO view of what is ‘contrived’ or ‘entered into for the purpose’ will be determinative of whether the compliance approach applies. The view of the taxpayer may differ to the ATO.
In relation to deceased estates, although the description of the compliance approach is in respect of “trust property, including cash or proceeds”, all examples deal only with distributions of cash, and not in specie distributions.
In relation to the provision of trust assets on commercial terms, the compliance approach will only be taken if the resident beneficiary can provide documentation objectively demonstrating that at the time of entering into the agreement the rate and terms of the agreement to borrow, hire, or use the trust property is consistent with market rates and terms in the same or similar circumstances.
In addition, the Commissioner will provide a “safe-harbour” (only for the purposes of section 99B if the relevant agreement is on Division 7A terms (that is, loan complies with section 109N of the Income Tax Assessment Act 1936).
The challenge with the safe-harbour is that the Division 7A interest rate is currently 8.77%, which may or may not be an arm’s length rate depending on factors such as the amount of the loan, the solvency of the borrower, etc. The Commissioner’s safe-harbour only applies in respect of the application of section 99B. If taxpayers want to rely on the Commissioner’s safe-harbour, they should obtain advice to confirm they do not breach any other taxation laws.
Conclusion
The Guideline is not the law but provides practical insights into the ATO's compliance approach to section 99B. While the Guideline is welcome, it is not without hullabaloo, some examples have the potential to mislead, and with others the utility is minimal.
Taxpayers receiving amounts from foreign trusts, including deceased estates, must carefully consider the application of subsection 99B(1), and any potential reductions under subsection 99B(2). However, taxpayers should also consider their factual circumstances and opportunities along with the interaction between the ATO’s safe-harbour approach and other taxation laws. What is essential is that to meet their obligations (and fit within the ATO’s compliance approach), beneficiaries must retain significant and proper records to demonstrate eligibility for reductions under subsection 99B(2).
Kaitilin Lowdon
Principal Lawyer
M +61 402 859 214 | T+61 3 9611 0120
E: klowdon@sladen.com.au
Neil Brydges
Principal | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au