Foreign trust example – the theory around foreign trusts is confusing. So in this episode let’s use a New Zealand trust as a foreign trust example.
Foreign Trust Example
Let’s say a foreign trust makes a capital gain. To what extent can you “mitigate” (never say ‘avoid’) the tax implications and treat the full distribution to Australian residents as corpus?
This is one of the questions Andrew Henshaw of Velocity Legal in Melbourne discusses with you in this episode. Here is what we learned but please listen in as Andrew explains all this much better than we ever could.
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Foreign Trust Example
In the last episode 399, Foreign Trusts, we looked at s99B ITAA 1936 in detail. The two scenarios where s99B most commonly raises its head are inheritances and migration.
So let’s use the example of an inheritance in New Zealand. Keep in mind that an estate is also a form of trust. So the overseas estate of a non-resident individual is a form of trust.
Example
Erin is an Australian tax resident. She has two sisters in New Zealand who are non-residents. Erin’s mother dies in 2023 and assets worth AUD 3m pass into a foreign trust.
When the trust is dissolved in 2025, the estate’s assets are worth AUD 6m. So the capital gain is AUD 3m.
Each daughter receives AUD 2m.
Equal Distribution of Corpus
If corpus and gain are distributed equally, then Erin receives AUD 1m of corpus and has a s99B income of AUD 1m. Even if Erin has capital losses, she can’t offset these losses against her s99B income.
Streamed Distribution of Corpus
However, corpus and gain don’t have to be distributed equally. If the trust distributes AUD 2m of corpus to Erin and no gain, then Erin has no s99B income. Her sisters would receive AUD 1m of corpus and AUD 3m of gain.
TD 2017/24 – Traknew Holdings Pty Ltd v FCT 91 ATC 4272 – Hill J:
This is just one of the points we discuss in this episode. We also speak about the role of Special Category Visas for New Zealanders and how these affect their tax position in Australia, including s99B and a lot more. So please listen in since we only scraped the tip of the iceberg in these show notes.
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