Imagine Australia didn’t have any rules around transferor trusts. It would be easy to ‘park’ assets and income in overseas trusts. And not pay any tax in Australia.
So the rules around transferor trusts are an anti-avoidance provision to prevent exactly that. These rules live in Div 6AAA of Part III of ITAA36.
The rules are to impose Australian tax on the undistributed income of non-resident trusts. They apply where Australian residents have directly or indirectly transferred property or services to a non-resident trust. Or are a beneficiary of such a trust.
A transferor trust is a non-resident trust to which a resident has made a transfer of property or services. Or is deemed to have made such a transfer.
A transferor is an Australian resident making such a transfer to a non-resident trust.
They have at any time transferred property or services to a non-resident discretionary trust estate. Or they have transferred property or services any time on or after IP time to a non-resident non-discretionary trust estate for either no consideration or for consideration less than an arm’s length amount.
IP time is any time at or after 7.30pm 12 April 1989.
A resident transferor’s attributable inome per s102AAU is the amount going into their assessable income.
The resident transferor to whom the attributable income is attributed is called an attributable taxpayer per s 102AAT. So attributable taxpayers are the ones paying Australian income tax on the attributable income.
But there are exemptions. Different exemptions apply to different types of trust estates.
# 1 Deceased Estates
The first exemption sits in s102AAL ITAA36. The exemption applies to a trustee of a deceased estate acting as instructed in a will or codicil. If the trustee transfers property or services to a non-resident trust estate according to directions contained in the deceased person’s will or codicil, then the exemption in s102AAL applies. It also applies if the trustee acts according to a court order which varies the will or codicil.
But there are two scenarios where this exception doesn’t apply. The first scenario is if the trustee has any discretion regarding the transfer. If the transfer is made through the exercise of the power of appointment or of a discretion by the trustee or any other person, then there is no exemption from the transferor trust rules.
An example would be where the trustee of a deceased estate has a discretion to invest money of the trust estate and decides to transfer the money to a discretionary trust estate.
The second scenario is if the trustee transfers property or services to a non-resident estate but the transfer was caused by another entity – other than a deceased person. In that case, the entity making the transfer is treated as a transferor.
# 2 Non – Resident Family Trust
The transferor trust measures do not apply to an individual per s102AAT who has transferred property or services to a non-resident family trust. Non-resident family trusts are defined at s102AAH.
However, the trust must be a non-resident family trust at all times while it exists. Starting from the transferor’s 1990-91 income year) until the end of the current income year, ie the income year for which the transferor is working out assessable income.
An exemption from the transferor trusts measures is also available to an individual who first became an Australian resident after 12 April 1989 and makes a transfer to a non-resident family trust before taking up residency in Australia (see a 102AAAT)
To qualify, the trust estate must be a non-resident family trust at all times after the transferor becomes a resident of Australia.
The exception does not apply to an individual who, as a trustee, transferred any property or services to the non-resident family trust from any other trust estate.
This exception covers two types of non-resident family trusts – post marital family trusts and family relief trusts.
Post-marital family trusts – s 102AAH(2)
Post-marital family trusts come into existence after a decree or order of dissolution or annulment of a marriage or a decree or order of a judicial separation or similar instrument. Trusts resulting from the breakdown of a de facto marriage also qualify. The beneficiaries of the trust estate must be non-resident individuals and:
- the spouse or former spouse of the individual, or
- a child of the individual or the individual’s spouse or
- a child of the individual’s former spouse during the marriage
Family relief trusts – s 102AAH(3)
Family relief trusts are to help non-resident family members who are in necessitous circumstances. Trusts with Australian or non-family beneficiaries do not qualify as family relief trusts. The only beneficiaries permitted are non-residents who are related to the transferor. These are:
- a spouse or former spouse
- a parent of the transferor or of the transferor’s spouse or former spouse
- a child of the transferor or of the transferor’s spouse or former spouse
- a grandparent of the transferor
- a grandchild of a transferor
- a brother or sister of the transferor or of the transferor’s spouse or former spouse
- a child of the transferor’s brother or sister
- a child of a brother or sister of the transferor’s spouse or former spouse
A trust estate will generally not qualify as a family relief trust if the assets of the trust are excessive. There is an exception to this rule however if there have been to transfers of property or services to the trust after 12 April 1989. In this case the trust can have excessive assets and still qualify as a family relief trust.
# 3 Migrant Transferors
An individual who first become an Australian resident after 12 April 1989 will not be subject to the transferor trust measures if they transferred property or services to a non-resident trust estate before becoming a resident and they were not in a position to control the trust estate (see s 102AAT(1)(c)).
# 4 Discretionary Trust Estate
The transferor trust measures do not apply to a transferor who has transferred a property or services to a discretionary trust estate if the transferor made the transfer
a) in the course of carrying on a business,
b) for terms identical or similar to those in the ordinary course of business with ordinary clients or customers – ie on an arm’s-length basis and subject to similar terms and conditions.
If the transfer was not at an arm’s-length in the course of carrying on a business, the transferor trust measures will normally apply if at any time after the transfer transferor or the transferor’s associates were in a position to control the trust estate.
However, if the transfer took place before 12 April 1989, the transferor trust measures will only apply if the transferor or the transferor’s associate were in a position to control the trust after 12 April 1989.
If a transferor subsequently gains control of the discretionary trust estate, all years before commencement of the transferor trust measures become subject to the measures.
A transferor is taken to be in a position to control a non-resident trust estate if the transferor or any associates:
- have power, by whatever means, to obtain the beneficial enjoyment of the corpus or income of the trust estate
- were able to control, directly or indirectly, the application of the income or corpus of the trust estate
- were capable, under a scheme of gaining the enjoyment or control referred to in the above two points
- could expect the trustee to follow their directions, instructions or wishes, or
- have the ability to remove or appoint any trustees of the estate
Non-discretionary trust estates
The transferor trust measures will not apply to any transfers to a non-discretionary trust estate before 12 April 1989.
And the measures will not apply to a transfer of property or services after 12 April 1989 if the transfer was made at arm’s length and the trust estate was a non-discretionary trust estate at all times during the transferor’s current year of income
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 01 February 2019