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Business & Investment Entities
ATO Resources |
What this Ruling is about
1. This Ruling addresses the following:
2. This Ruling does not apply to:
3. All subsequent legislative references are to the ITAA 1936 unless otherwise stated. Ruling
4. A resident beneficiary assessed on trust income is entitled to claim a foreign tax credit under subsection 160AF(1) in respect of foreign income1 included in the trust income together with their other foreign income provided foreign tax2 has been paid or deducted at source in respect of that foreign income. 5. Where a trustee is assessed on behalf of a resident beneficiary under section 98 (that is, a beneficiary under a legal disability or a beneficiary deemed to be presently entitled by the operation of subsection 95A(2)) on their share of the net income of the trust estate which includes foreign income, the trustee is entitled to claim a foreign tax credit under subsection 160AF(1) on account of the beneficiary provided foreign tax has been paid or deducted at source in respect of that foreign income. 6. Where a resident beneficiary to which subsection 98(1) or 98(2) applies has income from other sources,3 a credit is given in the beneficiary's assessment under subsection 100(2). This credit is calculated by reducing the gross tax payable by the trustee by the beneficiary's share of the foreign tax credit entitlement, along with any other credits or offsets that the beneficiary is entitled to. 7. Any excess foreign tax credit arising to the trustee under a section 98 assessment on behalf of a resident beneficiary is accounted for separately and is available to be carried forward and applied in the following five income years by the trustee on behalf of that beneficiary under section 160AFE. Example 1 8. XYZ Trust, a resident trust estate, receives $9,000 of foreign interest income, on which 10% withholding tax of $1,000 has been deducted during the income year ended 30 June 2007. An Australian resident, Joe Smith, 16 years old, is the sole beneficiary who is presently entitled to 100% of the income of the trust estate, but is under a legal disability. He also receives $1,000 in wages from a casual job.
9. Where the net income or any part of the net income of the trust estate in a year of income is assessed to the trustee under section 99 or section 99A, the trustee is entitled to claim a foreign tax credit under subsection 160AF(1) in respect of the foreign income included in the net income, provided foreign tax has been paid or deducted at source in respect of the foreign income. 10. Any excess foreign tax credit can be carried forward by the trustee for application by the trustee in the following five income years under a section 99 or 99A assessment. Example 2 11. In the year ended 30 June 2006 Frederick Jones, as executor in the capacity of trustee of a resident deceased estate,11 derives foreign income of $40,000 and pays $9,000 foreign tax on that income. No other income is derived by the trust. No beneficiary is presently entitled to the income and the trustee is assessed under section 99 as follows:
12. In the year ended 30 June 2007 the situation is repeated except that the rate of tax in the foreign jurisdiction changes and foreign tax paid by the trustee on foreign income of $40,000 is $4,200. The excess foreign tax credit from the previous year of $1,140 is carried forward to be applied in the section 99 assessment for 2007 as follows:
13. In a year of income that the trust estate makes a loss; or has zero net income, and has foreign income included in its assessable income in respect of which foreign tax has been paid or deducted at source, no entitlement to a foreign tax credit arises either for the beneficiary or for the trustee for the purposes of subsection 160AF(1) in that year of income. However, an excess foreign tax credit for the purposes of section 160AFE does arise for the trustee only, and can be carried forward for the following five income years for application against a future section 99 or section 99A assessment. Example 3 14. In the year ended 30 June 2006 ABC Pty Ltd (as trustee of a resident trust estate) derives domestic rental income of $15,000 and incurs total rental deductions of $22,000. The trust estate also receives foreign dividend income of $1,700 on which there has been 15% withholding tax of $300 deducted at source. Because there is a loss, no beneficiary is presently entitled to the trust income. 15. The trustee's liability under section 99A in the year ended 30 June 2006 is calculated as follows:
16. In the year ended 30 June 2007 the amount of domestic rental income remains at $15,000; however the total rental deductions are only $8,000. The trust estate also receives foreign dividend income of $2,550 on which there has been 15% withholding tax of $450 deducted at source. Because the trustee accumulates the income, no beneficiary is presently entitled to the trust income. 17. The trustee's liability under section 99A in the year ended 30 June 2007 is calculated as follows:
Date of effect
18. This Ruling applies to years of income commencing both before and after its date of issue.23 However, the Ruling does not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Ruling (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation18 July 2007 Appendix 1 - Explanation
19. The taxation of income of a trust estate is determined under Division 6 of Part III. 20. Where the net income24 of a trust estate includes foreign income25 in a year of income, a resident beneficiary, assessed under subsection 97(1) or section 100,26 will have foreign income included in their assessable income. 21. Subsection 160AF(1) in Division 18 of Part III provides that an Australian resident taxpayer is entitled to a credit for foreign tax paid in respect of foreign income that is included in their assessable income in a year of income. 22. To be entitled to a credit under subsection 160AF(1), an Australian resident taxpayer must have:
Entitlement to a foreign tax credit for a resident beneficiary assessed under subsection 97(1) or section 100 23. Income beneficially derived by a person is deemed to be derived from the source to which the income can be directly or indirectly attributed (see subsection 6B(2A)). Subsection 6B(3) provides that a beneficiary in a trust estate who is presently entitled to income of the trust estate is deemed to have derived that amount of income for the purposes of section 6B. Tracing rules are provided in respect of dividend income (subsection 6B(1)), passive income (subsection 6B(1A)) and interest income (subsection 6B(2)) for the purposes of calculating the foreign tax credit available in respect of each class of foreign income.27 The rules in section 6B therefore ensure that a resident beneficiary assessed under subsection 97(1) or section 100 satisfies the first test in subsection 160AF(1), where the net income of the trust estate includes foreign income. 24. The amount of foreign income included in the resident beneficiary's assessable income via section 97 and section 100 is the gross amount of the income before the payment of any foreign tax (see section 95 and section 6AC). 25. Where foreign income is derived indirectly through a trust estate and tax on that income has effectively been paid on the taxpayer's behalf, subsection 6AB(3) deems the taxpayer, for the purposes of the ITAA 1936, to have been personally liable for, and to have paid the foreign tax. The two circumstances set out in subsection 6AB(3) that are relevant for the purpose of this Ruling are those where foreign tax has been paid:
26. Subsection 6AB(4) deems a taxpayer deriving foreign income indirectly through a trust estate to have paid an amount of foreign tax equal to the difference between the net income actually derived and the gross amount to which it is attributable. This provision applies in a case where the trust estate itself did not pay the foreign tax, for example, where the resident beneficiary receives a distribution that comprises foreign income on which withholding tax was deducted before the income was received by the trustee. 27. The deeming provisions in subsections 6AB(3) and 6AB(4) therefore allow a resident beneficiary assessed under subsection 97(1) or section 100 to satisfy the second and third basic tests in paragraphs 160AF(1)(b) and (c). 28. Accordingly, a resident beneficiary assessed under subsection 97(1) or section 10028 on trust income that includes foreign income is entitled to a credit of:
whichever is the lesser amount in respect of each class of foreign income.30 29. To support a claim for a relevant foreign tax credit, the details of foreign tax paid shown in trust distribution advices provided by the trustee of a trust estate to beneficiaries will normally suffice as sufficient evidence.31 30. Any excess foreign tax credit in a year of income can be carried forward by the resident beneficiary for application in any of the following five income years in which foreign income is derived either directly or indirectly through any trust estate under section 160AFE. When can a trustee claim a foreign tax credit? 31. Division 6 of Part III adopts the scheme of assessing the beneficiary who is entitled to the income from the trust estate, except in special situations. Excepting in these situations provided for in the ITAA 1936, a trustee is not liable as trustee to pay income tax upon the income of the trust estate.32 32. The trustee is assessed and is liable to tax where:
Trustee assessed under section 98 33. A trustee assessed on behalf of a resident beneficiary under section 98 is entitled to claim a foreign tax credit under subsection 160AF(1) in respect of the foreign income included in the beneficiary's share of the net income, provided foreign tax has been paid or deducted at source. The trustee, as the legal owner of the trust property and in carrying out the affairs of the trust estate33 is personally liable for the foreign tax paid or is deemed to be personally liable under subparagraph 6AB(3)(a)(iv). 34. Section 100 provides that where a beneficiary who is under a legal disability or is deemed presently entitled to any trust income under subsection 95A(2) is either:
the beneficiary is to include their individual interest in the net income of all the trust estates. Accordingly, the foreign income included in their trust income is aggregated with their (other) foreign income in the individual tax return for the purpose of determining the entitlement for a foreign tax credit under subsection 160AF(1) (see paragraphs 23 to 28 of this Ruling). 35. The tax payable by the trustee under section 98 on account of the beneficiary's share of the net income is calculated by deducting from the gross tax payable, the beneficiary's share of the foreign tax credit entitlement under subsection 160AF(1) in respect of the foreign income included. Any other credits or offsets that the beneficiary is entitled to are also deducted from the gross tax payable. The remaining amount constitutes the credit that the beneficiary receives under subsection 100(2) for the Australian tax paid or payable by the trustee on behalf of the beneficiary. As Example 1 above shows, the benefit of the foreign tax credit is not actually allowed twice because the beneficiary is also required to include the income in respect of which the foreign tax credit arises. 36. Any excess foreign tax credit arising under a section 98 assessment on behalf of a resident beneficiary is accounted for separately by the trustee and is available to be applied by the trustee for that beneficiary in the following five income years in accordance with section 160AFE. Trustee assessed under sections 99 or 99A 37. Where the net income (or any part of the net income) of the trust estate in a year of income is income to which section 99 or section 99A applies and foreign income is included in the net income of the trust estate on which foreign tax has been paid or deducted at source, the trustee qualifies as an Australian resident taxpayer who has satisfied the 3 basic tests in subsection 160AF(1).34 38. The amount of foreign income included in the net income of the trust estate assessed to the trustee in such situations is inclusive of the amount of foreign tax paid in accordance with section 6AC. 39. Any excess foreign tax credit arising in a year of income as a result of section 99 or section 99A applying to the net income (or any part of the net income) of the trust estate can be carried forward under section 160AFE for the following five income years. Any excess foreign tax credit can be applied under subsection 160AFE(2) to increase the current foreign tax amount in an income year where foreign income is included in the net income (or any part of the net income) of the trust estate to which section 99 or section 99A applies. Where the resident trust estate derives foreign income, but returns a loss in a year of income 40. In a year of income that the trust estate has foreign income included in its assessable income, but returns a loss, any foreign tax paid in respect of foreign income does not give rise to a foreign tax credit in that year of income in the hands of either:
41. In a loss year, the requirements of subsection 160AF(1) are therefore not satisfied either by the beneficiary or by the trustee. Any foreign tax paid by the trustee or deducted at source cannot be applied as a credit against Australian tax payable by a beneficiary who has (other) foreign income in their hands in the income year that the trust estate returns a loss. 42. However, any foreign tax paid or deducted at source does give rise to an excess foreign tax credit that is available to be carried forward by the trustee only under section 160AFE. 43. Such an excess foreign tax credit can be applied in any of the following five income years in which the trustee is assessed on the net income or any part of the net income of the trust estate which includes foreign income under section 99 or section 99A. 44. It is considered that the requirements of subsection 160AF(1) are satisfied only by the trustee because of the inclusion of foreign income in calculating the loss of the trust estate for the earlier income year. As the amount of foreign income included in calculating the loss of the trust estate is the gross amount before the payment of any foreign tax, relief from (future) double taxation is afforded by the trustee carrying forward an excess foreign tax credit. The availability of an excess foreign tax credit to be carried forward by the trustee under these circumstances is aligned with its ability to carry forward foreign losses for offset against future foreign assessable income (of the same class) under section 160AFD for the purposes of the net income calculation under subsection 95(1). 45. Such an excess foreign tax credit is not available to a beneficiary of the trust estate as, in relation to a loss year, there is no trust distribution. Appendix 2 - Detailed contents list
46. The following is a detailed contents list for this Ruling:
Footnotes
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Previously issued as TR 2007/D3
ISSN: 1039-0731
Related Rulings/Determinations:
Subject References:
Legislative References:
Case References:
Other References
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The information contained in this website is intended only as a guide for small business, and should not be relied on to prepare tax returns in accordance with Australian taxation law. It is recommended that professional advice is sought by an accountant and registered tax agent regarding GST issues, capital gains tax and tax deductions. The publishers accept no responsibility for errors, omissions or any damages caused by the improper use of this guide. |
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