Tax costs of benefiting
There is a provision of the income tax legislation which allows any amount an Australian tax resident receives from a non-resident trustee to be taxed as income in Australia. That might sound reasonable at first but the catch is that the tax will be applied to amounts that have already been taxed overseas, to amounts that are loans and need to be repaid, to amounts from foreign pension plans, indeed to any amount unless the recipient can prove on the balance of probabilities that the amount is from the original capital settled on the trust or that tax has already been paid in Australia.
Anyone who becomes a tax resident of Australia, particularly those from a country where trust structures are commonplace may well receive a loan or have existing gifts from such a trust. A person may transfer funds to Australia from a trust which they previously became entitled to in their country of origin and on which they paid tax at that time. All these amounts are subject to tax in Australia as income of the recipient.
For example, Rohini moved to Australia after Covid to study and has found work and remained here after finishing her masters degree. Rohini’s grandfather established a trust for the benefit of all his grandchildren. To help Rohini with the costs of education and to assist her to become established in Australia the trustee has distributed various amounts to Rohini and also made loans to her.
In 2021 before she left India the trustee distributed some money to Rohini. She paid tax on this amount in India and used some of it to pre pay her course fees but she left ₹550,000 with the trustee to be used later when she needed the funds.
During 2022 Rohini settled in Adelaide and she was a tax resident of Australia in the year ended 30 June 2023.
During that year Rohini received another AUD$10,000 from the trustee as a distribution, she also withdrew the ₹550,000 the trustee was holding for her and in May 2023 the trustee lent her another AUD$10,000 to assist her to fund a deposit for her new home in Adelaide. Rohini signed a loan agreement and will start making repayments to the trustee when she has been working for six months.
Rohini knew that the AUD$10,000 distributed to her was income and subject to tax in Australia, she has set funds aside for this tax payment. She did not expect that the ₹55,000 (approximately another AUD$10,000) would be taxed all over again in Australia and she certainly did not expect the loan that she has to repay to the trustee to be taxable.
In Australia all these amounts are taxed as income. Rohini will be taxed on trust distributions of AUD$30,000 this year although the trustee has actually distributed AUD$10,000 to her.
If you have recently become an Australian tax resident you need to be extremely careful with any amount you may receive from a trustee who is resident in your home country or anywhere outside Australia. If you were born and bred in Australia but receive an amount from an overseas trustee you will have the same problem. In a country where about a third of us were born overseas this is a real issue and more people need to be aware of it and plan to manage it.
Going back to Rohini, if she had drawn all the cash she received in 2021 into her own account and brought it to Australia with her it would not be subject to tax again in Australia. If her grandfather had lent her AUD$10,000 from his own funds she would not have paid tax on the loan in Australia.
Before receiving funds from any overseas entity, it is important to obtain tax advice and ensure that you have proper records to show where the funds came from and what they represent. In Australia it is always the taxpayer who has to prove what really happened not the Australian Taxation Office.