Tax Implications of Non-Resident Trust Rules in Australia
If you are an Australian expat who is a non-resident for tax purposes, you may be wondering about the tax implications of holding assets in a trust. Taxation can be a complex subject, especially when it comes to trusts in an international context.
Whether you are an Australian expat living overseas or a foreign investor, understanding non-resident trust rules in Australia can be a game-changer for your financial strategy.
To begin, let’s first decipher what exactly a trust is.
What is a Trust?
Essentially, a trust is a relationship where one party, the trustee, holds assets for the benefit of another party, the beneficiaries.
Now, how does residency factor into this equation?
What is a Non-Resident Trust?
A non-resident trust is a trust that is not resident in Australia for tax purposes. This means that the trust is not subject to Australian income tax on its income or capital gains. However, the trust beneficiaries may still be liable to pay Australian tax on their share of the trust’s income or capital gains.
Understanding the Residency of a Trust in Australia
There are several factors that determine whether a trust is resident in Australia. These factors include:
- The location of the trustees
- The location of the trust’s assets
- The location of the trust’s activities
If a trust is not resident in Australia, the trustee may be required to withhold Australian withholding tax on distributions to non-resident beneficiaries. The withholding tax amount required to be withheld will depend on the country in which the non-resident beneficiary is a resident.
Difference Between Resident and Non-Resident Trusts
The main difference between resident and non-resident trusts is how the income generated from these trusts is taxed. Here are the main differences between resident and non-resident trusts in Australia, including:
- Taxation: Resident trusts are taxed on their worldwide income, while non-resident trusts are only taxed on their income sourced from Australia.
- Reporting requirements: Resident trusts must file tax returns with the Australian Taxation Office (ATO), while non-resident trusts are not required to file tax returns unless they have Australian-sourced income.
- Estate duty: Resident trusts are subject to estate duty, while non-resident trusts are not subject to estate duty.
- Capital gains tax: Resident trusts are subject to capital gains tax on the disposal of assets, while non-resident trusts are only subject to capital gains tax on the disposal of assets in Australia.
The specific tax treatment of a trust will depend on many factors, including the residency of the trust, the residency of the beneficiaries, and the type of income the trust generates. It is important to consult with a tax advisor to determine the specific tax implications of a trust.
Here are some examples of how resident and non-resident trusts are taxed differently in Australia:
- A resident trust that owns a rental property in Australia would be required to pay Australian income tax on the rental income, even if the beneficiaries are not Australian residents.
- A non-resident trust that owns a rental property in Australia would not be required to pay Australian income tax on the rental income unless the property is considered to be an Australian real property interest.
- A resident trust that sells an asset for a gain would be required to pay capital gains tax on the gain, even if the gain is not realised until after the beneficiaries have moved to a different country.
- A non-resident trust that sells an asset for a gain would not be required to pay capital gains tax on the gain unless the asset is considered to be an Australian real property interest.
The tax treatment of trusts can be complex, and it is important to consult with a tax advisor to determine the specific tax implications of a trust.
Can a Non-Resident Be a Trustee in Australia?
A non-resident can be a trustee in Australia, but they may be subject to Australian tax on their share of the trust’s income and gains.
The non-resident trustee must be able to act in the best interests of the trust and its beneficiaries, and they must be able to comply with all Australian laws and regulations relating to trusts.
The non-resident trustee may be required to withhold Australian tax on payments made to them by the trust. The tax implications will depend on the residency of the trustee, the residency of the beneficiaries, and the type of income the trust generates.
Tax Implications: How Are Non-Residents Taxed in Australia?
Non-resident trusts have unique tax obligations under Australian taxation law. The income generated by these trusts can be subject to withholding tax and may not enjoy the same exemptions available to resident trusts.
For non-resident trusts, the trustee is generally liable for tax on the trust’s income. However, this tax liability could be shifted to the beneficiaries under certain conditions. Non-residents may also need to pay capital gains tax (CGT) if they dispose of certain Australian assets.
There are a number of key tax considerations for non-resident beneficiaries of Australian trusts. These include:
Income Tax
Non-resident beneficiaries are generally liable to pay Australian income tax on their share of the trust’s net income. However, there are a number of exemptions and deductions that may apply.
Capital Gains Tax
Non-resident beneficiaries are generally liable to pay Australian capital gains tax on their share of the trust’s capital gains. However, there are a number of exemptions and deductions that may apply.
Withholding Tax
The trustee of an Australian trust may be required to withhold Australian withholding tax on distributions to non-resident beneficiaries. The withholding tax amount required to be withheld will depend on the country in which the non-resident beneficiary is a resident.
ATO Clarifies Capital Gains Tax Treatment For Non-Resident Beneficiaries
The ATO has recently published two tax determinations (TDs) that clarify the tax treatment of capital gains distributed by Australian trusts to non-resident beneficiaries. The TDs align with a decision made by the Federal Court of Australia in June 2021.
TD 2022/12 provides that a non-resident beneficiary of a resident non-fixed trust is assessable on an amount of trust capital gain, irrespective of whether the gain has a source in Australia. TD 2022/13 provides that Division 855 of ITAA 1997 does not enable a non-resident beneficiary of a resident non-fixed trust to disregard their share of a non-TAP trust capital gain.
That means that non-resident beneficiaries of Australian trusts are now liable for capital gains tax on their share of trust capital gains, regardless of whether the gains relate to assets that are not TAP.
Should You Hold Shares in a Trust?
As for whether or not you should hold shares in a trust as a non-resident, the answer will depend on your individual circumstances. Before deciding, you should weigh the pros and cons carefully, including the tax implications.
Here are some of the pros and cons to consider:
Pros:
- Trusts can offer benefits such as professional management, diversification, and tax efficiency.
- Trusts can be structured in a way to minimise taxes.
Cons:
- Trust fees can be high.
- You may have limited control over the trust’s investments as a non-resident.
- The tax rules for trusts can be complex.
If you are considering holding shares in a trust as a non-resident, it is essential to weigh the pros and cons carefully. You should also consult with a tax advisor to discuss the specific tax implications of your situation.
Odin Tax: Turning Challenges into Opportunities
Taxation can indeed be a complex maze. However, you can turn these challenges into opportunities with a thorough understanding of non-resident trust rules in Australia. Whether you are an Australian expat or a foreign investor, understanding these rules can help you strategise effectively, optimise your financial planning, and stay compliant with the Australian Taxation Office.
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Frequently Asked Questions (FAQs)
A non-resident trust is a trust that is managed by a trustee who is not a resident of Australia.
Yes, a non-resident can be a trustee in Australia. However, the tax implications are different for non-resident trusts.
The trustee of a non-resident trust is generally liable for tax on the trust’s income. However, this tax liability could shift to the beneficiaries under certain conditions.
Understanding non-resident trust rules, staying updated with Australian taxation laws, seeking professional advice, and planning can help you optimise your tax strategy.
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