ATO provides clarity on Section 99B in new guidance

The ATO published two important pieces of draft guidance on Section 99B yesterday which explain the ATO's compliance approach in relation to Section 99B of the Income Tax Assessment Act 1936.

Draft Practical Compliance Guideline PCG 2024/D1 outlines the ATO's approach to section 99B in respect of arrangements where property of a non-resident trust is paid to or applied for the benefit of a resident beneficiary.

The guideline sets out common scenarios where section 99B may be considered, the distributions and benefits which the ATO considers to be low risk and the record keeping expected to substantiate this.

The ATO noted that with increasing globalisation and migration flows into and out of Australia, there has been an increase in resident taxpayers receiving an amount of trust property from non-resident trusts.

"The purpose of the draft guideline is to support taxpayers in complying with section 99B of the Income Tax Assessment Act 1936," it said.

The Tax Office has also released Draft Taxation Determination TD 2024/D2 which explains the factors taken into account in applying the exceptions to section 99B contained in paragraphs 99B (2)(a) and 99B (2)(b).

Tax expert and education provider John Jeffreys said the fact the ATO has provided more clarity in this area is a positive development for the profession and for taxpayers.

However, Jeffreys warned that one of the big issues likely to arise from the guidelines will be the ability of resident individuals and their accountants to obtain all of the necessary information to prove that an amount received from a non-resident trust is not assessable under 99B.

"The ATO acknowledges that it may be difficult for the necessary information to be obtained from an offshore trustee, but reinforces the point that the onus of proof is on the taxpayer," said Jeffreys.

"That is, if you can't get the quite detailed records the ATO requires, you will probably be assessed under 99B. The ATO's acknowledgement of the difficulty in obtaining information doesn't amount to much."

The key issue in many cases will be trying to prove that an amount received from a non-resident trust has its source in the corpus of trust, he warned.

"Further, even if you can prove this, you must also prove that the amounts would not have been assessable income of a (hypothetical) resident taxpayer," he said.

"This requires detailed information and many accountants would be of the view that you would need access to the general ledger of the offshore trust and source documentation to be able to draw these conclusions.

"The ATO has a long list of possible sources of information in PCG 2024/D1."

Jeffreys warned that from a practical standpoint, this will be very hard to obtain for most Australian individuals and their accountants.

In PCG 2024/D1, the ATO has provided a carve out in their approach to to administering 99B for deceased estates which are trusts.

The guidance explains that provided the trust property is received by the Australian resident within 24 months of the date of death and the value of the property is less than $2 million and the documents the ATO requires are available, the ATO will consider this situation 'low risk' and not dedicate further compliance resources to the arrangement.

Jeffreys noted that 24 months can be a short period of time for the settlement of some deceased estates and that 36 months may be a more appropriate timeframe.

The ATO also states that 99B can also apply to the provision of loans from a trust and the use of property of the trust.

"Few people, including tax advisers, will appreciate this. The ATO highlighting this may be a surprise for many people," said Jeffreys.

He also noted that the draft guidance does not provide a second 'carve out' for arrangements that are provided on commercial terms.

"The recipient using the property or receiving the loan must make an actual physical payment to the non-resident trust for this to be considered 'low risk'," he said.

"There is no comment on what constitutes commercial terms. For example, there is no 'safe harbour' interest rate for loans, although there is an indication that using the Division 7A benchmark interest rate and repayment schedule would be acceptable."

Jeffreys said that accountants with clients who are expecting a distribution from a non-resident trust will need to get on 'the front foot' and make contact with the trustee of the trust and its accountant to forewarn them that they will need very detailed information regarding any distributions.

"If the amount in question is large enough, it may be worthwhile sending your accountant to the foreign jurisdiction to inspect all of the records to ensure the ATO can be provided with what it needs," he said.

"For example, if an individual is to receive, say $3 million, from a foreign trust, this could result in in a tax liability of nearly half this amount without proper records. This could well justify someone travelling to the foreign jurisdiction to ensure the necessary records are available."