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If you're an Australian financial advisor or accountant, you should be well-acquainted with Section 99b of the Income Tax Assessment Act 1936. This provision can have significant implications for your clients, and in this article, we'll delve into the intricate details of Section 99b, providing you with a clearer understanding of how it’s applied. 

What is Section 99b?

Section 99b taxes anything that is paid out of a trust to a beneficiary of the trust who is a tax resident. Think of it as a tax you pay on your inherited cash, land, or shares. 

Providing Documentation

To avoid an assessment under Section 99b, you must provide the ATO with clear documents that outline the type and nature of the payment that was received from the trust. 

If the trust is located outside of Australia, this can make things more difficult - as it was in the case of Campbell v Commissioner. In this scenario, the Australian taxpayer couldn't prove that she received the corpus of the trust as it was based in New Zealand. 

Proving that the funds your client received from a foreign trust do correspond to the type required under Australian law can feel daunting. You’ll face different legal systems, international regulations, and maybe even a language barrier. You should start gathering documentation early in case of an ATO assessment. 

Examples of Section 99b in Action

Let’s take a look at two examples of when Section 99b may or may not be applied: the Johnson Family Trust and the Anderson Charitable Trust. 

Scenario 1: The Johnson Family Trust

The Johnson Family Trust was established with Mr. Johnson as the trustee and his children as beneficiaries. The trust holds investments in real estate, stocks, and a small family business. Over the years, the trust has accumulated a significant income from these investments.

In this scenario, Section 99b would apply as Mr Johnson continues to control the trust's investments actively, making all financial decisions. 

He distributes the trust's income among family members to take advantage of lower tax rates available to them. However, he does not keep thorough records of the trust's financial activities, making it difficult to trace the flow of income.

The ATO investigates the trust's operations and determines that Mr Johnson exercises effective control over the trust, benefiting from the income while distributing it among family members for tax advantages. 

As a result, the ATO invokes Section 99b to assess the trust's income as Mr Johnson's income for taxation purposes. He is now liable for additional taxes and penalties from an underreported income.

Scenario 2: The Anderson Charitable Trust

The Anderson Charitable Trust was established to support charities. The trust's beneficiaries consist of different charitable entities and a board of independent trustees. The trust generates income from donations, investments, and fundraising activities.

In this scenario, Section 99b wouldn’t apply because the trust genuinely operates for charitable purposes. The independent trustees have complete control over the trust's assets and income, and no individual beneficiaries are benefiting personally from the trust's income. The trust operates transparently to ensure that all its revenue goes to good causes. 

The ATO reviews the trust's activities and determines that it’s operating for charitable purposes. So, Section 99b doesn’t apply as there is no evidence of income going towards individuals for personal gain. 

More Examples of When Section 99b Will Apply

  • An Australian taxpayer gets money from a family member who got it from a foreign trust.
  • An Australian beneficiary gets capital from a foreign trust from the trust's previous year's earnings.
  • Parents give money from their foreign family trust to their child, who is also a beneficiary of the trust.
  • An Australian beneficiary receives a loan from a foreign trust from the trust's earnings from a previous year.

What Are the Main Section 99b Challenges? 

Challenges from Section 99b come from its interpretation, especially the idea of a “hypothetical taxpayer” - but what does this mean?

To put it simply, the ATO uses how a typical taxpayer would be taxed to assess income from trusts. There are no exceptions despite differing individual circumstances. 

Suppose a foreign trust gives capital gains to an Australian resident. In that case, Section 99b treats the entire amount as assessable income, even if the resident has experienced a net capital loss or qualifies for capital gains tax discounts. 

A Closer Look At Receiving Payments from Foreign Trusts

If you live in Australia and get money, assets, or benefits from a trust outside the country, you should report it in your tax return. Here are some essential things to remember:

  • Section 99b matters when you receive money or assets from a foreign trust, and you're one of its beneficiaries.
  • Trust assets can be things like cash, land, shares, or other valuable items.
  • You should report the amount or value of what you receive in your income for the year when you get it.

Exceptions - When Section 99b Doesn't Apply

Section 99b usually applies without exceptions, but there are two important ones:

  • If the payment or asset has already been counted for tax under a different rule, Section 99b doesn't come into play.
  • If the money represents the trust's original assets or added contributions to those assets, Section 99b doesn't apply either.

Summing Up

As an advisor or accountant, you should be well-versed in Section 99b to help your wealthier clients avoid unexpected taxes. One way you can prevent this is by keeping detailed documents of income and assets. 

With QuickBooks, you can maintain accurate financial records for your clients, recording all trust-related transactions, income, and expenses. This makes it easier to demonstrate your client’s compliance in case of an investigation from the ATO. Sign up to start utilising the power of QuickBooks Online today

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