On a literal reading of section 99B, a resident trust’s accumulated corpus distribution could be assessed in full.
A family discretionary trust accumulates untaxed income for a few years. The trustee later distributes “capital” to a resident beneficiary. Corpus. Tax free. Except on a literal reading of section 99B, the ATO could assess the full amount.
Section 99B was enacted in 1979 to close the gap exposed by Union Fidelity. But s 99B(1) does not say “a non-resident trust estate”. It says “a trust estate”. The 1978 explanatory memorandum contemplated application to resident trusts. In Traknew Holdings, Hill J observed in obiter that s 99B is literally capable of applying to resident trusts. In 2011, Treasury noted the “expansive wording” of s 99B and its uncertain application to resident trusts. There is no requirement that the income be foreign sourced or the trust be a foreign trust.
The practical scenario
A discretionary trust holds a rental property. It earns $80,000 in rent but claims $50,000 in interest and $30,000 in depreciation. Net income for tax purposes is nil. No beneficiary is assessed under Division 6.
But the trust still holds $30,000 in cash, because depreciation is a non-cash deduction. That cash accumulates and is capitalised.
Years later, the trustee distributes $30,000 to a resident beneficiary as corpus. But s 99B(2)(a) excludes corpus only to the extent it is not attributable to amounts assessable to a hypothetical resident taxpayer. Rental income would be assessable. The corpus exception fails. Section 99B(2)(c) cannot help because no one was assessed.
Three traps
One: s 99B is self-executing. No tax avoidance purpose is needed. If no s 99B(2) exception applies, the amount is assessable at marginal rates.
Two: amounts caught by s 99B lose their character. Under TD 2017/24, amounts referable to capital gains do not get the CGT discount and cannot be offset by capital losses. The starting point is the gross amount paid, not the net gain.
Three: the burden of proof is on the beneficiary. In Campbell, the taxpayer could not prove distributions were protected corpus. The Tribunal rejected the s 99B(2)(a) argument. Record keeping is critical.
Why this is an unresolved risk
The Commissioner has stated in footnotes to TR 2018/7 and TD 2017/26 that s 99B does not apply unless the trust is or was non-resident. But footnotes are not binding law. No court has revisited Hill J’s observation in over 30 years. As Leibler AC has warned, the Commissioner could change position and commence issuing assessments on a literal reading.
For most trusts, s 99B(2)(c) protects income assessed under Division 6. Where deductions reduced net income to nil, nothing was assessed. If that cash is later capitalised and distributed as corpus, neither exception may protect it.
General information only. This note was accurate when written. The law may have changed since and the note is not updated. It is not legal or tax advice, does not take account of your circumstances and must not be relied upon as a substitute for advice on your own matter. If the issue is live for you or your client, email arda@nortonquaytaxlaw.com.au for advice on the current position.