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Trusts and income distribution to beneficiaries living overseas

 
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Old 07-06-2008, 06:53 PM   #1
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Trusts and income distribution to beneficiaries living overseas

Hi if my hybrid or discretionary trust has only beneficiaries that live overseas, what happens if i want to distribute iincome to them?

What is the tax rate?

I heard that there is a 10% witholding tax? Does that 10% apply for ALL amount?
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Old 07-06-2008, 06:54 PM   #2
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Something from the ATO site, but from quite a few years ago I suppose. Can you make out what they are saying about the example.
What does this mean- "interest distribution - 10%
dividend distribution - 15% (excluding franked dividends)
royalty distribution - 10%
business/rental income - taxed at non-resident rates to the trustee on account of the non-resident beneficiary under section 98(3) or 98(4) of the Act."


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Tax treatment of distributions to overseas beneficiaries.
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Presentation to the Federal Commissioner of Taxation by Michael D'Ascenzo Chief Tax Counsel Australian Taxation Office, on the 30 August 1996.

The Legislation
The Income Tax Assessment Act 1936 (ITAA) draws a basic distinction between people (including companies) who are residents of Australia and people who are not residents of Australia. In relation to interest, dividends and royalties received from Australia, non-residents generally pay tax under the withholding tax system.

Put simply, the withholding tax system provides that a flat rate of 10%, is to be deducted at source from gross interest income paid by a resident to a non-resident. Generally, the rate of withholding tax for dividend and royalty income paid to non-residents is 30%. However, for dividends and royalties paid to residents of countries with which Australia has a double tax agreement, the rate is usually 15% and 10% respectively.

Dividend, interest and royalty income paid by a resident to a non-resident is brought into the withholding tax regime by subsections 128B(1), 128B(2) and 128B(2B). Liability is imposed by subsections 128B(4) (5) and (5A).

Dividend, interest and royalties included in the income of a trust retains its character when distributions are made to beneficiaries. Subsection 128A(3) deems dividend, interest and royalty income of a trust to be dividend, interest and royalty income derived by the beneficiary when the beneficiary becomes presently entitled to such income.

Once income is caught by the withholding tax provisions, section 128D of the ITAA operates to exclude it from assessable income.

Generally, trust income (not caught by the withholding tax provisions) distributed to a non-resident beneficiary by an Australian trust estate is taxed at non-resident rates to the trustee on account of the non-resident beneficiary under section 98(3) or 98(4) of the Act.

Example -

A resident trust distributes income to non-resident beneficiaries in Italy. The withholding tax system provides that a flat rate be deducted from source before the income is remitted overseas. There are four types of income distributions. They are taxed (in accordance with Australia's Double Tax Agreement with Italy) as follows -

interest distribution - 10%
dividend distribution - 15% (excluding franked dividends)
royalty distribution - 10%
business/rental income - taxed at non-resident rates to the trustee on account of the non-resident beneficiary under section 98(3) or 98(4) of the Act.
It should be noted that in cases where distributions of interest, dividend and royalties purportedly made to non resident beneficiaries is (in the Commissioner's opinion) income to which no beneficiary is presently entitled, the income will be taxed in the hands of the trustee - sections 99A or 99.
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Old 07-06-2008, 09:08 PM   #3
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[QUOTE=ionic;61782]...What does this mean- "interest distribution - 10%
dividend distribution - 15% (excluding franked dividends)
royalty distribution - 10%
business/rental income - taxed at non-resident rates to the trustee on account of the non-resident beneficiary under section 98(3) or 98(4) of the Act."

Hi Ionic,

Working for a bank, I can tell you for non-residents we withhold 10% of the interest from term deposits for taxation reasons.

Hope this helps,

Dan

PS Before making an investment or taxation decision speak to your registered taxation adviser.
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Old 07-06-2008, 11:13 PM   #4
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s.128A(3) ITAA36 is the rule for withholding tax for dividends, interest and royalties attributed to foreign (tax) resident beneficiaries.

Read the relevant double tax agreement for the country of residence of the beneficiaries. This will give the withholding rates.

Refer to IT 2680 for PAYG obligations.

Also read the Commissioners practice in IT 2344. Note this is to combat schemes as mentioned in IT 2466.

I am NOT familiar with international taxation - it is a very messy area with numerous exceptions.

PLEASE get appropriate specific advice for your circumstances as time is running out to make valid distribution minutes.

Cheers,

Rob
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Old 10-06-2008, 02:53 PM   #5
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the funny thing is, i have asked several accountants and they gimme all the wrong and different asnwers!



For 10% witholding tax, does that mean the most they pay is just 10%?

I heard the the Rudd government is going to reduce tax for non-residents to 7.5% in 3 years time?

Anyone?
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Old 10-06-2008, 03:37 PM   #6
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Ok. one accountant told me its 29% if its a trust distribution of profit.

He says 10% witholding tax is only for "interest income". What's interest income? Can i give interest income to my beneficiaries instead?
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Old 10-06-2008, 05:43 PM   #7
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Provided the Trustee keeps sufficiently detailed accounts that the income can be streamed, otherwise each beneficiary gets a bit of every source of income.

Keep 10% of interest income attributed to them, to be remitted to the ATO as part of the PAYG obligation.

The non-resident beneficiary does not have to file an Australian tax return for the interest income (but maybe for other types of income) since it is a final tax.

Cheers,

Rob
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