The Jurisdictions: Australia
Australian Taxation of
Non-Residents and Foreign
Source Income of Residents
By David Russell QC, Barrister at Law,
Wentworth Chambers,
Sydney, Australia
“No one is surprised when I tell them
that the most important tax haven in
the world is an island. They are
surprised, however, when I tell them
that the name of that island is
Manhattan. Moreover, the second most
important tax haven in the world is
located on an island; it is a city called
London in the UK. However, there is
one big problem – the US is a tax
haven only for foreigners who invest in
the US. Most of its best tax haven
attributes don’t work for you if you
are either a US citizen or US resident.
And, Britain is a tax haven for many of
those who move there from abroad,
but not for those whose domicile of
origin is in the UK.” 1
ustralia is a capital importing
country. It also sees itself as a
major tourism destination.
Its principal tourism State,
Queensland, promotes its product under
the moniker “Queensland – Beautiful one
day, Perfect the next”. Somewhat less
successfully (in a – now scrapped –
multimillion dollar advertising campaign),
the federal tourism authorities promoted
Australia under the caption “Where the
bloody hell are you?” (meaning that the
potential tourists were somewhere else).
A review of features of the Australian
tax system may well encourage the view
that the first of these propositions applies,
but for non-residents only, whilst the
second applies to residents who have the
choice of investing abroad and nonresidents who have effective choices about
those categories of investments which are
potentially taxable in Australia. Certainly
over a range of inbound investments
Australia provides an even larger example
of the features referred to by Marshall
Langer above.
A resident of Australia is subject to
income tax on worldwide income and
realised capital gains including income
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from each office, employment, business,
and property, and on net taxable capital
gains.2 Conversely, in general, a nonresident of Australia is subject to
Australian taxation3 only if such nonresident person/entity was either
employed in Australia or realised income
or gains from Australian sources. Under
the Australian system of taxation,
residence is the main basis of taxation
rather than citizenship or domicile.
Taxation of a non-resident of Australia
is therefore restricted to that income or
those payments that have a nexus with
Australia. Income of a non-resident that is
not derived from Australia or Australian
sources will not be subject to Australian
taxation. Income derived by a nonresident consisting of capital gains (other
than direct or indirect investments in real
property)4 and company dividends paid
from profits which have been subject to
tax5 will generally be exempt from tax.
Interest will be taxed at concessional
rates6 or, in some cases, not at all.7
Distributions from managed investment
funds will be taxed at concessional rates
under recent government
announcements.8
Individuals holding a temporary
residence visa (which can last for up to
four years9) are treated for tax purposes
as non-residents.
Generally speaking, foreign source
income passing to non-residents through
Australia conduit entities will also be
exempt.10
Australia has a comprehensive
network of Double Taxation Agreements11
modelled in most cases on the OECD
Model Conventions.
Australia has no death, gift or estate
taxes at State or Federal level.
So much for the good news. The bad
news for residents in relation to foreign
source income is that it will usually be
taxed upon receipt by the ultimate owner,
although it can in some cases be
repatriated to Australian corporate
vehicles without an immediate tax liability.
And comprehensive accrual regimes exist
in relation to trust and corporate income.
Notwithstanding the fundamental fact
that a trust is not itself a legal entity, for
Australian tax purposes, trusts are treated
as separate legal entities12 which are,
however, generally fiscally transparent
where a beneficiary is “presently entitled”
to the income or gains in question.13
Accordingly, the residence of both the
trust and its beneficiaries are critical issues
from an Australian income tax perspective.
As previously noted, a resident of Australia
will generally be taxable in Australia on its
worldwide income and, for inter vivos
trusts, such income is subject to tax in the
hands of the resident beneficiaries at their
applicable rates if they are presently
entitled or in the hands of the trustee at
the highest marginal tax rate where no
beneficiary is presently entitled. A nonresident trustee or beneficiary, on the
other hand, will generally only be subject
to Australian tax on income in respect of
which a non-resident individual would be
taxed. Which of these will bear the tax
depends on whether or not the
beneficiary is presently entitled.
In addition, there are a number of
provisions directed to ensuring that
foreign trust income and capital gains in
which Australian residents have (or may be
expected to obtain) indirect interests of
various types are brought to tax.
Under common law, a trust is generally
considered to reside where the majority
of its trustees reside.14 If one of several
trustees clearly exercises a more
substantial portion of the management and
control of the trust, however, the trust will
reside where that trustee resides.
However a trust will be a “resident
trust estate” for Australian tax purposes if
either any of the trustees was a resident at
offshoreinvestment.com
owners. Notwithstanding their
nomenclature, the CFC rules can apply in
respect of controlled foreign trusts as well
as corporations.
Australian tax law requires a person
who is resident in Australia and is filing a
tax return to disclose whether the person
has an interest in an overseas company or
trust or could have such an interest
brought into existence. Transactions with
related non-residents are also required to
be the subject of specific exposure. The
Australian Taxation Office views nondisclosure of foreign income seriously and
currently has a major investigation under
way in relation to such income. In addition
it co-operates enthusiastically with foreign
revenue authorities.
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OI 190 • October 2008
comes into his hands and is not retained
to pay the tax.29
Where the receipt of income or
capital gains is deferred, the beneficiary
will be liable to additional tax representing
interest for the period of the deferral.30
Although Australian tax law normally
regards trusts as separate entities,
Australian tax law also contains specific
attribution rules that, in certain
circumstances, attribute a trust’s income
gains to another person. As mentioned
above, if a trust was created on condition
that property held by it may revert to the
person from whom the property was
received (the creator), or pass through to
beneficiaries to be determined subsequent
to the trust’s creation by the contributor,
any income or loss from the property, as
well as realised gains and losses, earned by
the trust would attribute to and be taxed
in the hands of the creator. Accordingly, if
a person settles a trust and is also a
beneficiary, this attribution rule will apply
to that person and he/she would be
subject to tax on any property income or
capital gains from the property of the
trust. In short, such trusts are treated as if
their income and gains belongs to the
transferor(s) without regard to the fact
that a transfer of property has been made
to the trust (analogous to the grantor
trust rules in the USA).
Similarly, income of foreign trusts to
which a resident has at any time
transferred property or services (even if
not a resident at that time) will be taxed in
the hands of the resident transferor.
The definition of resident transferor
requires a further reference to the defined
term “transfer”. This has an extended
meaning which is both involved and
convoluted. Notably, the mere fact that an
arm’s length consideration is given in
relation to the transfer of property or
services will not necessarily prevent a
person from being a resident transferor.
Reference should be made to the actual
legislation should there be any doubt as to
what constitutes a “transfer” in a
particular circumstance.
Parts X and XI of the ITAA36 contain
provisions directed to investments in
Controlled Foreign Corporations (the
CFC rules) and Foreign Investment Funds
(the FIF rules). The intent behind the CFC
rules and FIF rules is to prevent Australian
resident taxpayers from avoiding or
deferring Australian tax through
respectively non-portfolio and portfolio
investments in non-resident entities that in
turn carry on investment business.
A detailed explanation of the CFC and
FIF rules is beyond the scope of this paper
but both sets of rules can have a dramatic
and unexpected impact on Australian
residents because they can result in
income being attributed to intermediate
entities and their ultimate Australian
Australia
any time during the year of income15 or
the central management and control of the
trust estate was in Australia at any time
during the year of income.16 A corporate
trustee incorporated in Australia will
always be an Australian resident,
irrespective of its residence at common
law.17
Australian tax consequences will arise
in respect of a non-resident trust in
respect of its foreign source income if a
person is a resident and:
(1) is a beneficiary and presently entitled
to its income;18
(2) whilst not being a presently entitled
beneficiary, has “an interest” whether
future or contingent in the trust;19
(3) is a beneficiary and has any amount
being property of the trust estate
paid to or applied for the person’s
benefit;20
(4) has an interest in a Controlled
Foreign Trust;21
(5) has an interest in a foreign trust
which is a Foreign Investment Fund;22
(6) has a controlled foreign company or
trust which in turn has an interest in
the trust of the type referred to in
(1), (2) or (3);
(7) has transferred property or services
to the trust other than in an arm’s
length business transaction;23 or
(8) is the person who has created the
trust24 and either has power to
revoke it or the beneficiaries of the
trust are his minor children.25
Australian tax consequences will also
arise in respect of a non-resident trust
with Australian source income:
(1) if no beneficiary is presently entitled
to the income, the trustee will be
liable to tax at the top marginal
rate;26 and
(2) if a beneficiary is presently entitled to
the income, the beneficiary is liable
to tax and the trustee must withhold
the tax before making a distribution
to the beneficiary who is entitled to
a credit in relation to the tax
withheld.27
The critical issue, absent application of
the attribution rules, will therefore be
whether or not a beneficiary has actually
received trust income (or capital gains) or
is “presently entitled” to it. A person with
a vested and indefeasible interest is
presently entitled.
Where present entitlement arises as
part of a tax avoidance arrangement, it
may be disregarded in which case the
trustee will be liable to tax on the
income.28
Australia has no rules which make a
person other than the person in whose
assessable income the income or capital
gains of a trust are included liable to pay
the tax in respect of the income. A
trustee is personally liable to tax only to
the extent that trust money or property
END NOTES:
1. Marshall Langer, Offshore Investment, Issue
182 (January 2008).
2. Subsection 6-5(2) of the Income Tax
Assessment Act 1997 (the “ITAA97”).
3. ITAA97, s. 6-5(3).
4. ITAA97 Division 885.
5. Income Tax Assessment Act 1936 (the
“ITAA36”) section 128B(3)(ga).
6. The general interest withholding tax rate is
10%.
7. ITAA36 paragraph 128B(3)(jb).
8. ITAA97 Division 840 – generally 7.5% if the
recipient is a resident of a country with which
Australia has an exchange of information
agreement, otherwise 30%.
9. Or longer for New Zealand citizens.
10. ITAA97 Division 802.
11. 47 such Agreements are currently in force.
12. ITAA97, s.960-100.
13. Division 6 or Part III of the Income Tax
Assessment Act 1936 (the “ITAA36”).
14. Thibodeau Estate (Trustees of) v. Canada
(1978), 78 D.T.C. 6376 (F.C.T.D.).
15. ITAA36 paragraph 95(2)(a).
16. ITAA36 paragraph 95(2)(b).
17. ITAA36 subsection 6(1).
18. ITAA36 subparagraph 97(1)(a)(i) and
paragraph 98(1)(a).
19. ITAA36 sections 96B and 96C.
20. ITAA36 sections 99B and 99C.
21. ITAA36 Part X.
22. ITAA36 Part XI.
23. ITAA36 section 102AAT.
24. This term has been construed narrowly in
Australia to apply only to the initial settlor
and does not include subsequent contributors
to the trust fund.
25. ITAA36 section 102.
26. ITAA36 subsections 99A(4B), 99A(4C).
27. ITAA36 section 98.
28. ITAA36 section 100A.
29. ITAA36 subsection 254(1).
30. ITAA36 section 102M.
“Australia – an attractive base
for foreign multinationals?”
February 2006, Issue 163
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