Australian Expat Trusts: A Guide

Trusts play a crucial role in wealth management, estate planning, and tax efficiency for Australian expats.

Many people use trusts to protect assets, distribute income efficiently, and ensure long-term financial security. However, for Australian expat trusts, taxes and management can change significantly.

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The Australian Taxation Office (ATO) applies specific rules to non-resident trust beneficiaries and trustees, which can impact income distribution, tax withholding requirements, and capital gains obligations.

In some cases, an expat’s departure from Australia could trigger unexpected tax liabilities, such as deemed capital gains tax on trust assets.

Australian Expat Tax Rules

When an Australian resident moves abroad, their tax residency status changes, affecting how their trust is taxed and administered. The main concerns for expats include:

Taxation of Non-Resident Beneficiaries

• Australian-sourced income remains taxable in Australia, even if the beneficiary lives overseas.

• Foreign-sourced income distributed to a non-resident is generally not taxed in Australia but may be taxed in the expat’s country of residence.

• Trustees must withhold tax on certain types of trust distributions (e.g., dividends, interest, royalties) to non-residents.

• The non-resident beneficiary may need to file an Australian tax return to reconcile their tax obligations, potentially receiving a refund if the withheld amount exceeds their actual tax liability.

Changing the Trust’s Residency

• The residency status of a trust is determined by the residency of its trustee(s) and where the central management and control of the trust is located.

• If a trustee becomes a non-resident, this could lead to the trust being considered a foreign trust, which may have tax implications.

• Some expats restructure their trusts before leaving Australia to avoid unintended tax liabilities.

Australian Capital Gains Tax (CGT)

Changes in residency can trigger CGT events, and careful planning is necessary to manage potential tax liabilities. Australian expats who are involved with trusts—either as beneficiaries or trustees—must carefully navigate Australian tax laws to avoid unexpected liabilities.

To minimize tax risks and ensure compliance, expats can take several proactive steps.

Appointing an Australian-resident trustee helps maintain trust residency, while strategic planning of trust distributions can reduce withholding tax and avoid double taxation.

Leveraging Australia’s tax treaties can also lower tax liabilities on international distributions.

Expats should restructure their trust before moving abroad if necessary and monitor foreign trust reporting obligations, particularly if they plan to return to Australia and may face taxation on past foreign trust earnings.

Proper financial planning and legal advice are essential for ensuring smooth wealth management across borders. Read further for a more complete picture of how trusts are taxed in Australia.

Australian Expat Tax: How are trusts taxed in Australia?

Generally, trusts in Australia operate under a flow-through taxation system, meaning that the income generated by the trust is generally not taxed at the trust level but instead distributed to beneficiaries, who then pay tax at their individual tax rates.

However, for expats, trust income may be subject to different tax rules, including withholding tax and deemed disposal provisions.

General Tax Treatment of Trusts

In Australia, trusts do not pay tax directly. Instead:

• If a trust distributes income to an Australian resident beneficiary, the beneficiary includes that income in their tax return and pays tax at their marginal tax rate.

• If the trust retains income, the ATO taxes it at the highest marginal rate (47%).

• If a trust distributes income to a non-resident beneficiary, the trustee is responsible for withholding tax on certain income types before distribution.

For Non-Residents

Once an Australian trust distributes income to a non-resident beneficiary, Australian tax laws apply differently compared to resident beneficiaries.

When an Australian trust distributes income to a non-resident:

• The trustee must withhold tax on certain types of Australian-sourced income before distributing funds.
• The tax rate varies depending on the income type and whether a tax treaty exists between Australia and the expat’s country of residence.

Standard Withholding Tax Rates for Non-Residents

• Interest Income → 10% of the gross interest, unless a higher or lower rate applies as per tax treaties. There can be further exemptions if the interest is paid by offshore banking units.

• Dividends paid out of pre-tax profits (unfranked dividends) → 30% withholding tax (or reduced if a tax treaty applies), but it can be exempt to the extent that the company declares the dividends to be conduit foreign income (CFI).

• Royalties → 30% of the gross royalty (unless reduced by a tax treaty).

• Capital Gains → Taxable in Australia if related to Australian real estate or taxable Australian property.

Franked Distributions from Trusts

• Franked dividends from Australian companies are tax-free for non-residents, meaning they can be received without any additional Australian tax obligations.

Reporting Obligations for Non-Residents

• Even though tax is withheld, non-residents may still need to file a tax return in Australia, depending on their income structure.
• Expats should check if their new country of residence also taxes foreign trust distributions, as double taxation could occur if no tax treaty exists.

Foreign Trusts and Section 99B for an Australian Expat

One of the most critical provisions affecting Australian expats is Section 99B of the Income Tax Assessment Act 1936, which can subject foreign trust distributions to Australian tax upon repatriation.

If an expat returns to Australia and receives a distribution from a foreign trust, it may be treated as assessable income, even if it was not originally taxed when earned.

How Foreign Trusts Are Treated

A foreign trust (non-resident trust) is a trust that has non-resident trustee(s) and is not managed or controlled in Australia. Expats may encounter foreign trusts in several ways:

• Establishing a foreign trust while living abroad – Many expats set up foreign trusts in tax-efficient jurisdictions for wealth management.

• Receiving distributions from an overseas family trust – Some expats inherit or benefit from a foreign trust created by family members.

• Owning a foreign business held in trust – Business structures in countries like Singapore, the U.K., or the U.S. may involve trusts.

For expats living abroad, distributions from these trusts may be tax-free in their country of residence. However, if they return to Australia and become a tax resident again, they may face ATO scrutiny under Section 99B.

What is Section 99 of the Income Tax Assessment Act 1936?

Section 99, particularly 99B, is a provision in Australian tax law that treats certain foreign trust distributions as taxable income when received by an Australian resident. This means:

• If an Australian resident beneficiary receives money, assets, or benefits from a foreign trust, they must include it as assessable income in their Australian tax return.

• The ATO taxes these distributions at the beneficiary’s marginal tax rate, which can be as high as 45% plus the Medicare levy.

• This applies regardless of whether the trust originally paid tax on the income abroad—there is no automatic exemption for previously taxed earnings.

What types of foreign trust distributions are taxable under Section 99B?

Not all distributions from foreign trusts are taxed in Australia. The ATO assesses each type of trust distribution differently, with key distinctions between taxable and exempt amounts.

Taxable Foreign Trust Distributions

The following amounts are assessable income under Section 99B:

• Undistributed foreign income that has accumulated within the trust and is later distributed.
• Interest, dividends, and capital gains earned by the trust that have not been previously taxed in Australia.
• Loans from foreign trusts that are not repaid—if a trust gives a “loan” to a beneficiary but does not expect repayment, the ATO may treat it as a distribution.
• Assets transferred from a foreign trust, such as property, shares, or investments, if they are considered distributions rather than repayments of contributed capital.

Section 99B Exemptions

Some distributions may be excluded from taxation under Section 99B, depending on their nature. These include:

• Corpus (original capital contributions) – If the amount distributed comes from the trust’s initial contributions (not earnings or gains), it may be exempt from tax.
• Previously taxed foreign income – If the income has already been taxed in Australia (such as via attributable taxpayer provisions in controlled foreign entity rules), it is generally not taxed again.

Expats must keep proper documentation to prove that a foreign trust distribution falls into one of these exempt categories. Without clear records, the ATO may default to taxing the entire amount under Section 99B.

Section 99B vs. Controlled Foreign Trust (CFT) Rules

In addition to Section 99B, the ATO also applies Controlled Foreign Trust (CFT) rules to Australian residents with significant influence over foreign trusts. These rules can:

• Require an Australian resident to report and pay tax on a foreign trust’s income annually, even if they do not receive distributions.

• Prevent Australian taxpayers from deferring tax by accumulating income in a foreign trust.

• Apply strict reporting requirements for offshore trust structures, particularly in tax havens.

Expats who establish or manage foreign trusts while overseas may need to consider whether their trust falls under these CFT rules.

For Returning Expats Receiving Foreign Trust Distributions

Expats returning to Australia should carefully plan their financial affairs to avoid unexpected tax burdens on foreign trust distributions.

Once an expat becomes a tax resident of Australia, all foreign trust distributions may become taxable under Section 99B.

Any previously untaxed foreign income in the trust may be assessed at Australian tax rates upon distribution. The expat must declare all trust distributions in their Australian tax return or risk ATO penalties.

For more guidance, please consult an expat financial advisor.

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