What is a trust? Can a temporary resident establish a trust?
With its robust economic foundations, well-established legal system, and business-friendly environment, Australia stands out as an attractive investment destination for international investors.
A trust is a legal arrangement where one party (the trustee) holds assets for the benefit of another party (the beneficiaries). Trusts can be useful tools for managing assets and potentially minimising taxes. However, the tax implications depend heavily on the residency status of the trust and its beneficiaries.
The type of visa a person has and the personal situation both affect that person’s residency status for tax purposes in Australia. For those on temporary visas, tax residency classification may vary.
Generally, individuals on temporary visas are considered temporary residents for tax purposes. However, an exception applies if you have a spouse who is an Australian citizen or permanent resident – in that case, you are treated as a tax resident.
Temporary tax residents are typically subject to the same tax rates as Australian residents if you are a tax resident.
The key factor in determining the tax implications for trust beneficiaries is whether you are classified as an Australian tax resident or a non-resident, even if you hold a temporary tax resident status.
In essence, the tax treatment of trust distributions for individuals with temporary visas depends on their specific residency classification for tax purposes, which can vary depending on things like marital status and personal ties to Australia.
Determining Trust Residency in Australia
The residency status of a trust for income tax purposes in Australia is determined by the residency of its trustees or the location of its central management and control (CMC). A trust is considered an Australian resident for an income year if it meets either of the following conditions:
- The trust has at least one resident trustee at any time during the income year, or
- The CMC of the trust was in Australia at any time during the income year.
Conversely, a non-resident trust is one that does not satisfy these criteria.
A common question arises when a trust has multiple trustees: Do all trustees need to be Australian residents for the trust to be considered a resident? The answer is no. As long as at least one trustee is an Australian resident for tax purposes, the trust will be treated as a resident trust, even if the other trustees are non-residents.
The residency tests for trustees and trusts are interconnected. For instance, if a trust has a foreign trustee (either an individual or a company), but that trustee carries on business in Australia and the company’s CMC is in Australia, the trustee would be considered an Australian resident, consequently making the trust a resident trust.
On the other hand, if the sole trustee is a non-resident whose CMC is located overseas, the trust will automatically be classified as a non-resident trust. It’s important to note that a change in the trust’s residency status from resident to non-resident can have significant tax consequences. If you require further information on the tax implications of a trust becoming a non-resident, it’s advisable to seek professional advice.
Resident vs Non-Resident Trusts
The first important distinction is whether a trust is considered a resident or non-resident entity for Australian tax purposes. A resident trust is taxed on its worldwide income and capital gains, while a non-resident trust is only taxed on income sourced within Australia.
The location of the trustees, the trust’s assets, and the place where its primary activities take place all affect a trust’s residency. If most of these point outside Australia, it is likely to be viewed as a non-resident trust.
Tax Treatment of Non-Resident Trusts
For non-resident trusts, the default is that the trustee pays tax on the trust’s net income at the usual rate. However, this liability can potentially be passed to the beneficiaries through distributions in some cases.
Non-resident beneficiaries may need to pay Australian tax on their share of income or capital gains from the trust. The trustee is typically required to withhold tax on distributions to non-residents, with the rate depending on their country of residence.
A recent Tax Office ruling, TD 2022/13 clarified that non-resident beneficiaries are liable for capital gains tax on their share of gains from both Australian and certain foreign assets.
Some additional context on non-resident trust taxation in Australia:
- Distributions to non-resident beneficiaries are subject to withholding tax rates based on their country’s tax treaty with Australia
- Anti-tax-deferral rules like the Controlled Foreign Company provisions aim to prevent using non-resident trusts for deferral purposes
- Tax treatment can differ for fixed vs non-fixed trusts, compensating trusts, family trusts, unit trusts etc.
- Different residency tests apply to trusts established in Australia vs foreign trusts
- Special rules govern tax file number requirements, franking credits, CGT events unique to trusts
Managing Tax for Non-Residents
As a non-resident, holding assets like shares in an Australian trust can still make sense from a tax planning perspective, but it requires carefully weighing the pros and cons. Potential benefits include professional management, diversification, and tax efficiency through the trust structure.
The downside could include high fees, lack of control as a non-resident beneficiary, and navigating complex tax rules. Getting expert advice is highly recommended before making any decisions.
Ultimately, understanding the residency status and tax treatment of trusts under Australian law is crucial for non-residents. With proper planning and the right structure trusts can remain a valuable tool despite the cross-border complexities.
Summary
– Trusts can be resident or non-resident for tax purposes based on the trustees, assets, and activities
– Non-resident trusts are only taxed on Australian-sourced income
– Beneficiaries may need to pay tax on distributions of income and capital gains
– Recent rules require non-residents to pay CGT on trust gains from foreign assets
– Weigh pros and cons before holding assets in an Australian trust as a non-resident
– Seek professional tax advice to optimise and remain compliant.
Disclaimer: The information provided in this content is intended as a general guide and is informative in nature. It should not be construed as legal or tax advice. If you require expert assistance, please seek professional advice tailored to your specific legal, tax, or investment circumstances.
