15.54. As briefly indicated in Chapter 7, the bases on which Australia asserts jurisdiction to tax income are residence in Australia of the person beneficially deriving income and source in Australia of the income. Residence in Australia of a trustee intermediary is not asserted as a basis of jurisdiction. The provisions of Division 6 are not in their terms founded on any basis of jurisdiction. There is judicial opinion that

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those provisions of Division 6 depending on the notion of net income of a trust estate apply only to income having an Australian source.

15.55. A number of consequences follow:

  • (a) Even though the trustee is an Australian resident, foreign-source income to which a non-resident is entitled through a trust is not subject to Australian tax.
  • (b) Even though the trustee is an Australian resident, foreign-source income accumulating in a trust is not subject to Australian tax.
  • (c) Foreign-source income to which an Australian resident is entitled through a trust may be subject to Australian tax in his hands but only when he receives that income: entitlement to receive is not a derivation.
  • (d) Even though foreign-source income has been paid to an Australian resident, it is arguable that it is still not taxable in his hands if it has previously been accumulated by the trust or retained for him because he was under a disability. The argument would be that he has received, not income, but an amount paid to him in satisfaction of his interest in the trust.
  • (e) When instead of paying it to him, the trustee has applied foreign-source income for the benefit of a beneficiary, the application may not give rise to a receipt within the meaning in (c) so as to consitute a derivation of income by the beneficiary.

15.56. All except the first of these consequences involve some escape from or deferral of Australian tax, which the Committee considers unacceptable. Australia should assert a wider jurisdiction to tax income moving through a trust intermediary and Division 6 should be adapted to apply to any such income in relation to which jurisdiction is asserted. The following proposals are made:

  • (a) Where an Australian resident beneficiary is presently entitled to foreign-source income derived by a trust estate, that income should be subject to tax in his hands, in the same manner as Australian-source income is taxed under the present Division 6. Present entitlement for this purpose will include deemed entitlement arising from a payment or application for the benefit of the beneficiary.
  • (b) Where an Australian resident beneficiary receives a distribution from income of a trust estate that has been accumulated, and the income has not been subject to Australian tax in the hands of the trustee, it should be taxed in the hands of the beneficiary.
  • (c) Where income is accumulating, and the trustee is an Australian resident, or for other reasons the trust is to be regarded as an Australian trust, the income should be subject to Australian tax in the hands of the trustee. If subsequently such income is distributed to a non-resident beneficiary, there ought to be an appropriate refund of Australian tax. If, on the other hand, it is distributed to an Australian resident there will be no further tax on the income in the hands of the beneficiary.

15.57. It will be necessary to provide against an assignment to a non-resident by an Australian resident beneficiary of the latter's interest in accumulating income. In proposal (b) such an assignment would defeat the taxing provision; in proposal (c) it would generate an unjustified refund. It may also be necessary to provide that a change of residence by an Australian resident beneficiary shall not preclude an assessment under any of the proposals.

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15.58. The implementing of these proposals will require extensions to the scheme in Division 6. Net income of the trust estate should include foreign-source income. An Australian resident beneficiary presently entitled, or deemed to be presently entitled, to that income would be taxed in the same manner as any beneficiary is now subject to tax in respect of Australian-source income. A non-resident beneficiary would of course be exempt in respect of foreign-source income. Accumulating foreign-source income would be subject to Australian tax in the hands of the trustee where the trust is an Australian one. A distribution from accumulated foreign-source income that has not been previously subject to Australian tax would be taxed to an Australian resident beneficiary receiving it. A distribution to a non-resident from accumulated foreign-source income of an Australian trust would not be subject to Australian tax in the hands of the beneficiary and there would be a refund of Australian tax imposed on that income.

15.59. The notion of an Australian trust will have to be defined. Residence in Australia of a sole trustee or a majority of the trustees should be sufficient to make the trust an Australian one. Management and control of the trust in Australia should also be sufficient. The latter aspect is further considered in Chapter 17.

15.60. The Committee's proposals will give rise to a number of problems that are to a degree avoided by the present limited assertion of jurisdiction. Where the foreign-source income has borne foreign tax, relief against double taxation will be necessary. Where Australian tax is imposed on a distribution of accumulated income, there will be difficulties in applying the relief in respect of foreign tax paid some years before, especially if the relief is in the form of a tax credit. The onus that the law imposes on the taxpayer will assume special significance.

15.61. It will be necessary, to a greater extent than at present, to distinguish in the trustee's accounts between Australian-source and foreign-source income. There will be a question whether the character of a beneficiary's entitlement, or the character of a distribution made to him, is to be determined by the law or by an appropriation by the trustee. If the trustee's action governs, he may be able to limit Australian tax by the appropriation of foreign-source income to a non-resident beneficiary. Alternatively, the law could provide a formula by which any income, for purposes of the tax liability of a beneficiary, will include Australian-source and foreign-source elements in proportions reflecting the amounts of these elements held in the trustee's accounts.

15.62. A potential liquidity problem faces a taxpayer whenever a liability to tax is imposed on money that has not been remitted to Australia. The liquidity problem in the present context inheres in a scheme of taxation by reference to present entitlement as distinct from actual receipt. The problem in its wider context is considered in paragraphs 22.60 and 22.61.