Everyone wants to save tax. In the old days there were plenty of ideas from small business accountants everywhere on how to avoid the taxman by setting up offshore companies and trusts in the Caymans, Bahamas and other low-tax jurisdictions. There have been plenty of high profile cases in recent years where the ATO has taken to and chased celebrities who they believed were trying to avoid tax in Australia.
Now, it's not illegal to set these structures up but if you think you are doing it to legally save tax then you need to understand the rules which may make you think twice about it.
Figure 1: Tom Cruise spent time in the Caymans in The Firm
1. Is The Offshore Trust REsident for Australian Purposes?
Even though a trust or company may be set up overseas, it can still be deemed to be a resident trust for Australian tax purposes.
Generally a resident trust is one which had at any time during the year had a trustee resident in Australia or had its central management and control in Australia.
For Capital Gains Tax (CGT) purposes, the residency status of a trust depends on the type of trust involved. For unit trusts, a trust is a resident for CGT purposes if any property of the trust is situated in Australia or the trust carries on business in Australia and either:
- The central management and control of the trust is in Australia; or
- Australian residents held more than 50% of the beneficial interests in the income or property of the trust.
For all other trusts, a trust is a resident for CGT purposes if any trustees are Australian residents at any time during the year or the central management and control of the trust is in Australia at any time during the year.
2. Non-Resident TRusts
If the trust set up is a non-resident trust, income earned by some non-resident trusts is attributed to resident taxpayers in some circumstances. Under these rules, the income is taxed to beneficiaries on an accruals basis (when it is derived by the trust not when it is received by the beneficiaries). The objective of these rules is to tax Australian residents on their share of income derived by certain foreign entities that has not been taxed in a comparable way overseas.
There are three sets of rules that may potentially apply to non-resident trusts.
3. Distributions By Non-Resident TRusts
Under Section 99B ITAA 1936, distributions made by a non-resident trust estate to Australian resident beneficiaries are assessable in the hands of the beneficiaries except in some specific cases (e.g. the distribution represents corpus/capital of the trust). There are other exceptions depending on the type of distribution. Generally distributions of income such as interest or dividends would be assessable in the hands of the beneficiaries.
Figure 2: Beware of tax avoidance schemes that involve offshore trusts.
4. Transferor TRust Rules
The transferor trust rules are intended to apply to trusts in low-tax jurisdictions which are used to accumulate income free from tax in Australia. Broadly, the transferor trust measures apply to the Australian resident entity that has directly or indirectly caused the transfer of property (including money) or services to a non-resident trust. These rules can apply to both discretionary and fixed trusts. Transfers generally do not apply where they were made in the ordinary course of business and at arm’s length or where they weren’t, neither the transferor entity or its associates were in a position to control the trust from the time of the transfer up to the end of the entity’s current year of income.
They also generally do not apply to an executor of a deceased estate who transfers property or services to a non-resident trust estate according to directions contained in the deceased person’s will or according to a court order. This exception does not apply if the transfer was made through the exercise of discretion by the executor.
5. Attributable Income
If the transferor rules are triggered, Australian resident attributable taxpayers may need to include some or all of the trust’s income or gains in their assessable income even though they have not received a distribution from the trust. The amount of the attributable income will depend on whether the trust is a resident of a listed or unlisted country.
If the trust is a resident in a listed country then the attributable income is the portion of the net income of the trust that relates to eligible designated concession income. However there is a de minimis exemption for trusts in a listed country. There are currently 7 listed countries (Canada, France, Germany, Japan, New Zealand, UK and the US).
The rules do not apply if the attributable incomes of all foreign trusts for which the taxpayer is an attributable taxpayer (i.e. has transferred property or services) is equal to or less than the lower of the following amounts:
- $20,000; or
- 10% of the total incomes of the trust.
If the trust is a resident in an unlisted country then the attributable income is the full net income of the trust that year. There is an exception for amounts that are subject to full Australian tax or are taxed in a listed country.
If you are an attributable taxpayer in relation to a foreign resident trust, all the attributable income of the trust for an income year is included in your assessable income. This rule can potentially result in more than one person paying tax on the same income. If there is more than attributable taxpayer, the ATO may allow a reduction of the amount of attributable income to be included in the assessable income of each taxpayer. The taxpayers must apply to the ATO to obtain a reduction.
Important Disclaimer: The above comments are general in nature and should not be relied upon without seeking advice specific to your circumstances. Scolari Comerford small business accountants Sydney does not accept responsibility for information relied upon in this blog.
You may have a very good reason for wanting to set up an offshore trust or company but when you look at the above rules will you actually save tax in the end if that is your dominant purpose? The OECD is currently working hard to ensure that information is shared between countries so that tax is paid in the right places. The ATO is working hard to catch those that set these up to avoid tax when it should have been paid.
If somebody suggests that you create these foreign entities and that you will save a lot of tax, it is best that you get proper advice and be aware of the rules that catch these 'tax saving' havens.
A holiday in the Caymans to save tax might sound nice but you also do not want to end up with a 'Zebra Suntan' back here in Australia.