Whilst many foreign funds are established as Limited Partnerships and Corporates, some funds are established as trusts. The taxation of the income of a non-resident trust is broadly the same as for a resident trust. Where an Australian beneficiary of a trust (whether resident or non-resident) is not under a legal disability and is presently entitled to a share of the trust income, the beneficiary is assessed on its share of the trust net income under section 97.
Prior to the repeal of the FIF rules, an Australian beneficiary of a non-resident trust may also have been assessed on FIF attributable income in respect of the non-resident trust. To prevent possible double taxation, former section 96A was introduced by the Bill containing the FIF rules. Section 96A(1) essentially exempted an Australian beneficiary in a foreign trust from having to include in its assessable income a share of the net income of the trust, if the beneficiary was subjected to FIF income attribution in respect of the trust or would be subject to the attribution but for certain specific FIF exemptions.
Section 96A was repealed as part of the abolition of the FIF regime as there was no longer a need to deal with the possible double taxation that it was designed to deal with. Consequently, an Australian beneficiary in a non-resident trust will be assessed on its share of the net income of the non-resident trust even if it was previously exempt from the FIF attribution, e.g. a complying superannuation fund.
The repeal of section 96A(1) creates a practical problem and additional compliance burden for taxpayers investing in non-controlled foreign trusts. It is difficult for Australian investors to gather information from a non-controlled foreign entity to perform an equivalent taxable income calculation as if the foreign trust were an Australian taxpayer. This was indeed one of the reasons that the former FIF regime allowed an Australian investor to choose a simpler method to calculate the FIF income (i.e. the deemed rate of return method or the market value method).
The additional compliance burden is particularly significant for qualifying superannuation entities investing in non-controlled foreign trusts or taxpayers investing in non-controlled U.S. trusts as they were previously exempt from both the FIF regime and section 97.
There are no current proposals before Treasury to address this issue nor does any practical guidance exist from the ATO on how taxpayers can obtain comfort that the use of best endeavours will protect them should their calculation later be found to be inadequate or incorrect.